WAPCO Share Price Target Raised on Expectation of Resilient Earnings
Analysts have said that performance outlook for Lafarge WAPCO Africa Plc is positive given that cost optimisation would support earnings in 2020.
Following adjustments to its model, analysts at Cardinalstone raised its 12-month target price to ₦20.31 from ₦15.40.
Competition in the cement segment has taken a new turn as BUA Cement brought extra capacity into the industry, thus raised pricing rivalry among the cement oligarchies.
In its equity analysts’ note, Cardinalstone Partners explained that there may be a clear mispricing of WAPCO.
The investment believe that the company share price is trading at a current price earnings (PE) ratio of 9.2x compare to 5-year mean at 14.8x.
To analysts, this appears materially underpriced given the company’s return on equity (ROE) improvements in recent quarters.
Specifically, WAPCO’s ROE has lifted 5.7 percentage points higher than historical average.
“We attribute this implicit mispricing to the heightened aversion for equities occasioned by recent macro frailties”, Cardinalstone stated.
However, analysts said they are expecting a resilient financial year 2020 earnings performance to drive a re-rating of the stock over the next 12 months.
Meanwhile, Cardinalstone indicates that it has projected WAPCO revenues to grow by 2.9% in financial year 2020.
In explaining the estimate, Cardinalstone stated that WAPCO was partially affected by the second quarter of 2020 lockdown measures.
The lockdown specifically led to a 3.7% year on year decline in its output, but analysts expect the gradual reopening of the economy to drive an output rebound in the second half of 2020.
“Our volume expectation is also consistent with Nigeria Metrological Agency’s prediction of near-normal rainfall in 2020, which would imply that the seasonal impact of third-quarter rains could be less of an issue this year2, Cardinalstone explained.
However, the cement company’s full-year volumes may, therefore, be marginally higher at 5.1MT, up +3.0% year on year with revenue likely to print at N219.4 billion.
This represents a 2.9% year on year growth, considering slightly lower regional pricing.
Analysts explained that the sale of Lafarge South Africa subsidiary has proved a turning point for WAPCO.
The transaction reduced high cost of maintaining the relatively old South African plants and dollar-denominated parent company obligations were wiped off the books by the transaction.
It would be worthwhile to note that about 60.0% year on year surge in after-tax earnings from continuing operations in Q2’20 still reflected the gains from this transaction in our view.
Cardinalstone reckoned that the company’s recent investments in HCC strategy to cut down on excessive costs related to day to day operations may underscore a commitment to sustaining cost-efficiency farther out.
Ashaka debottlenecking and power plant projects could drive more upside, Cardinalstone explained.
The investment firm stated that WAPCO was unable to meet the first half 2020 deadline for the completion of its Ashaka de-bottlenecking and captive power plant projects because of the coronavirus restrictions.
Notably, the company was unable to bring in equipment and personnel from China due to the travel restrictions imposed by the federal government.
However, these challenges are likely to be resolved as international travels resume leaving scope for the projects’ completion before year-end and a resolution to the high cost of running the Ashaka operation.
“We, therefore, forecast earnings before interest, tax, depreciation and amortisation (EBITDA) margins for 2020 and 2021 higher at 34.4% and 34.6% respectively”, Cardinalstone stated.
Relatively, the projection exhume analysts’ optimism, higher compare to 27.6% and 27.7% in the comparative period.
In 2020, Cardinalstone estimates indicates that profit after tax is also likely to come in at N34.4 billion on the knock-on effect of cost efficiency and materially lower interest expense.
This resulted from a 50.1% year on year decline in interest expense to N10.1 billion in analysts forecast.
Analysts said lower interest expense should reflect the impact of balance sheet restructuring and considerable yield moderation in Nigeria.
Cardinalstone is projecting financial year 2020 ROE at 9.6%, which is highest level in five-years; aided by strong improvements in net income margin and stable asset turnover.
“We forecast free cash flow to equity (FCFE) at N22.2 billion for 2020 compared to the negative N40.7 billion recorded last year”, Cardinalstone said.
The firm stated that its FCFE estimate is likely to reflect declines in debt repayments and capital expenditure (CAPEX).
On the former, analysts projected debt repayment at N10.0 billion compared to the N86.9 billion repaid last year.
This is because its bond program, which accounted for 61.8% of total debt stock as at first half of 2020, was designed on a bullet principal repayment structure which matures in 2021.
Similarly, having deployed most of the required funds needed for its strategic projects, Cardinalstone explained that the firm expects a CAPEX of only N10.9 billion in the current year compare to N22.8 billion in 2019.
Following adjustments to its model, analysts at Cardinalstone arrived at a 12-month target price of N20.31 as against N15.40 previously estimated.
“Our target price is at a 69.3% premium to our reference price of N12.00.
Equity analysts rated that WAPCO is trading at a financial 2020 enterprise value (EV) to EBITDA and price earnings ratios of 3.13x and 5.48x respectively.
This is lower compared to peer averages of 9.7x and 16.1x apiece, thus Cardinalstone retain BUY rating on the stock.
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WAPCO Share Price Target Raised on Expectation of Resilient Earnings
