July 28, 2022/CSL Research
Following a strong performance in Q1 2022, Lafarge has continued to leverage the strong domestic demand for cement. Based on its just released unaudited H1 2022 results, Lafarge reported a 28.7% y/y Revenue growth to N186.6bn in H1 2022 from N145.0bn in the prior period (H1 2021). Similarly, on a q/q basis, Revenue was up by 5.9% to N95.98bn in Q2 2022 from N90.6bn in Q1 2022. Despite the torrential downpour in Q2 2022 which we believe may have affected cement demand in the period, the q/q growth proved the company’s resilience, and we suspect the growth was price-led, though at our last engagement with the company, the management indicated that the pipeline network issues which affected cement production at its Ewekoro plant in Q1 2022 had been resolved. While we believe production could have improved in Q2 2022, the heavy rainfall in the review period may have restricted demand for cement. Moreso, the price increment we saw in Q1 2022 was an adjustment made in Q4 2021 which took effect in Q1 2022. Currently, the cement players are facing challenging times ranging from inflationary pressures to currency devaluation, which we believe could have resulted in another increase in Q2 2022. Broad-based growth across its business segments from Cement Sales (up 28.2% y/y to N181.1bn) to the sale of Aggregates & Concrete (up 45.3% y/y to N5.2bn) and Others (up 73.8% y/y to N276.7m) drove the improved topline performance in H1 2022.
Cost of Sales (adjusted for depreciation) grew faster than Revenue growth, up 33.2% y/y (vs. Revenue growth of 28.7%) to N78.7bn in H1 2022 from N59.1bn in H1 2021. While there was a y/y decline in production fixed costs (down 19.5% y/y to N11.3bn), the significant increase in production variable costs (up 51.5% y/y to N58.98bn) and maintenance fixed costs (up 38.2% y/y to N8.4bn) drove the increase in Cost of Sales. Without a doubt, we believe inflationary pressures on key materials and FX devaluation impact on USD priced inputs, spiked costs. Given the robust Revenue growth, Gross profit still grew significantly, up 25.5% y/y to N107.9bn in H1 2022 while Gross margin declined by 144bps y/y to settle at 57.8% in H1 2022.
Operating Expenses (adjusted for depreciation) increased by 37.0% y/y to N47.1bn in H1 2022 from N34.4bn in H1 2021. The double-digit growth was driven by pressure on both Selling & Distribution Expenses (up 45.4% y/y to N37.7bn) and Administrative Expenses adjusted for depreciation (up 11.6% y/y to N9.5bn). Notably, the company retrospectively reclassified distribution costs from Cost of Sales to Selling and Distribution Costs to appropriately reflect the nature of the expense. Given the elevated cost pressures, coupled with a 70.3 y/y decline in Other Income and Impairment reversal on Receivables, growth in EBITDA moderated, climbing higher by 16.5% to N60.97bn in H1 2022 from N52.3bn in H1 2021. EBITDA margin also contracted by 341bps to 32.7% in H1 2022 from 36.1% in H1 2021. With a 12.0% y/y decline in Depreciation and Amortisation to N12.4bn, Operating Profit received a boost, growing by 27.0% y/y to N48.5bn in H1 2022 from N38.2bn in the previous period.
Lafarge continues to maintain a low leverage position. However, Net Finance Cost rose by 13.4% y/y to N1.7bn in H1 2022 from N1.5bn in H1 2021, basically due to gain of N826.9m on disposal of investment in joint venture in H1 2021 which was absent in H1 2022. Excluding the impact of the gain on disposal, the company’s Net Finance Costs would have reduced by 37.7% y/y to N1.7bn from N2.3bn in H1 2021 as Finance Cost declined by 30.1% y/y to N1.9bn which outweighed 47.2% fall in Finance Income to N191.6m in H1 2022. Nevertheless, Pre-Tax profit grew, up 27.6% y/y to N46.9bn in H1 2022.
Effective Tax Rate moved down to 20.2% in H1 2022 from 22.9% in H1 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 32.1% y/y to N37.4bn in H1 2022 from N28.3bn in H1 2021. Earnings per share was up 32.1% y/y to N2.32/s for H1 2022 from N1.76/s in H1 2021.
We maintain our target price of N43.88/s with a BUY recommendation on the stock. Current Price; N22.60/s.
Source: Company data, CSL Research
