August 4, 2020/InvestmentOne Report

     Turnover: down 10.76% q/q, 5.05% y/y.

·         Gross margin performance: rose to 42.37% from 27.67% in Q1 2020 and 36.53% in Q2 2019.

·         OPEX/Sales ratio: down 234bps q/q, 449bps y/y

·         PBT Margin: rose to 34.08% from 14.37% in Q1 2020 and 18.15% in Q2 2019.

The Q2 2020 Lafarge Africa results showed that the cement producer recorded a decline in topline performance as a result of slower sales during the economy lockdown in Nigeria. However, significant reductions in COGS, operating expenses and finance cost were more than enough to boost bottom-line performance to commendable levels. 

Not a Bad Performance during a Pandemic 

Revenue generated by the cement producer in Q2 2020 came in at N56.84billion, dropping by 5.05% y/y. Looking at the numbers, revenue performance was on the back of 3.70% y/y decline in volume sales as well as a slightly lower (-1.40% y/y) average cement price during the quarter. We spotlight that the imposition of lockdown in major cities in Nigeria during the month of April was a major factor behind decline in sales. 

Nonetheless, the fall in cost of sales (down 13.79% y/y) owing to a 44.72% y/y and 51.47% y/y plunge in production and raw material cost, as well as a 7.76% y/y decline in energy cost boosted gross profit margin by 584bps y/y to 42.37% in Q2 2020. According to the management, the fall in energy cost resulted from fuel mix optimisation following increasing use of alternative fuels, while the decline in production cost is hinged on the restructuring of its quarry operations.  

Moving on, as the cement producer continues to enjoy the benefits from the sale of its loss-making SA operations; its OPEX/sales ratio fell by 449bps y/y to 6.95% in Q2 2020. The improvement in OPEX/sales ratio was mainly as a result of a 85.36% y/y decline in office and general expense, which was attributed the implementation of the firms’ “Health, Cost and Cash” initiatives. 

Solid Performance at the Bottom 

Despite the c.79% decline in finance income, owing to a fall in interest income on current account, the cement producer recorded a decline of 67.16% y/y in its net finance cost to N1.79billion on the back of a 68.39% plunge in interest on borrowings. We highlight that this was as a result of decline in total borrowings which were paid off with the proceeds of the sale of its South African factory. The drop in net finance cost, in addition to improvements in OPEX/sales ratio, drove PBT margin up to 34.08% from a PBT margin of 18.15% in Q2 2019.  

Strong Half year Numbers 

The cement producers’ half-year numbers came in solid with improvements across major lines. So far this year, top line has inched up by 2.25% despite the COVID-19 pandemic. This resulted from relatively higher cement price and strong volume performance in Q1 2020. Lafarge also recorded a slight improvement in COGS (shedding 0.52% y/y), which further improved GPM by 113bps to reach 34.60%.  

We observed further cost reduction in its operations leading to a 326bps decline in OPEX/sales ratio to 7.78%. This indicates the level of success that has been achieved in the implementation of its cost minimisation initiatives. 

Furthermore, bottom line performance also came in stronger as PBT margin improved to 23.86%, from 13.11% in H1 2019. Thanks to the reduction in finance cost following the sale of loss making SA operations and settlement of related party debt in 2019. 

Outlook

Going into the third quarter of the year, we expect the company’s topline performance to remain somewhat stable. While there continues to be easing in economy lockdown across Africa, which should support cement demand and construction activities, we pinpoint that Q3 is usually a slow quarter for cement manufacturers owing to heavy rainfall. 

In addition, the prospects of volume demand from the public sector may be weak as government revenue generation for the rest of the year comes under pressure. We believe the downward review of government revenue will have a negative impact on its capital budget implementation.  

Nonetheless, lower finance cost should continue to be positive for bottom-line performance. This should combine favorably with cost reduction and containment strategies, which management affirmed will be maintained going forward keeping cost drivers at relatively lower levels.

Source: Company Financials, Investment One Research 

*Estimated from our model

Source: Company Financials, Investment One Research