May 21, 2021/Proshare

by FBNQuest Research

Downgrading to Neutral from Outperform

Lafarge’s Q1 ’21 earnings grew 13% y/y to NGN71.5bn, supported by a 12% y/y rise in prices. Cement volumes were flattish y/y at 1.44 million metric tonnes (mmt) during the quarter as production capacity was limited by the scheduled Electrostatic Precipitator (ESP) Bag Filter Upgrade Project on Ewekoro Line 1. The upgrade is commendable, given the impact it is expected to have on the local environment’s air quality. According to management, full operations in Line 1 is expected in H2. Ewekoro Line 1 has an installed capacity of 1.4 million metric tons. We therefore, expect Lafarge’s cement sales to benefit from solid local demand over the course of the year.  

Nonetheless, we note that rising interest rates could hurt real estate appetite in the medium term. We estimate cement sales growth for Lafarge of around 7% y/y to 5.4mmt. This implies a capacity utilisation projection of c.50%. Looking ahead, we do not see further increases to cement pricing. We have also raised our cogs forecast by c.10%, reflecting the impact of the naira’s devaluation on gas (a major contributor to Lafarge’s fuel mix) prices, while lowering our operating cost forecasts by 8%. Lafarge has no intention to increase borrowings this year. Overall, we have made negligible changes to our EPS outlook over the ’21-’23f period. However, our new price target of N21.9 is down -15% because we have raised our risk-free rate assumption by +150bps to 12.5% due to a higher interest rate environment. Our price target implies a potential upside of 9% at current levels. While peers embark on expansion and new projects, Lafarge is focused on increasing capacity of current facilities via debottlenecking.  

According to management, the debottlenecking project for Ashaka and Ewekoro, which is expected to unlock additional capacities of 2mmt over the next 2 years, is progressing well. Management also stated a Q3 deadline to sell its 35% stake in CBI Tema, Ghana. Lafarge shares are trading on a ’21f EV/EBITDA multiple of 3.3x compared with 6.6x for DangCem. Year-to-date, Lafarge shares have shed -4.0% vs. the NSE ASI’s -4.8% decline. We downgrade our rating on the stock to Neutral from Outperform.    

Q1 ’21 earnings missed our estimate by around 8%

Lafarge posted Q1 ’21 earnings growth of 13% y/y and 253% q/q respectively. Overall, profitability was primarily driven by an improved topline (up 12% y/y to NGN71.5bn). While cement volumes were flattish y/y, average prices were up by around 12% y/y. To a lesser extent, operating costs and net finance expenses, which declined by -14% y/y and -21% y/y respectively, also helped profitability.  

In particular, administrative expenses fell -15% y/y to NGN4.3bn. Compared with our estimates, sales and PBT were slightly ahead by 5% and 3% respectively. However, earnings missed by around 8% because of an effective tax rate of 28.5% vs. the 20% we were modelling.