Culled—Proshare

April 19, 2018/FBNQuest Research

 Material cuts to our 2018-19E EPS forecasts and price target 
Similar to Q3 2017, Lafarge Africa’s (Lafarge) Q4 2017 results surprised negatively due to an impairment loss of N20.4bn taken on fixed assets and one-off related costs of N10.4bn. On its Q4 conference call, management stated that it expects additional one-off costs related to the implementation of its ERP software in 2018E. As such, given the extent of the miss relative to our forecasts and guidance, we have cut our 2018-19E EPS forecasts by around -46% on average and our price target by -35% to N46.9. Our newprice target now includes the impact of the rights issue. Going forward, we forecast unit volume growth of around 5% y/y for the group (8% y/y for Nigeria), driven largely by improving economic growth prospects in Nigeria. 

This underpins our 2018E sales growth forecast of 6% y/y to N317.3bn. Further down the P&L, we forecast PBT of N19.8bn in 2018E (vs. –N34.0bn 2017). On a relative basis, Lafarge Africa shares are trading on a 2018E P/E multiple of 23.8x for 8% EPS growth in 2019E. These are less compelling than the 16.4x 2018E P/E multiple for 28% EPS growth in 2019E that rival Dangote Cement is trading on. At current levels, Lafarge shares are tradingclose to our price target. Consequently, we retain our Neutral recommendation on the shares. 

Pre-tax loss of –N35bn in Q4 due to one-off related costs
Lafarge’s Q4 2017 results showed that the company reported a pre-tax loss of -N35.1bn compared with a PBT of N17.5bn in Q4 2016. Excluding the topline which grew by 29% y/y, the results were weak across the P&L. The weak earnings were mainly driven by a negative gross margin of -9.5% in Q4 (vs.38.4% Q4 2016) and a 63% y/y spike in opex. Further down the P&L, the after-tax loss narrowed to –N29.4bn (vs. +N43.2bn Q4 2016), thanks to a positive result of N6.1bn in other comprehensive income. 

Sequentially, sales grew by 10% q/q. However, the pre-tax and after-tax losses compare with losses of -N17.1bn and –N21.2bn that the company reported in Q3 2017. Compared with our forecasts, sales were only slightly ahead of our N73.8bn forecast. However, earnings missed our PBT and PAT forecasts of N5.2bn and N5.0bn respectively, because of negative surprises in gross margin, opex and net interest expense.