August 9, 2021/Cordros Report
Lafarge Africa’s H1-21 report showed that Q2-21 standalone PAT grew by 25.7% y/y to NGN19.19 billion while EPS settled at NGN1.19/share, bringing H1-21 EPS to NGN1.76/share (+21.4% y/y). The double-digit growth in PAT was driven by a combination of topline growth (+29.4% y/y) and reduction in finance cost (-71.5% y/y), both of which offset the increases in OPEX (+61.3% y/y) and cost of sales (+42.6% y/y). On a q/q basis, we note that EPS rose sharply from NGN0.30/share in Q1-21 to NGN1.19/share in Q2-21, due to (1) the steep decline in net finance cost (down 81.1% q/q), and (2) a gain of NGN826.88 million arising from the disposal of investment in Continental Blue Investment (CBI) Ghana Ltd. Over the rest of the year, we expect sustained growth in earnings due to favourable price/volume mix and moderation in finance cost given its low leverage position. On our revised 2021E EPS of NGN3.43/share (previously: NGN2.17/share), we estimate a DPS of N1.55/share, implying a dividend yield of 7.3% based on the price of NGN22.00/share (August 6).
Price Increment and Sustained Volume Growth to Support Revenue: Revenue grew by 29.4% y/y in Q2-21 (H1-21: +20.3% y/y) on the back of improvement in cement sales (+27.0% y/y; 97.2% of revenue), aggregate & concrete sales (+292.6% y/y; 2.8% of revenue). We understand that the double-digit growth in cement sales was price-driven given the higher increase in price per tonne (+17.7% y/y) compared to volumes (+9.9% y/y to 1.4MMT). Without downplaying the strong demand from individual homebuilders as disclosed by management, we imagine that the low base in the prior-year further aided the volume growth. On a q/q basis, however, we observed that revenue growth slowed substantially in Q2-21 (+2.9% q/q vs +41.3% q/q in Q1-21). In our opinion, the slower q/q growth was due to reduced private sector demand given the sharp increase in cement prices in Q1-21 and slower activities in the real estate sector due to the rapid increase in FI yields – last year, the industry players alluded to the fact that the low yield environment bolstered appetite for investment in real estate. As such, we think the upward movement in yields on risk-free assets in H2-21 and adjustment of lending rates by banks may lead to constrained activities in the real estate sector. In H2-21, we expect volumes to be supported by public sector demand, given the knock-on impact of high oil prices on government finances. However, we note that the third wave of the pandemic is a key downside risk if government rekindles lockdown measures. Overall, we have revised our 2021E sales volume upwards by 6.9% to 5.7MMT (+10.3% y/y). This, alongside our expectation of a higher price per tonne (+15.0% y/y), translates to revenue of NGN294.43 billion (+27.7% y/y) in 2021E.
Higher Realised Prices to Ease Pressure on Margins: Gross Margin declined in Q2-21 to 48.5% (vs 54.1% in Q2-20) mainly due to the increase in the variable (+22.6% y/y) and production (+113.5% y/y) cost components of COGS. The rise in these cost items alongside OPEX ex-depreciation (+48.8% y/y) pushed EBITDA margin lower to 42.0% in Q2-21 (vs. 50.2% in Q2-20). Management noted that margins were pressured by the pass-through impact of the Naira devaluation on USD denominated cost items, namely gas contracts, spare parts and strategic raw materials. We expect the price increments implemented at the start of the year and improved fixed cost absorption associated with the recommissioning (in July) of Ewekoro Line 1 to support margins in H2-21. For 2021E, we estimate EBITDA growth of 37.8% y/y, but forecast EBITDA margin will moderate to 35.3% by year-end from 36.5% in H1-21.
Low Leverage to Cushion Impact of Cost Pressures on PBT: As observed in Q1-21, the growth in Q2-21 PBT (+ 28.0% y/y) was also supported by the deceleration in finance cost (-71.5% y/y), which is reflective of its deleveraged balance sheet. Notably, gross debt (-64.1% y/y) fell to NGN19.75 billion as of H1-21 following the redemption of its NGN34.08 billion bond this year. In addition, management has guided that there are no plans to embark on significant borrowings in the short term. As a result, we do not expect a material increase in leverage (Debt/Equity ratio of 0.05x as of H1-21). Overall, we forecast 2021E interest expense to decline by 44.2% y/y.
Valuation: We have revised our 2021E PBT to NGN71.83 billion (prior estimate: NGN42.64 billion), translating to an EPS estimate of NGN3.43/share (prior estimate: NGN2.17/share). The net impact of our changes is an increase in our target price to NGN34.44 (previously; NGN29.56/share), implying a potential upside of 56.5%. Consequently, we retain our “BUY” rating on the stock.
