Culled—Proshare

August 19, 2020

by FBNQuest Research

Outperform rating maintained

Lafarge Africa’s (Lafarge) Q2 2020 surprised positively. Our forecasts were hinged on a significant adverse impact on cement volume sales from the pandemic-related lockdown during the quarter. However, Lafarge and indeed the sector faired better. Lafarge’s cement volumes were down -3.7% y/y to c.1.3million tonnes while net average prices were relatively flat y/y. As a result, Q2 sales beat our estimate by around 20%.

Given the better-than-expected cement sales performance, we have revised our sales forecast upwards to N219.8bn (representing a sales growth of around +3% y/y) for 2020E with pricing likely to remain flattish through the rest of the year. The biggest driver for improved profitability during the quarter was the implementation of cost optimisation initiatives, including the reduction of industrial quarry costs and operating expenses.

We expect benefits from this strategy to positively impact H2 performance. We have therefore elevated our EBITDA margin forecast for 2020-21E period to c.42% from 31% previously. We also anticipate that H2 performance will continue to benefit from a deleveraged balance sheet – total debt down -73% y/y to N55bn – and project an adjusted EPS growth of 32% y/y to N2.34. In our view, Lafarge is in line for its strongest performance in recent years.

Our new price target of N26.4 is up by around 33% and implies a potential upside of 125.4% at current levels. Over the last month, Lafarge has gained 6.4% compared with the broad index’s 3.5% performance. We retain our Outperform rating on the stock.

Pre-tax profits of N19.4bn up 78% y/y

Lafarge’s Q2 sales of N56.8bn declined 5% thanks to softer cement volume sales (-3.7% y/y) and lower average net prices (-1.4% y/y). PBT and PAT of N19.4bn and N15.3bn were up 78% y/y and 161% y/y respectively.

Improved profitability was primarily driven by a gross margin expansion of 584bps y/y. During the quarter, production expenses, fuel & power costs, distribution costs and raw material purchases were all down -45% y/y, -8% y/y, -85% y/y and -51% y/y respectively.

These expenses were muted by significantly curtailed operations during the coronavirus-related lockdown in Q2. Net interest charges also declined -71% y/y to N1.6bn while operating expenses declined -49% y/y to N3.5bn. Excluding sales, all key line items compare favourably on a q/q basis.