April 24, 2017/Cordros Research

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Lafarge Africa Plc (LAFARGE) announced Q1-17 PAT of N5.2 billion (vs. –N1.9 billion in Q1-16) this morning, driven by (1) 55% y/y increase in revenue, (2) comparatively higher gross margin, and (3) higher investment and other incomes. The PAT, however, was behind consensus, owing to higher effective tax rate.

Compared to our estimate, the realized revenue was ahead by 23%, and beat consensus by 12%, on higher-than-expected aggregates/concrete revenue (N6 billion est., vs. N12.8 billion reported). Cement revenue grew by 61% y/y (vs. Cordros’ 44% estimate), as relatively higher price in both Nigeria and South Africa more than offset the lower sales volume experienced in both markets. In Nigeria, sales volume grew by 6% compared to Q4-16, but was down by 12% y/y. In absolute terms, the N81.3 billion revenue reported during the period is the second largest (behind the N99.1 billion reported in Q4-15) since the emergence of Lafarge Africa.

Gross margin increased by 1086 bps y/y, as higher average price offset higher average per tonne cost of production. Compared to Q4-16 however, gross margin was lower by 1247 bps, and contradicts management’s claim that it continues to witness savings from (1) energy efficiency, via increasing substitution of alternative fuel) and (2) de-correlation of FX, via local sourcing and energy diversification. Although gross margin has recovered quite impressively from the Q1-Q3 2016 low levels, it remains well-below the pre-2015 price-crash levels.

Also supporting profitability during the period were other income (via capital gain from the disposal of property) and finance income (via interest on loan receivable). In addition, opex margin fell by 206 bps y/y and 767 bps q/q, in line with management’s overall cost savings programme towards the restoration of EBITDA margins.

Finance charges more than doubled y/y, and beat our estimate by 23%. Although lower by 16% y/y, gross debt increased by 11% from end-2016 level. Given the lower book value of debt, we attribute the higher finance charges relative to Q1-16 to a higher average cost of borrowings (+217 bps).

LAFARGE reported effective tax rate of 45.4% (way above the  CIT and education tax rate of 32%), which in our view, is the readjustment of the deferred tax credit (N36.8 billion) the company claimed in the final quarter of 2016. A deferred tax charge of N2.9 billion (vs. N106 million credit in Q1-16) was recorded during the period.

Overall, LAFARGE’s latest result, excluding one-offs, is consistent with the performance in Q4-16, and in line with consensus expectation of an improvement in the company’s performance following the challenge it faced in 2016. Management retained its 0-2% demand growth, and flat to declining outlook, for both the Nigerian and South African markets respectively. We retain BUY recommendation on the stock. Our estimates are under review.