October 28, 2021/CSL Research
In its recently released 9M 2021 results, Lafarge reported a 21.9% y/y increase in Revenue to N219.2bn from N179.9bn in 9M 2020. On a q/q basis, Revenue was up marginally by 0.9% to N74.2bn in Q3 2021 from N73.5bn in Q2 2021. We believe the effect of the rainy season, which characterized Q3, may have affected cement demand during the review period. Meanwhile, the broad-based growth in Cement Sales (up 20.9% y/y to N213.7bn) and sale of Aggregates & Concrete (up 75.2% y/y to N5.5bn) drove the improved topline performance in 9M 2021. While no information has been provided on the Revenue breakdown, we believe, just as in H1 2021, price-volume mix supported the Revenue growth, with the former being stronger than the latter. One, persistent inflationary pressure left the card wide open for the company to implement higher prices in H1 to neutralize the cost impact. Also, the rainy season in Q3 could have limited cement demand, thereby restricting volume growth.
Cost of Sales (adjusted for depreciation) rose faster than Revenue, up 30.4% y/y (vs. Revenue growth of 21.9%) to N134.6bn in 9M 2021. We note that the increased cost pressure was mainly in Q3 as the Cost of Sales (adjusted for depreciation) rose 34.9% q/q to N51.1bn. The increase in Cost of Sales was driven by cost increases across all cost components; variable costs (up 28.0% y/y to N101.1bn), production fixed costs (up 37.1% y/y to N20.9bn, maintenance fixed costs (up 57.0% y/y to N9.6bn) and distribution fixed costs (up 4.7% y/y to N3.0bn). We believe FX devaluation impact on imported raw materials as well as USD priced energy sources spiked costs. Consequently, Gross profit grew 10.3% y/y to N84.6bn in 9M 2021 while Gross margin contracted by 403bps y/y to settle at 38.6% in 9M 2021.
The company tightly controlled its Operating Expenses (adjusted for depreciation) reflected in the sub-inflationary growth of 4.0% y/y to N14.9bn in 9M 2021 from N14.3bn in 9M 2020. The moderate growth was driven by upward pressure in Administrative Expenses adjusted for depreciation (up 7.5% y/y to N12.3bn) as it recorded a double-digit decline in Selling & Marketing Expenses (down 10.3% y/y to N2.5bn). The controlled growth in Opex and robust Revenue growth supported a 12.0% y/y increase in EBITDA to N70.7bn in 9M 2021 from N63.1bn in 9M 2020. There was also an impairment reversal on trade receivables to the tune of N0.5bn compared with N9m in the previous period. EBITDA margin contracted by 285bps to 32.3% in 9M 2021 from 35.1% in 9M 2020. Operating Profit grew moderately, up 17.1% y/y to N48.1bn due to below EBITDA growth in Depreciation & Amortisation (up 2.4% y/y to N22.6bn) in 9M 2021.
The company’s deleveraging efforts were further reflected in the 25.7% y/y decline in Net Finance Cost to N5.1bn in 9M 2021 from N6.8bn in 9M 2020. Notably, since the liquidation of its major debt in June 2021, the leverage position remains low. A 25.3% y/y decline in Finance Cost drove the steep decline in Net Finance despite the 21.1% decline in Finance Income. The decline in Finance Income reflects the prevalent low-yield environment. As a result, Pre-Tax profit increased, up 28.0% y/y to N43.9bn in 9M 2021, also supported by gains of N0.8bn from the disposal of investment in joint venture compared with nothing in the previous period.
Interestingly, the company recorded a Tax Credit of N4.9bn in Q3 2021, thus reducing the Tax Expense in 9M 2021 to N3.5bn (down 42.5% y/y) compared with a Tax Expense of N6.1bn in 9M 2020. Due to the impact of the Tax Credit, Net Income received a boost, increasing by 43.3% y/y to N40.4bn in 9M 2021 from N28.2bn in 9M 2020. Earnings per share was also up 43.3% y/y to N2.51/s for 9M 2021 compared with N1.75/s in 9M 2020.
We have a target price of N34.87/s with a BUY recommendation on the stock. Current Price–N25.60/s.
