November 2, 2020/InvestmentOne Report 

·         Turnover: up 4.39% q/q, 31.36% y/y.

·         Gross margin performance: down to 23.26% from 42.37% in Q2 2020 and 26.88% in Q3 2019.

·         OPEX/Sales ratio: up 283bps q/q, down 187bps y/y

·         PBT Margin: dropped to 9.33% from 34.08% in Q2 2020 and 10.37% in Q3 2019.

The Q3 2020 Lafarge Africa results showed that the cement producer recorded a rise in topline performance as a result of faster sales volume. This offset the rise in COGS and operating expense as bottom-line performance came in higher on a year-on-year basis. 

Strong Top line Performance 

Revenue generated by the cement producer in Q3 2020 registered at N59.34billion, rising by 31.36% y/y. Looking at the numbers, revenue performance was on the back of 29.70% y/y rise in volume sales as well as a relatively higher (+1.52% y/y) average cement price during the quarter. We believe the low base in Q3 2019 supported this performance, as sales declined sharply due to heavy rainfall during that quarter last year.

Nonetheless, gross profit margin declined by 361bps y/y to 23.26%, owing to a 66.35% y/y and 61.19% y/y jump in production and variable cost respectively. According to the management, the rise in costs is not unconnected with naira devaluation, which affected energy and raw material cost as well as shutdown in maintenance activities across the company’s plants in the country. 

Moving on, the cement producer’s OPEX/sales ratio fell by 187bps y/y to 9.78% in Q3 2020. The improvement in OPEX/sales ratio was mainly as a result of faster rise in sales during this quarter as well as a 30.29% y/y drop in selling and marketing expenses to N1.26billion. Nonetheless, we point out that admin expenses jumped by 31.53% to N4.54billion on the back of jump in technical fees to N1.33billion from N259million in the previous year. Management affirmed that the rise in its technical fee payment resulted from strategic spreading of its cost; it expects full year fees to not be significantly different from prior year.  

Decent Performance at the Bottom 

The cement manufacturer recorded a decline in net finance cost on the back of drop in finance cost (down 4.27% y/y to N3.11billion) and rise in finance income (up 82.97% y/y to N344million). This, combined with increased top line, supported bottom-line performance as PBT rose by 18.11% y/y to N5.54billion. However, on a margin basis, the decline in gross margin filtered into PBT margin, despite decline in OPEX/Sales ratio; consequently, PBT margin declined by 105bps to 9.33%. 

Strong 9M Numbers 

The cement producers’ 9M numbers came in solid with improvements across major lines. So far this year, top line is up by 10.32% despite the COVID-19 pandemic. This resulted from relatively strong volume performance so far in 2020 as average price remained relatively flat. In addition, GPM improved mildly by 31bps to 31.20%.

We observed further cost reduction in its operations leading to a 72bps decline in OPEX/sales ratio to 8.78%. This indicates the level of success that has been achieved in the implementation of its cost and cash initiatives. 

Furthermore, bottom line performance also came in stronger as PBT margin improved to 19.06%, from 12.35% in 9M 2019. Thanks to the reduction in finance cost (down 54.55% y/y to N7.54billion)  following the sale of loss making SA operations and settlement of related party debt in 2019, which has significantly reduced its debt position (9M 2020 total debt: N53.44billion, -17.25% y/y). 

Sequential Performance – Not Impressive 

On a Q/Q basis, revenue inched up by 4.39% largely fostered by improved volume performance; this suggests that the periodic seasonality effect of the third quarter was muted this year. Nonetheless, GPM was down to 23.26%, from 36.53% in the previous quarter on the back of a 38.98% q/q rise in COGS.  

In addition, the company recorded a 46.93% q/q jump in operating expense with OPEX/Sales rising to 9.78%, from 6.95% in Q2 2020. Consequently, PBT margin dropped to 9.33% from 34.08% in the previous quarter, on the back of rise in net finance cost and operating expenses as well as lower gross margin. 

Outlook 

Going into the last quarter of the year, we expect the company’s topline performance to remain stable, as cement demand is likely to be sustained barring any significant weather changes. However, volume demand from the public sector may be weak as government revenue generation for the rest of the year comes under pressure.  

Nonetheless, we expect the challenges of the devaluation in Naira to be a downside on the cost part of the business as it relates to the firm’s energy costs, spare parts and raw materials. However, we opine that some of these pressures may be alleviated by its costs containment and reduction initiatives. 

In terms of capital projects, Lafarge’s management affirmed that they are looking to resume activities around the construction of the Ashaka power plant, after the setback posed by the pandemic. The company expects the plant to commence operation by Q3 2021.

Source: Company Financials, Investment One Research 

*Estimated from our model