August 6, 2020/United Capital Report

Recently, Lafarge Africa Plc (WAPCO) released its H1-2020 unaudited financial statement and according to the report Revenue grew by 2.3%y/y during the period. This was despite apparent challenges that characterized Q2-2020 amid the COVID-19 induced lockdown. Herein, we review the H1-2020 performance and updated some of our assumptions for the rest of the year. 

Operational efficiency fueled impressive performance   

WAPCO’s Revenue declined by 5.1% y/y to N56.8bn in Q2-2020 due to lockdown measure imposed across Nigeria (especially in Abuja, Lagos, and Ogun) during the quarter. However, Revenue grew by 2.3% y/y to N120.5bn in six months period of H1-2020. Notably, the management attributed the growth to increase in volume sold and better average prices in H1-2020 when compared to corresponding period in 2019. Analysing the Revenue by product, we observed a significant decline (-64.1%) in Aggregate and Concrete product(which accounted for less than 5% of the total revenue) in Q2-2020 to N0.5bn and similar trend was observed in H1-2020 (-40.2%) to N1.95bn. Meanwhile, Cement product which accounted for over 90.0% of total revenue produced a mixed performance, down 3.6% y/y to N56.3bn in Q2-2020 but up 3.5% y/y to N118.6bn in H1-2020.  

The management was able to contain Cost of Sales which mildly increased by 0.5% y/y to N41.7bn, slower than Revenue growth (+2.3% y/y). Although Variable cost of sales rose sharply 6.5% y/y to N52.5bn, the pressure was eased by the sharp decline in Production cost (which include personnel expenses, by-products costs and electrical energy expenses), down 17.8% y/y to N9.2bn. 

Also, a sharp decline in Operating Expenses (OPEX), by 27.9% y/y to N9.4bn supported the overall bottom-line performance in H1-2020. This was as Administrative/Selling and Marketing expenses fell 30.6% and 9.9% y/y to N7.8bn and N1.5bn, respectively. Similarly, Net finance cost tumbled 67.3% resulting in 86.1%y/y surge in Pre-tax profit to N28.8bn. However, a 1.5x jump in Tax expense brought Post-tax profit growth to 47.3% y/y to settle at N23.3bn. Notably, the jump in tax expense was a fallout of tax credit accessed by the company in 2019.  

Healthy Balance sheet   

The cash balance spiked by 47.1% y/y to settle at N39.9bn. Our findings revealed that the spike in cash balance was driven mainly by significant reduction in interest paid (53.5% y/y to N4.0bn), lease payment (22.0% y/y to N3,4bn), and loan repayment (93.9% y/y to N5.4bn). We note a 10.9% y/y decline in receivables to N7.3bn, this was partly due to the drop in Q2-2020 sales volume. Furthermore, total borrowing decline by 14.4% y/y to N55.0bn, which supported the decline in interest cost. In all, net asset increase by 2.1% y/y to settle at N352.1bn while total assets experience a mild decline of 0.3% y/y to N495.8bn.   

Rating upgraded to BUY at 23.1% potential upside   

We are positive about the short-term outlook for WAPCO, as the company continues to restructure its balance sheet to improve performance. Also, we believe that the relaxation of economic lockdown in the second half of 2020 help sustain revenue expansion (as construction activities resumes fully). Accordingly, we have estimated a Revenue growth of 3.3%y/y in FY-2020E. Also, we expect Cost of Sales growth to come lower compare to revenue growth, hence, gross margin is expected to be strengthen. Our expectation for lower cost of sales rest on the back of the aggressive cost optimization strategy that the company has embarked on since the beginning of the year which has resulted into a 17.8% reduction in production cost. However, our concern remains the continued increase in energy cost. Also, we have estimated an uptick in OPEX as the company resumes promotional activities in a bid to drive volumes and compensate for Q2-2020 shortfalls. In all, we expect the surge in PAT to be sustained, fueled by lower base effect of the 2019 performance. WAPCO currently trades at a forward EV/EBITDA of 4.3x, which is well below both the local and EM peers average of 5.13x and 10.9x, respectively implying that the ticker is currently undervalued. Putting the above together, we update our valuation assumption and revised our 12M-TP to N14.4/share (from prior N16.6/share) with a potential upside of 23.1% when compared to current price of N11.70/share

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