November 17, 2016/Cordros Research
In announcing its 9M-16 result, the management of LAFARGE informed investors/analysts that the company, as at July, 1st 2016, converted shareholders’ loan for an amount of USD493 million (out of USD510 million) to an equity instrument, on which the repayment (including interest at an average 6% p.a) is discretionary. The summary of this renegotiation (permissible under IAS 32) is that it removes volatility on the income statement by (1) significantly reducing losses from currency depreciation to only those emanating from outstanding third party USD borrowings and (2) charging interest expenses accruing from the loan to retained earnings.
Going forward, while acknowledging the impact of the debt conversion as par the summary above (recall that forex losses from sizeable USD loans — accounting for about 60% of gross loans — contributed significantly to the post tax loss the company reported over 9M-16), we choose to focus more on the (1) impact of higher cement price on margins, beginning from this quarter; (2) somewhat stable, but still expensive energy supply; and (3) on-boarding of 2.5MTs UNICEM’s Line II at Mfamosing. We believe these have more direct link with the company’s operations and in determining earnings over next year. We expect LAFARGE to return to profitable operation in 2017 and forecast PAT of N11.2 billion. The assumptions driving this forecast are (1) 5% volume growth; (2) higher average cement prices in Nigeria; (3) significantly lower forex losses; and (4) reduction in finance charges.
Following the revision to our forecasts, we have increased 2017 TP to N60.10 (from N50.38) and upgrade recommendation to BUY (from HOLD) due to the 31% correction in the company’s share price since we last updated. At current price, the stock is trading on a forward PE and EV/EBITDA of 14.8x and 6.7x, at 33% and 13% premium respectively to Bloomberg’s SSA comparables. While acknowledging the risks to earnings recovery in the short term, we think LAFARGE’s shares have faced intense pressure and expect the market price to rise to our 2017 TP on relatively (compared to 2016) better performance.
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