May 17, 2024/Cordros Report
We update our views on Lafarge (WAPCO) in this report and review our estimates for the company. Just like its local peers, WAPCO witnessed robust topline growth (+50.0% y/y) in Q1-24, which we attribute to a possible price/volume mix favouring the company’s sales turnover in the period. However, we highlight the company fell short of our expectations as the cost pressures in the period contracted margins significantly as well as FX losses impacting earnings further (-65.2% y/y). Consequently, our outlook on cost control in 2024E is now negative and we expect notable impact on margins, with additional pressure on earnings from the higher FX losses (+33.9% y/y) expected for the year. As a result, we reduced our year-end TP by 5.1% to NGN45.78/s (previous: NGN48.24/s) but maintain our “BUY” rating on the stock. Sequentially, we now project a 2024E EPS forecast of NGN3.59 (+13.2% y/y) with DPS projected at NGN2.15 (dividend yield: 6.4%). On our estimates, WAPCO is trading on a 2024E P/E of 9.3x and EV/EBITDA of 2.8x.
Margins contraction imminent as rising costs undermine control efforts: In 2024E, we expect WAPCO to continue to benefit from the expected improvement in cement demand given the impressive sales performance put out in Q1-24. We note that further growth in volumes for the rest of H1 and Q4 (peak season of cement demand) amid price increases should drive revenue growth. As a result, we project a robust topline expansion of 28.6% y/y (previous: +13.6% y/y) in 2024E with an average growth of 18.1% between 2025E – 2028E. Nonetheless, the company’s poor margin performance in Q1-24 derails from our expectations following aggressive increases across its entire cost line – raw materials, fuel, energy, distribution, electricity, maintenance, outsourced activities, and salaries. Thus, we now envisage a slowdown in the company’s cost reduction efforts in 2024E and think this, alongside FX losses for the year (+33.9% y/y to NGN28.56 billion) will depress earnings growth. Consequently, we foresee EBITDA margin contracting by 374bps y/y to 28.2% (prev.: 32.5%) as EPS settles at NGN3.59 (+13.2% y/y | prev.: NGN4.04).
Drop in operating cash flow to moderate free cash generation: For 2024E, we forecast an FCF yield of 4.7% (2023FY: 28.3% | 5-year forecast average: 12.4%), the lowest in six years, following our estimation of a moderation in free cash flow (-76.9% y/y to NGN25.25 billion). Our 2024E FCF forecast is driven by our projection of a lower operating cash flow (-58.8% y/y to NGN62.11 billion) and capital expenditure in maintaining and developing production plants, buildings, and exploration and evaluation assets. For context, although the company has no plans for capacity expansion in the near term, we anticipate a capex spend of NGN36.86 billion majorly from the ongoing debottlenecking strategy – optimisation and replacement of parts to maximise existing assets and utilisation from the current 55.0% to 85.0%. Overall, our model suggests a slight increase in closing cash balance in 2024E to NGN170.49 billion (+2.8% y/y | 5-year CAGR: +9.5%).
Valuation: Our target price is NGN45.78/s, derived from an 80/20 blend of DCF and sector relative valuation (P/E & EV/EBITDA) estimates. Our DCF FV is derived from an equal blend of FCFF (NGN51.36/s) and FCFE (NGN37.69/s) estimates, assuming a 23.1% WACC and a 4.0% terminal growth rate. On P/E, we utilised the Bloomberg Middle East & African (MEA) peer average 2024E multiple of 18.1x. Applying this to our 2024E EPS estimate of NGN3.59/s gives a FV of NGN65.00/s. Similarly, for EV/EBITDA, we also utilised the 2024E Bloomberg MEA peer average (11.4x) and derived a fair value estimate of NGN112.47/s.
