August 28, 2023/CSL Research

Lafarge Africa reported a 5.9% y/y Revenue growth to N197.6bn in H1 2023 from N186.5bn in the prior period (H1 2022). Similarly, on a q/q basis, Revenue was up 15.3% to N105.8bn in Q2 2023 from N91.8bn in Q1 2023. The broad-based growth in cement sales (up 10% to N102.4bn) and aggregate and concrete sales (up 23.2% to N3.3bn) contributed to the marginal increase in topline growth in H1 2023, despite a decrease in sales of other products (down 51.9% to N85.4bn).

Due to the expiration of the tax holiday on the company’s profit from the Mafamosing line 2 plant in Calabar, the company’s Tax Expense increased to N19.83bn in H1 2023 from N9.46bn in H1 2022. Consequently, Net Income declined by 5.2% y/y to N35.47bn in H1 2023 from N37.41bn in H1 2022. Thus, Earnings per share also declined by 5.2% y/y to N2.20/s in H1 2023 from N2.32/s in H1 2022.

We see room for growth in demand in the second half of the year, as indications from the new government suggest an increase in capital expenditure in H2 2023. The new minister of works recently stated that all ongoing work on federal roads would be completed within the shortest possible time. Also, given threats of revocation of undeveloped lands by some governors and the new FCT minister, we expect to see an uptick in demand by private players. Finally, there is the possibility of another price increase as macroeconomic conditions continue to increase operational cost. 

We have a price target of N45.96/s, with a BUY recommendation, our price target implies a 67% 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. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.

Revenue growth solely driven by Increases in Price

In its recently released H1 2023 results, Lafarge Africa reported a 5.9% y/y Revenue growth to N197.6bn in H1 2023 from N186.5bn in the prior period (H1 2022). Similarly, on a q/q basis, Revenue was up by 15.3% to N105.8bn in Q2 2023 from N91.8bn in Q1 2023. The broad-based growth in cement sales (up 10% to N102.4bn) and aggregate and concrete sales (up 23.2% to N3.3bn) contributed to the marginal increase in topline growth in H1 2023, despite a decrease in sales of other products (down 51.9% to N85.4bn).

According to management, the marginal Revenue rise (+5.9% y/y) was primarily driven by an upward price adjustment, as there was a drop in production volumes. In terms of pricing, Lafarge implemented a price adjustment in Q1 2023, following the modifications made at the tail end of Q4 2022. The average cement price in Lafarge Africa was N74,770 in H1 2023, a 15.3% increase from the N64,827 reported in H1 2022.

We note that the increase in price is necessary to protect profit margins as production volumes continue to decline. Production volumes closed in H1 2023 at 2.59 million MT from the 2.82MT in H1 2022, indicating an 8.1% decrease. The management attributed the decline in production volumes to the naira cash crunch and the distortion of trading days caused by the general elections in Q1 2023. Also, we note that the constrained purchasing power by private players amidst the challenging macroeconomic environment and the change of leadership has contributed significantly to the decline in the demand for the company’s product.

Reduced cost pressures lifts EBITDA margin

Despite a y/y increase in production fixed costs (up 11.5% y/y to N30.7bn) and production variable costs, Cost of Sales (adjusted for depreciation) declined, down 3.7% y/y (vs. Revenue growth of 5.9%) to N81bn in H1 2023. We are happy with the company’s effort to keep cost down despite the impact of FX devaluation on imported raw materials, persistent inflationary pressures, and rising energy costs. Consequently, Gross profit grew 13.9% y/y to N116.6bn in H1 2023, while Gross margin rose by 4.1ppts to 59.01% in H1 2023.

Operating Expenses (adjusted for depreciation) increased by 90.1% y/y to N51.5bn in H1 2023 from N27.09bn in H1 2022. The increase was driven by both Administrative Expenses adjusted for depreciation (up 14.6% y/y to N10.87bn) and Selling & Distribution Expenses (up 7% y/y to N40.27bn). Other Income was also up significantly by 112% to N425m. Despite the cost pressures, EBITDA increased by 8.1% to N65.92bn in H1 2023.  Consequently, EBITDA margin increased by 0.7ppts to 33.35% in H1 2023 from 32.68% in H1 2022. Depreciation and Amortisation were up to N13.6n while Operating Profit grew by 7.7% y/y to N52.2bn from N48.54bn in H1 2022.

We remain happy with the company’s effort to stem cost pressures despite the impact of FX crisis and the high-level inflationary environment. The company’s introduction of green logistics which has led to the use of LMG trucks and the railways has helped reduce diesel cost which in turn saved a chunk of the company’s selling and distribution costs.  We estimate EBITDA of N131.8bn in 2023e, which translates to an EBITDA margin of 33.2% in 2023 from 29.5% in 2022.

Increased Tax Expense drags PAT

Lafarge recorded a 281.6% increase in Net Finance Income to N3.02bn in H1 2023. The significant increase reflects a 24.4% y/y decline in Finance Cost amidst a significant growth in Finance Income. We note that the growth in Finance Income was driven by a significant increase in interest income from short term fixed deposits and current accounts. Pre-Tax profit was up by 18% y/y to N55.3bn in H1 2023.  Due to the expiration of the tax holiday on the company’s profit from the Mafamosing line 2 plant in Calabar. Tax Expenses increased to N19.83bn in H1 2023 from N9.46bn in H1 2022. Consequently, Net Income declined by 5.2% y/y to N35.47bn in H1 2023 from N37.41bn in H1 2022. Earnings per share also declined by 5.2% y/y to N2.20/s for H1 2023 from N2.32/s in H1 2022.

We note that the impact of the unification of the FX markets did not hit the company as badly as it hit its peers because the company’s balance sheet is deleveraged with significantly lower FX-denominated liabilities compared to its competitors, as the company prioritizes locally made materials. The management stated that they had been valuing their FX liabilities (as it is sourced from the parallel market) at a blended rate of N751/US$1 in H1 2023. This helped the company manage the fluctuation better when the FX rates were floated in June. Looking ahead, we expect the company’s Net Finance Cost will remain at low levels for the rest of the year as its loans and liabilities are under control.

Outlook

The cement sector has played a vital role in Nigeria’s growth and development as rapid urbanization and increased productivity have led to a surge in cement production. Amidst a challenging business, the sector witnessed a dip in demand despite the moderate increase witnessed in Q4 2022. In H1 2023, the cement sector struggled in the first half of the year, with price increases driving marginal growth in the revenues of players.

Looking ahead, we see room for growth in demand in the second half of the year, as indications from the new government suggest an increase in capital expenditure in H2 2023. The new minister of works recently stated that all ongoing work on federal roads would be completed within the shortest possible time. Also, given threats of revocation of undeveloped lands by some governors and the new FCT minister, we expect to see an uptick in demand by private players. On the other hand, price will continue to reflect macro-economic happenings which point to higher prices, especially since it is in a seller’s market and margin protection is a key concern. We project price growth of 15.0% y/y and sales volume of 5.00 million MT in 2023. Consequently, we project FY Revenue of N397.43bn in 2023e, a 6% y/y increase compared with the previous year (2021; N373.24bn).

Valuation

We have a price target of N45.96/s, with a BUY recommendation, our price target implies a 67% upside potential from the last closing price of N27.20/s.  We still believe the market is yet to price in the firm’s improved operating performance fully. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.