June 7, 2022/CSL Research

A 30.2% y/y increase in cement prices was the main driver of Lafarge Africa’s topline growth (26.8% y/y) in Q1 2022 as volume declined by 3.1% y/y, taking a hit from gas scarcity in its Ewekoro plant, which affected production in the review period. Specifically, Revenue growth of 26.8% y/y to N90.6bn was driven by Cement Sales (up 26.0% y/y to N87.99bn), Aggregates & Concrete (up 62.3% y/y to N2.52bn) and sale of Mortar (up 60.4% y/y to N98.94m). The company’s sustained efforts at deleveraging, evidenced in a steep decline in Net Finance Cost (down 66.4% y/y) and tax relief from the pioneer status on one of the production lines in its Mfamosing plant, led to a 92.2% y/y growth in Net Income. Thus, EPS rose to N1.09/s in Q1 2022 from N0.57/s in Q1 2021.

Lafarge began the year strong. Growth opportunities exist for the firm if it can be aggressive in unlocking additional capacity from its ongoing debottlenecking exercise. From our engagement with the management, it intends to unlock an additional 500,000 tonnes in the year, resulting in an installed capacity of 11m MT by year-end. Apart from that, given the impact of currency volatility on energy costs, we believe the firm may need to further raise prices to neutralize cost pressures and consequently support top line performance.

We have updated our model, and the overall impact is an upward adjustment of our price target to N43.88/s from N31.86/s previously. Our price target implies a 61.3% upside potential from the last closing price of N27.20/s. We still believe the market is yet to fully price in the firm’s improved operating performance, and we maintain our Buy recommendation. Lafarge is currently trading at a FY 2022E EV/EBITDA of 7.1x, a discount to its EM peer average of 10.2x. We arrived at our target price using a blend of DCF valuation and Relative valuation in the ratio of 50:50.

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