Michel Puchercos sends green light, raises investors’ expectations
Lafarge Africa: Investors are warming up for the coming jubilee but don’t take anybody words for it. Though, it looks like things are fast changing given the side-by-side adjustment to Lafarge Africa’s operations in addition to the ongoing financial restructuring in the cement company.
In the past few years, Lafarge wasn’t looking good in numbers. There were ambitious, albeit, wrong moves including bucket of foreign currency loans accessed before local currency devaluation.
At about N232 billion market capitalisation, the company’s share price traded between N12.95 and N14.40 in the last 7-days. Analysts said that sales of South Africa subsidiary would enable the re-rating of the company’s share price.
Michel Purcheros, the Chief Executive Officer, Lafarge Africa Plc is struggling to find value for investors as strategy 2022, building for growth, seems to be putting the company back on track.
The management realised there are problems, and has set out to solving the conundrum strategically. Beyond internal issues, fierce competition in the cement industry hit strongly forcing operators to engage in price war.
That may underscore year 2019 trading space but it was observed that Lafarge worked on its cost structure – a breather to compete with price.
Analysts at Pan Africa Capital Research said that with the expectation of improved income statement and balance sheet, they expect Lafarge to pay at least a dividend of ₦0.50 per share in the full year of 2019.
Lafarge Africa Plc, a leading Sub-Saharan Africa building materials company is a subsidiary of LafargeHolcim, a world leader in building materials. It is LafargeHolcim that is buying out margin-dilutive South Africa subsidiary as analysts at Cardinalstone partner called it.
How did it go in the first half?
Lafarge was strong as both striker and defendant on the field. Though when Lionel Mercy of the cement industry-talking about Dangote Cement- moves, it has to follow strongly to avoid being over dribbled.
In the first half of 2019, Lafarge Africa total assets settled at N577.5 billion, just as its shareholders equity funds closed the period at N227.8 billion. Even with all the right issues, Lafarge remains highly geared, as debt to equity ratio is remains at the rooftop.
The company’s performance scorecard came stronger than expected but not yet there … investors that are still waiting take value talking about dividend payment plus capital gain, of which they are already starved and they would be veracious when the pie comes.
Overall, the company’s turnaround strategy for 2022 is worthwhile – so far. Gross revenues hit N160.3 billion having recorded 1.2% decline year on year.
In the first half of 2018, Lafarge did N162.3 billion. The decline was traced to price adjustment as record shows that volume of sold jerked up. Numbers of cement sold increased 3.2%, from 3,206 kilotons to 3,310 kilotons at the end of first half in 2019.
Revenue analysis indicates that Lafarge Africa engaged in price war, but this was supported with efficiency in production, logistics and distribution. Therefore, minimal impact of price was reflects on the scorecard.
Managing the margin
About the Nigeria operation, the management said that the market was affected by delays in the new cabinet nomination post February general elections.
For every N100 sales made, the company has ultimately pocketed N25.39 kobo as contribution from unit sale to cover other costs. That was not the case in 2018. Its gross margin was N24.03 kobo. Up to this stage, for Lafarge, things got better.
Lafarge said that the cement volumes went up 3.3% supported its new Route-to Market whilst net sales grew by 1% only, impacted by downward pressure on prices, notably after the first quarter end announced increase.
So, as expected, cost of sales adjusted downward by 3.1%. The company’s cost of sales was N119.6 billion in the first half, from N123.3 billion in the comparable period.
The reduction in cost was driven by efficiency achieved around production cost, maintenance cost and distribution cost.
Thus, the reduced cost of sales margin strengthened the bottom line. The number shows that cost margin dropped to 74.6%, from 76%.
By interpretation, 76% of revenues were burned down the line in the first half of 2018, and then it dropped to 74.6%.
Effectively, gross profit margin jerked up to 25.39% against 24.03% in the comparable period.
It is then safe to conclude that though sales declined, margin increase and this is a good thing from profit maximization point of view. T
Result of the 6-months operation
Lafarge expended N18.4 billion on operations in the first half of 2019. This was 19.1% lower than N22.7 billion that was burned in the course of operation in the first half of financial year 2018.
Then, this is a good thing but not if it is the variable part because of lower activities level. How well did Lafarge use its capacity?
In the first half of 2018, Lafarge made N100 million from another sources other than its principal business, but nothing has been recorded to that credit in 2019.
Reduced bills from operating lines, and lower cost of sales combined to support earnings before interest and tax (EBIT). In the first half, Lafarge EBIT increased by 37%.
The company’s EBIT closed the half year at N22.4 billion as against N16.3 billion in the comparable period. That means the company actually has some cash to play with this time before interest and tax obligations were met.
