November 2, 2020/Cordros Report
Lafarge Africa’s 9M-20 report result showed that EPS settled at NGN1.75/share, up 37.1% y/y after adjusting for gains from discontinued operation in 9M-19. The growth in bottom line was supported by an increase in revenue and deceleration in finance cost, both of which outweighed the substantial increase in cost of sales. However, the momentum in PBT growth waned in Q3-20 (+18.1% y/y), due to the pressure in cost of sales, operating expenses, and FX losses arising from a restatement of related-party payables. Over the rest of the year, we expect margins to be pressured by input costs associated with energy and certain foreign currency (USD) denominated items (such as spare parts, gypsum) following the devaluation of the local currency during the year. However, we expect the impact on earnings to be cushioned by a sustained recovery in cement demand and moderation in finance cost. Overall, we have revised our 2020E PBT to NGN40.33 billion (Previously: NGN28.99 billion), translating to an EPS estimate of NGN2.05/share (previously: NGN1.27/share).
Volume-led Topline Growth to Support Earnings: Following the COVID-19 induced dip in cement sales during Q2-20 (-9.5% q/q), the relaxation of lockdown measures which enabled the restart of construction activities, and the recovery in private sector demand, drove a rebound in Q3-20 (+3.3% q/q). Accordingly, revenue grew strongly in Q3 (+31.4% y/y | +4.4% q/q) – we note that the single-digit sequential growth was due to the relatively high base in Q2-20 arising from robust sales in late-May till end-June. Management noted that the revenue growth in Q3 was volume-driven as prices remained broadly flat. We believe that the stiff competitive landscape, amid soft industry conditions, hindered any price increases.
Rising FCY denominated Costs Pressure Margins: Gross Margin declined in Q3-20 to 36.9% (vs. 42.0% in Q3-19 and 53.2% in Q2-20) due to the increase in the variable cost component (+61.2% y/y) of COGS. Management attributed this to the pass-through impact of the devaluation of the local currency on USD denominated cost items namely gas contracts, spare parts and strategic raw materials.
Deleveraged Balance Sheet to Cushion Impact of Cost Pressure on PBT: Despite input cost and OPEX (ex-depreciation) pressures in Q3-20 (+28.9% y/y | 77.3% q/q), PBT grew 18.1% y/y supported by the topline growth and deceleration in finance cost (-4.2% y/y) which is reflective of the deleveraged balance sheet – gross debt (-17.2% y/y) fell to NGN53.44 billion as at 9M 2020. We note that the slower decline in finance cost was due to FX losses (NGN641.9 million) arising from a restatement of related-party payables.
Valuation: We revise our 2020E PBT to NGN40.33 billion (Previously: NGN28.99 billion), translating to a 2020E EPS of NGN2.05/share (previously; NGN1.27/share). The net impact of our changes in a slight increase in our target price to NGN20.76 (previously; NGN17.90/share), implying a potential upside of 15.3%. As such, we downgrade the stock from a “BUY” to “HOLD”.
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