§  Marginal Improvement in Turnover: up 4.17% q/q, 0.17% y/y.

§  Improving gross margin performance: up 442bps q/q, 191bps y/y.

§  Declining OPEX/Sales ratio: down 199bps q/q, down 292bps y/y.

§  Rising PBT Margin: up 1103bps q/q, 1535bps y/y.

Lafarge Africa published its Q2 2019 results on Monday. The results showed that the cement producer’s turnover was somewhat flat, rising marginally by 0.17% y/y to N81.78billion. Nonetheless, a decline in cost of sales was able to bring about improvements in gross profit margin. Additionally, price increase in Nigeria taken in May 2019 may have supported gross profit margin performance. Furthermore, the decline in finance cost, following successful rights issue and redemption of its matured bond, led to solid bottom line performance.

Top-line Performance – Slow Growth Environment

While revenue generated from its South Africa operations recorded a 2.10% decline, revenue from Nigeria recorded a marginal 1% increase, bringing the group revenue to N81.78billion (up 0.17% y/y) in Q2 2019. We highlight that the construction sector in South Africa continues to remain subdued hence, the unimpressive top-line performance from the region. Nigeria operation, on the other hand, recorded a 3.30% increase in cement volume sales. We think the reason for slow growth momentum in the Nigeria market may be due to the poor implementation of the capital expenditure aspects of the national budget. 

Nonetheless, a decline in cost of sales as well as price increase in May 2019 provided some cushion for gross profit margin performance. A 60.55% y/y decline in maintenance cost combined with N150 increase per bag to offset the flattish performance in revenue performance as gross profit margin was up by 191bps y/y to reach 27.59%.

Bottom-line Performance – Reaping Benefits of Right Issue

Moving down the P& L line, OPEX/sales ratio contracted by 292bps y/y, this was driven by a 21.75% and 20.66% y/y decline in administration and selling expenses respectively. The reduction in operation expenses was as a result of successful implementation of turnaround plan and cost reduction strategy in its operations home and abroad. 

Furthermore this, in combination with 64.49% y/y drop in net finance cost, drove PBT margin up to 11.19% from a loss before tax of 4.16% in Q2 2018. The decline in net finance cost was as a result of decline in finance cost (down by c.39% y/y), following successful right issue where the company raised N89.2billion, giving it the chance to reduce its debt position. We highlight that the proceeds of the issue allowed cement producer to redeem its matured N26.4billion bond in June 2019.

Setting the Ladder

On a sequential basis, the company reported a decent q/q performance as topline rose by 4.17%. Price increase, combined with a slight decline in cost of sales (down 1.83% q/q), led to 443bps improvement in gross profit margin.  

In addition, we highlight that operating expenses decreased by 12.39%, pushing OPEX/sales ratio down by 198bps to 10.50%. Furthermore, a 42.19% q/q decline in net finance cost contributed to the rise in PBT margin to 11.19% (up by 1103bps q/q). 

H1 2019 performance was commendable as we saw a 246% jump in PBT to reach N9.27billion on the back of declining net finance cost, operating expenditure and cost of sales, despite 1.23% decline in turnover to N160billion.  

Q3 2019 may be a tepid quarter due to the rainy season, which slows construction. However, going forward, we expect the company’s top-line performance to see support from potential increase in FG capex spending following the appointment of executive cabinet and implementation of 2019 budget. In addition, the cement producer should continue to reap benefits of its right issue and successful turnaround plan, which should bode well for cost containment and margin performance. 

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 as the deal seeks to resolve its debt levels which has marred bottom-line performance in past quarters.

Source: Company financials, Investment One Research