Lafarge: Analysts Project Positive Earnings as Fundamental Improves

Lafarge: Analysts Project Positive Earnings as Fundamental Improves

Equity research analysts at Chapel Hill Denham have raised valuation on Lafarge WAPCO as they expect core momentum to inspire fresh upside.

Speaking to the valuation, analysts specifically stated that they have rolled valuation forward to 2021 and raised target price slightly by 2.8% to ₦31.99.

Chapel Hill Denham reiterates BUY recommendation on Lafarge Africa.

In its assessment, Lafarge revenue is now expected at ₦241.71 billion as against ₦226.91 billion previously estimated, mostly reflecting our adjustment to cement volume to 5.1MT from 4.9MT.

“While management confirmed, during our engagement, that export sales is a long term plan for the company, we believe the need to regain the lost market share in Nigeria, where profitability is at the highest, will incite management to strictly focus on the domestic market”, analysts stated.

Since the launch of its turnaround strategy, WAPCO has halted cement export to Ghana, due to uncompetitive pricing environment.

Beyond that, it has also divested from the margin-dilutive Lafarge South Africa (LSAH) to cement its domestic-centric stance.

Despite the sales expansion witnessed in Q3-2020 with 31.4% year on year growth, analysts believe Lafarge still favours profitability ahead of volume.

Hence, analysts at Chapel Hill Denham said they see further headroom for an upward adjustment in prices.

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“In our view, cost pressures stemming from the blend of naira weaknesses and double digit inflation will further tempt management to adjust prices upward, a justifiable move in our opinion”, analysts posited.

For evidence, Chapel Hill Denham said it channel checks suggest that Q4-2020 prices are already ahead of last year.

Elsewhere, analysts have modelled a 47.3% year on year earnings before interest tax depreciation and amortisation (EBITDA) growth for 2020.

This reflects 24.6% reduction in cost of goods sold 24.6%, following the disassociation from LSAH. The related margin is estimated at 37.0% as against 23.0% in 2019.

“We like that WAPCO has progressively reduced its absolute debt from the highs of ₦301.5 billion in 2018 to ₦53.4 billion in 9M-2020”, analysts said.

This was done through the blend of rights issue and proceed from the sale of the margin-dilutive LSAH business.

Thus, leverage ratio has improved significantly, with debt to EBITDA improving to 0.85x in 9M-2020, from 6.2x in financial year 2020.

Similarly, finance charges are down to ₦7.5 billion over 9M-2020, from the high of ₦34.9 billion in 9M-2018.

“We have modelled further reduction in finance charges to ₦5.3 billion by financial year 2021”, Chapel Hill Denham said.

Chapel Hill Denham also cut cost of equity to 18.5%, from 21.0%, mostly owing to a 250 basis points reduction is risk-free rate to 10.5%.

This was considered to be in line with the lower yield environment.

Analysts stated that revised target price of ₦31.99, implies a 34.5% upside (including a dividend yield of 7.4%).

Lafarge has made significant improvement post LSAH sale.

The company has managed to de-risk its balance sheet with the blend of proceeds from rights issues and LSAH divestment.

For one, analysts said they like that foreign currency debt (as proportion of total borrowing) is now down to 0%, from as much as 56% in 2017, as the company completely offset all FX denominated loans in 2019.

The positive connotation from this is that the company’s earnings are now less volatile to currency shocks, analysts explained.

From its debt profile breakdown in 9M-2020, bond constitute 66% of the company’s loan balance, followed by lease liabilities (18%) and power fund (11%).

Overall, Lafarge’s debt and debt/EBITDA ratios are now well below post-2016 devaluation level.

Lafarge: Analysts Project Positive Earnings as Fundamental Improves