November 29, 2021/Proshare

by FBNQuest Research 

EPS forecasts over the next two years raised by around 5% on average

Lafarge’s Q3 ’21 earnings came in slightly ahead of our forecast by around 5%. However, this beat was masked by a tax credit of N4.9bn vs. a tax expense of -N4.0bn that we were modelling. PBT missed by 54%. The weaker-than-expected results were driven by a gross margin contraction of -320bps y/y to 21.5% as a y/y rise in variable production costs (+48% y/y) more than offset topline gains. Management statements reveal that Lafarge raised average prices by close to 25%, broadly similar to peers, during the quarter.

We expect cost pressures to remain through Q4 and have cut our gross margin estimate for ’21f by around -300bps to 32.4% while retaining all previous P&L estimates. This sole cut in gross margin has resulted in a -9% reduction in our EPS forecast for ’21f. Looking beyond this year, we have raised our EPS forecasts for each of the next two years (+4.7% on average) as a result of elevated cement prices. We do not see any material threats to national cement demand next year.

For Lafarge, management’s near-to-medium term growth strategy remains the debottlenecking of plants which could see capacity utilisation reach c.75%, up from c.55% currently. Our price target is relatively unchanged at NGN27.9 and implies a potential upside of 12% from current levels. Lafarge’s shares are up +13% over the last three months. As such, we downgrade our rating on the stock to Neutral from Outperform. Year-to-date, Lafarge shares have gained +18.8% vs. the NSE ASI’s +7.5% gain.

Q3 ’21 results stonger on a y/y basis but declined q/q due to seasonality

Lafarge’s Q3 sales were up 25% y/y driven by a similar y/y increase in average cement prices. Unit volume sales for the quarter were flattish y/y. This compares with Dangote Cement’s (-6% y/y for Nigeria) and BUA Cement’s (-3% y/y). Q3 PBT grew 29% y/y to NGN7.2bn. CoGS, up +30% y/y to NGN15.9bn, provided the strongest headwind and more than offset a -7% y/y decline in operating expenses and a 25% y/y rise in revenues.