August 20, 2024/InvestmentOne Report

Lafarge Africa Plc posted a 49.52% YoY revenue growth to NGN295.58bn in H1:2024, after recovering from the slower sales recorded in the first half of the previous year. The strong growth was primarily driven by a hike in cement prices coupled with volume expansion following the introduction of Watershield cement in H1:2024. . In specifics, revenue from cement rose by 49.56% to NGN287.01bn, aggregates and concrete increased by 47.25% to NGN8.23bn and other products surged by 79.58% to NGN335.42mn. Despite the outstanding revenue growth, rising cost of sales continue to hinder margin expansion. Cost of sales grew at a
faster pace of 56.90% YoY to NGN147.94bn and accounting for 50.05% of H1:2024 revenue, while the gross profit saw a 42.79% YoY increase to NGN147.64bn during the period.

Consequently, gross margin contracted by 236bps to 49.95% as the increasing inflationary pressures continue to weigh on performance. Operating profit rose by 50.92% YoY to NGN78.91bn, with support from a 289.96% YoY increase in other income amounting to NGN1.65bn, following a government grant (NGN981.14bn), gain on disposal of property, plant and equipment (NGN382.26bn) and sales of scrap (NGN293.99bn). Despite the 34.47% YoY increase in operating expenses to NGN69.73bn, owing to cost pressures across selling and distribution costs and administrative expenses, the operating margin slightly increased by 25bps to 26.70% in H1:2024 – supported by the material rise in other income.

Foreign Exchange Loss Drag Bottom Line Growth: Lafarge Africa Plc recorded a significant foreign exchange loss of NGN19.91bn in H1:2024, which consequently pushed finance cost to NGN33.31bn – a significant jump from NGN1.41bn recorded in the previous year. Moreso, the material increases in bank charges to NGN12.76bn (vs NGN602.13mn in H1:2023) added to the pressure on finance costs.

Net finance costs in H1:2024 stood at NGN32.28bn – a stark contrast to the net finance income of NGN3.03bn recorded last year, which was an industry outlier. Due to the foreign exchange loss caused by the currency devaluation amid the challenging macroeconomic environment, Profit Before Tax (PBT) declined by 15.70% YoY to NGN46.63bn in H1:2024. Likewise, the PBT margin shrank by 1221bps to 15.78% relative to the preceding year. Following the foreign exchange loss and an income tax expense of NGN17.28bn, the company posted a Profit After Tax (PAT) of NGN29.35bn –a three-year low and marking a 17.27% YoY earnings decline. Consequently, the Earnings Per Share (EPS) fell to NGN1.82 kobo from NGN2.20 kobo in the corresponding period in 2023.

Sequential Performance: On a quarterly basis, revenue growth outpaced the increase in cost of sales (COS), rising by 14.54% to NGN157.80bn, meanwhile COS edged up by 5.11% to NGN75.81bn. The impact of higher pricing amid the relatively slower COS growth in Q2:2024 led to a 24.90% rise gross profit, totaling NGN81.99bn, with gross margin rising by 431bps to 51.96%. The net finance cost moderated by 54.56% in Q2:2024 to NGN9.78bn, thus providing leg room for PBT growth to reach NGN37.92bn. Despite the relatively higher income tax expense of NGN13.76bn during the period, PAT advanced by 365.19% from the previous quarter’s earnings to NGN24.16bn in Q2:2024.

Balance Sheet: As of 30th June 2024, Lafarge Africa Plc’s total assets increased by 12.28% YoY to NGN735.11bn, majorly driven by the 9.56% YoY growth in property, plant and equipment. Inventory at the end of H1:2024 advanced by 11.46% YoY to NGN84.06bn. Conversely, cash and cash equivalent decreased to NGN93.42bn from NGN179.24bn in H1:2023. On the other hand, total liabilities rose faster by 28.04% YoY to NGN301.31bn, due to increases in trade payables (+56.78%), contract liabilities (+51.30%) and deferred tax liabilities (+75.31%). At the end of the reporting period, shareholders’ funds stood at NGN433.80bn.

Outlook: We expect Lafarge Africa Plc to continue to grow its revenue through volume expansion and price increases, albeit at a slower pace. In line with its commitment towards a greener planet, the company will launch ECOPlanet cement in Q3:2024. We expect the addition of this product to improve revenue, especially in this coming quarter. Notwithstanding, we still believe that the prevailing macroeconomic headwinds may continue to weigh on bottom line numbers.

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