April 22, 2022/CSL Research
Following a record performance in 2021, Lafarge has continued to leverage the strong domestic demand for cement as it began the year on a strong note. Based on its recently released unaudited Q1 2022 results, Lafarge reported a 26.8% y/y Revenue growth to N90.6bn in Q1 2022 from N71.5bn in the prior period (Q1 2021). Similarly, on a q/q basis, Revenue was up by 22.6% from N73.9bn in Q4 2021. The q/q growth (Q1 2022 compared with Q4 2021) is particularly impressive given that Q4 is historically known as the best quarter for the cement sector due to the favourable weather conditions and the euphoria towards completing housing projects during the festive season. The broad-based growth across its revenue segments from Cement Sales (up 26.0% y/y to N88.0bn) to the sale of Aggregates & Concrete (up 62.3% y/y to N2.5bn) and Others (up 60.4% y/y to N98.9m) drove the improved topline performance in Q1 2022. Essentially, the current run rate aligns well with our Cement outlook for the year that an impressive 2021 sets tone for 2022. Although no information from the management is available about the drivers of the revenue as of writing, we believe that both price and volume growth aided top-line growth. The persistent FX illiquidity continues to impact the cost of key materials, leaving the company no option but to raise prices.
Cost of Sales (adjusted for depreciation) also tracked that of Revenue growth, up 25.6% y/y (vs. Revenue growth of 26.8% to N42.1bn in Q1 2022 from N33.5bn. The increase in Cost of Sales was driven by growth across its major cost components; production variable costs (up 28.4% y/y to N31.4bn), production fixed costs (up 3.2% y/y to N6.5bn, and maintenance fixed costs (up 51.9% y/y to N4.2bn). Without a doubt, we believe inflationary pressures on key materials, FX devaluation impact on USD priced inputs, spiked costs. Given the robust Revenue growth, Gross profit still grew 27.8% y/y to N48.5bn in Q1 2022 while Gross margin also expanded by 43bps y/y to settle at 53.5% in Q1 2022.
Operating Expenses (adjusted for depreciation) increased by 18.8% y/y to N19.6bn in Q1 2022 from N16.5bn in Q1 2021. The double-digit growth was driven by an upward pressure in both Administrative Expenses adjusted for depreciation (up 25.7% y/y to N4.6bn) and Selling & Distribution Expenses (up 16.9% y/y to N15.0bn). Notably, the company retrospectively reclassified distribution costs from Cost of Sales to Selling and Distribution Costs to appropriately reflect the nature of the expense. Still benefitting from a decent topline growth, EBITDA increased by 31.5% to N29.1bn in Q1 2022 from N22.1bn in Q1 2021. EBITDA margin increased by 115bps to 32.1% in Q1 2022 from 30.9% in Q1 2021. With a 6.1% y/y decline in Depreciation and Amortisation to N6.9bn, Operating Profit further rose by 50.4% y/y to N22.1bn from N14.7bn in the previous period.
Lafarge continues to maintain a low leverage position reflected in the 66.4% y/y decline in Net Finance Cost to N650m in Q1 2022 from N1.9bn in Q1 2021. We expect the company to maintain a low leverage position as the company has not signalled an intention to raise new significant debt finance. The impact of a 67.9% y/y decrease in Finance Cost despite an 84.7% fall in Finance Income drove the steep decline in Net Finance Cost. As a result, Pre-Tax profit grew significantly, up 68.1% y/y to N21.5bn in Q1 2022.
Effective Tax Rate moved down to 18.2% in Q1 2022 from 28.5% in Q1 2021, benefitting from a tax relief arising from the pioneer status granted on one of the company’s production lines in the Mfamosing plant. As a result, Net Income grew significantly, up 92.2% y/y to N17.6bn in Q1 2022 from N9.1bn in Q1 2021. Earnings per share was up 92.2% y/y to N1.09/s for Q1 2022 from N0.57/s in Q1 2021.
We maintain our target price of N34.87/s with a BUY recommendation on the stock. Current Price; N25.55/s.
Source: Company data, CSL Research