After it paid interest, the company’s pretax profit pitched at N9.3 billion. It is noteworthy to say that net finance cost (that is interest income minus finance cost) declined by 42.4%.
In the first half, Lafarge paid funds providers sum of N13.1 billion as interest obligations on credits facilities as against N22.7 billion paid in the comparable period.
That means that the company did not have just enough that covered interest obligations in first half in financial year 2018. EBIT was N16.3 billion and interest payment was N22.7 billion. Then, its pretax profit closed at N6.3 billion negative.
Lafarge Plc paid no tax in the first half in 2018, instead it claimed N2.4 billion as tax credit, and this was used to reduce its negative profit position.
At the end of first half 2018, the loss after tax for Lafarge was N3.6 billion. In 2019, it closed the first half with N9 billion earnings after tax.
Where are investors in all these?
Lafarge earnings per share for the first half were N0.50, though the company share is traded at N14.40 on the day this result was released.
What that means is that, Lafarge earned 50kobo on every share it used to finance the company. The company has 8.8 billion outstanding shares and was unable to pay dividend.
Lafarge Plc increased cash locked down in its inventories by 3.8%, from N47.2 billion to N48.9 billion. Trade and other receivables also increased 7.6% from N21.2 billion to N22.8 billion at the end of first half 2019.
However, the company’s cash resources went up 65.4% to N20.8 billion, it was N12.6 billion in the first half of 2018.
Looking at the current assets, which increased from N81 billion to N92.5 billion (that is combination of Trade and receivables, stock and cash); one would have expected an increased in borrowed funds. This was not the case.
Debt load was incredibly oppressive
Foreign debt load was a corporate nightmare, and all advantages of foreign currency or any other loans for that matter were lost to devaluation of Naira. That ate into the company’s competitive advantage but that finance strategy looks lie rookie version for such a bellwether company.
The company’s total borrowing went down significantly. Its borrowed funds ended the first half at N203.5 billion as against N266.2 billion in the comparable period in 2018.
Thus, overall liabilities declined 13.9% to closed the period at about N350 billion as against N406.2 billion a year earlier.
With that, Lafarge Plc recorded a 6.8% increase in total assets, from N540.7 billion to N577.5 billion as its shareholders funds jerked up to N227.8 billion, this represents 69.3% upswing from N134.5 billion in the first half of 2018.
Still a highly geared company, Lafarge Plc debt is 89.3% of its total shareholders’ funds. What that mean is that, from every N100 invested in its assets, N89.30 were borrowed funds.
Analysts at Pan Africa capital Research stated that going forward; it expects finance costs to reduce significantly as Lafarge Africa Plc reported that the proceeds from the proposed sale of 100% of the issued share capital in LSAH would be used to settle part of the debts owed by the group.
That is highly risky for investors but consider where the company is coming from last year when its debt as proportion of equity was about 198%, it would be easier to say the process for deleveraging is in progress – that’s with a caveat.
Meanwhile, Lafarge said the recent rights issue was fully subscribed and the closing of the divestment of the South African Operations expected in third quarter 2019 will significantly deleverage Lafarge Africa Plc by about N239 billion.
Where is the cash?
Lafarge Plc raised free cash flow to N28.4 billion, more than 184% upsurge from N10 billion in the first half of 2018.
Michel Puchercos, CEO of Lafarge Africa stated said, “Our Strategy 2022 – building for growth – in Nigeria is delivering the expected results with strong volume growth, considerable EBITDA improvement, and robust net income and operating cash flow development.
In 2019, Lafarge Africa Plc. disclosed intention to offload its non-performing assets – Lafarge South Africa Holdings, LSAH, limited to Caricement B.V, an indirect subsidiary of LafargeHolcim. The subsidiary deal is expected to close at $316 million by July 31st.
Analysts at Cardinalstone said that the South African business has always been margin-dilutive.
It was noted that after 2014 consolidation, Lafarge South Africa Holdings experienced consistent deterioration in earnings before interest and tax depreciation and amortization margin in the ensuing 3-years period due to elevated cost amidst aggressive market competition.
Analysts said that the conclusion of the Sale is expected to boost Lafarge Africa’s cash flow and net income, given the reduction in debt service outflows. Also, it would cut annual interest expense by N9.1 billion on account of the full repayment of the foreign currency inter-company loan.
The spin-off would also enable Lafarge Africa to reinvest in (and expand) operations in existing plants.
Read Also: Lafarge Africa Share Price Jumps on Improved Earnings Performance
Michel Puchercos sends green light, raises investors’ expectations
