June 21, 2019/InvestmentOne Report
§ Mixed performance in Turnover: up 5.92% q/q, down -2.64% y/y.
§ Rising gross margin performance: up 483bps q/q, 84bps y/y.
§ Mixed Opex/Sales ratio: up 198bps q/q, down 210bps y/y.
§ Improving PBT Margin: up 165bps q/q, 646bps y/y.
Lafarge Africa published its Q1 2019 results yesterday. The cement producer’s turnover was down marginally by 2.64% y/y to c.N79billion. However, a decline in cost of sales was able to alleviate the effect of the decline in revenue as gross profit improved by 1.02% to c.N18billion. In the same vein, a decline in operating expenditure and net finance cost combined to help bottom-line performance with PBT margin improving by 381bps y/y to settle at 0.16%, representing a second consecutive quarterly profit after recording losses in five preceding quarters.
Top-line Performance
We believe that slow volume growth in its South Africa market may be responsible for the decline in top line performance. This may be as a result of the slow growth in the economy, which may have slowed down activities in the construction sector. Hence, group revenue dipped by 2.64% y/y to N78.51billion in Q1 2019. However, the company recorded a weak growth in revenue accrued from its Nigeria operations, inching up marginally by 1.62% y/y to N49.49billion in Q1 2019. The weak growth in Nigeria revenue may be a due to slow momentum in cement demand following the delays in the Presidential and Gubernatorial elections.
Nonetheless, a decline in cost of sales provided a cushion for gross profit performance. A 36.62% y/y decline in production cost was able to offset decline in revenue performance as gross profit ticked up by 1.02% y/y; gross profit margin also improved by 84bps y/y to reach 23.16%.
Bottom-line Performance
Moving down the P& L line, opex/sales ratio contracted by 210bps y/y, this was driven by a 32.23% y/y decline in administration expenses. Furthermore this, in combination with 10.01% y/y drop in net finance cost, drove PBT margin up to 0.16%, from a negative margin of 3.65% in Q1 2018. The decline in net finance cost was as a result of the jump in FX gains which increased finance income (up by 320% y/y).
Finally, A Breather!
On a sequential basis, the company reported a decent q/q performance as topline rose by 5.92%. Combined with a slight decline in cost of sales, gross profit improved by 33.83%. Consequently, gross profit margin improved by 483bps. However, we highlight that operating expenses increased by 25.83%, pushing opex/sales ratio up by 198bps to 12.49%. Nonetheless, a 23.13% decline in net finance cost contributed to the rise in PBT margin to 0.16%, from a negative PBT margin of 6.71% in Q4 2018.
Following the group’s plan to sell its South Africa business through a divestment to Caricement BV (a related party); we believe that the company may be heading for a positive year. The divestment plan (agreed by both parties but subject to shareholders approval) has a cash consideration of US$317million, which the Management has indicated will be used to completely pay off shareholders loan of US$293 million.
Prior to this, Lafarge Africa has had problems with their operations in South Africa, which severely marred its operational performance. In addition, huge debt also adversely affected bottom line performance as the firm continued to record high finance cost quarter after quarter, which consistently wiped out profit.
On completion of this transaction, we expect the company’s gearing ratio positively, with total loans and borrowings declining to c.N54billion. While this will bode well for the company’s Debt to Equity position, it will also lead to decline in annual interest income (c.N10billion by our estimate), which will be positive for bottom line performance. Along the same line, we expect improvements in operating margin with the sale of the South Africa operation which recorded operating losses for about 5 quarters. By our estimates, operating margin should improve by c.968bps annually judging from FY 2018 performance.
Following management’s indication of taking a price increase in May 2019, we opine that we may see improvements in top line performance especially as we have exited the election periods. The company also plans to improve on its logistics by increasing daily dispatch and reducing turnaround time of delivery trucks.
YE(DEC) | Q1 2019 | Q/Q
| Y/Y
|
Sales | 78,512 | 5.92%
| -2.64%
|
Cost of Sales | (60,328) | -0.35%
| -3.69%
|
Gross Profit | 18,184 | 33.83%
| 1.02%
|
Gross margin
| 23.16% | 483.0bps
| 83.9bps
|
OPEX | (9,805) | 25.83%
| -16.66%
|
Opex/sales | 12.49% | 197.7bps
| -210.0bps
|
Net Finance Cost | (8,281) | -23.13%
| -10.01%
|
PBT | 123 | 102.47%
| 104.17%
|
PBT margin
| 0.16% | 687.0bps
| 381.0bps
|
Tax Credit/ (Expense) | 3,022 | -55.02%
| 220.12%
|
PAT | 3,145 | 80.47%
| 257.08%
|
PAT margin
| 4.01% | 165.5bps
| 648.8bps
|
Source: Company financials, Investment One Research
Recently Released Q1 2019 Industrial (Cement) Sector Results |
| |||
NGN Million (unless stated otherwise) | Dangote Cement | CCNN | Lafarge Africa | |
Key Income Statement Figures | Revenue | 240,157 | 16,886 | 78,512 |
Y/Y Revenue Growth
| -0.81%
| 213.05%
| -2.64%
| |
Gross Profit | 140,679 | 7,688 | 18,184 | |
Opex | (52,834) | (2,299) | (9,805) | |
Net Finance Cost | (9,422) | (44) | (8,281) | |
Profit Before Tax | 78,960 | 5,347 | 123 | |
Y/Y PBT Growth
| -27.16%
| 255.39%
| 104.17%
| |
Key Balance Sheet Figures (NGN Billion) | Total Assets | 1,742.06 | 358.54 | 597.20 |
Total Liabilities | 695.35 | 21.42 | 372.16 | |
Total Equity | 1,046.71 | 337.13 | 225.04 | |
Net Debt | 53.51 | (7.27) | 184.19 | |
Key Ratios | ROE | 5.76% | 2.09% | 3.76% |
ROA | 3.46% | 1.97% | 1.41% | |
PBT Margin | 32.88% | 31.67% | 0.16% | |
GP Margin | 58.58% | 45.53% | 23.16% | |
TA/TL | 2.51 | 16.74 | 1.60 | |
Current Ratio | 0.89 | 1.57 | 0.76 | |
Source: Company financials, Investment One Research
