Culled—Proshare
November 11, 2020
by FBNQuest Research
Solid Q3 y/y sales growth offset by rising business costs
Lafarge Africa (Lafarge) posted strong Q3 2020 sales growth of 31% y/y to N59.3bn. Unit volume y/y growth was primarily responsible for the sales improvement (up c.30% y/y to 1.3 million tonnes) as prices were flattish during the period. Nonetheless, topline growth was offset by production costs which were up by a similar magnitude y/y.
Looking forward, we expect solid cement demand in Q4, and as such, forecast a sales growth of around 11% y/y to N235.6bn for 2020E. Our projection is driven by a unit volume growth forecast of around 12% y/y and an average capacity utilisation of c.51% for the year. On its Q3 2020 conference call, management noted that prices were unlikely to be raised in Q4.
Therefore, we have narrowed our gross margin estimate by more than -450bps to 30.3% for 2020E. In our view, price increases will be necessary to offset fx-indexed costs such as gas prices (energy costs) which are benchmarked to the US dollar, following the recent fx devaluation.
For opex, we believe that the implementation of cost optimisation initiatives will remain supportive. We note that technical fees of N1.3bn in Q3, a major driver of the y/y opex escalation, are not expected in Q4. Our adjustments to the P&L have resulted to an -11% cut in our EBITDA forecast for the year.
Overall, our earnings forecast over the 2020-22E period is down by around 4%. Regardless, we still believe that Lafarge is in line for its strongest performance in recent years. Our new price target of N24.8 is down by around 6% and implies a potential upside of 17.9% from current levels. Over the last three months, Lafarge has gained 76% compared with the broad index’s 31% performance. Therefore, we downgrade our rating on the stock from Outperform to Neutral.
PAT (excluding discontinued ops) of N4.9bn came in flattish y/y
Lafarge’s Q3 2020 sales of N59.3bn advanced by 31% y/y and were ahead of our estimate by 14% while profit after taxes (excluding gains from discontinued operations) of N4.9bn came in flattish y/y.
In Q3 2019, Lafarge Africa posted a gain of N106.4bn from the sale of its South African business. Q3 cogs of N44.9bn were up by 31% y/y, offsetting topline growth while operating expenses increased by 155% y/y to N6.3bn. Technical service fees of N1.3bn were up 5.1x in Q3. Net finance costs continue to contract given the softer lending environment.
The combination of a balance sheet deleveraging and relatively lower funding cost were primarily responsible for this decline. Compared with our forecast, PAT missed by around 8%. Sequentially, while sales beat by 4%, PBT declined by c.-71%.