Event: WAPCO published FY-2020 audited financials earlier this morning. The result showed that Profit After Tax grew 98.8% y/y to NGN30.84 billion while EPS settled at NGN1.91/share, up 98.8% y/y after adjusting for gains from discontinued operations (NGN99.58 billion) in FY-2019. On the EPS of NGN1.91, the board has proposed a final dividend of NGN1.00/s (same as in FY-2019), translating to a yield of 4.4% based on the last closing price of NGN22.50/s.

Revenue grew by 8.3% y/y in FY-2020, on the back of improvement in cement sales (+9.1% y/y), which offset the decline in aggregate and concrete sales (-25.5% y/y). We believe volumes drove the growth in cement sales as the relaxation of lockdown measures in Q2-20 drove a strong rebound in construction activities in the second half of the year.  

Gross margin increased by 164bps in FY-2020, as the topline growth (+8.3% y/y) outpaced the increase of 5.3% y/y in cost of sales (excluding depreciation). However, we note that the rise in the cost of sales was driven mainly by energy costs (+21.7% y/y), which were substantially above the increase in cement sales (+9.1% y/y). We believe this reflects the pass-through impact of the local currency’s devaluation on gas contracts.   EBITDA rose by 16.0% y/y to NGN75.46 billion in FY-2020, supported by the increase in gross margin and a 1.6% y/y decline in operating expenses (excluding depreciation). Accordingly, the EBITDA margin increased by 217bps to 32.7% in FY-2020.   

Earnings continued to benefit from the deceleration in finance cost (-51.9% y/y), reflecting gains from the company’s deleveraged balance sheet, as gross debt declined by 22.5% y/y to NGN49.73 billion in FY 2020 (FY 2019; NGN64.19 billion). Lafarge made principal repayments of NGN7.75 billion on its power sector loan and another NGN7.48 billion on lease liabilities in FY-2020.

Overall, PBT grew by 110.0% y/y to NGN37.52 billion in FY-2020, due to the combined impact of (1) revenue growth of 8.3% y/y, (2) decline of 1.6% y/y in operating expenses (excluding depreciation) and (3) the steep decline in finance cost (-51.9% y/y). 

Comment: We like that the company sustained profitability for the second year after recording Pre-tax losses in the 2016-2018 financial years. The post-tax profit of NGN37.52 billion is also the highest since 2014 (NGN40.36 billion), suggesting that the divestment from its loss-making South African subsidiary in 2019 and the debt restructuring programme have continued to yield positive results. As observed with the industry leader (DANGCEM), our primary concern stems from the impact of the local currency’s weakening on energy cost and its attendant effect on margins.  Our estimates are under review.