August 26, 2024/CSL Research
Lafarge Africa reported a 49.5% y/y Revenue growth to N295.58bn in H1 2024 from N197.68bn in the prior period (H1 2023). Similarly, on a q/q basis, Revenue was up by 14.5% to N157.80bn in Q2 2024 from N137.77bn recorded in Q1 2024. The broad-based growth in cement sales (up 49.6% to N287.01bn), aggregate and concrete sales (up 47.25% to N8.23bn), and other products (up 79.59% to N335m) drove the topline growth in H1 2024.
The increase in sales volume reflects growing demand, driven by higher government capital expenditure (CAPEX) and increased private-sector activity. As the government continues to prioritize infrastructure development, demand for cement is expected to remain robust. Furthermore, despite government intervention to cap cement prices, we anticipate that cement prices will continue to rise in 2024, as pricing is likely to remain responsive to macroeconomic conditions.
With a seller’s market dynamics and a strong focus on margin protection, there is likely to be an ongoing trend toward higher prices. We forecast a 20% y/y increase in cement prices, averaging N93,484 per tonne in 2024. Additionally, we expect sales volumes to rise by 21.1%, reaching an average of 6.10 million metric tonnes. Consequently, we project FY 2024 Revenue to reach N584.70 billion, representing a 44.2% increase from the previous year’s N405.50 billion.
We also anticipate that Net Finance Costs will rise to N40.22 billion in 2024, up from N21.04 billion in 2023, primarily due to higher interest on local borrowings. However, no further foreign exchange losses are expected, as the company has confirmed that all its foreign-denominated obligations have been settled. Overall, we anticipate a 9.0% growth in Profit Before Tax (PBT) to N85.84 billion in 2024.
We have revised our price target upwards from N45.96/s previously to N47.81/s. However, we maintain our BUY recommendation. Our price target implies a 28.87% upside potential from the last closing price of N37.10/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. The stock currently trades at an EV/EBITDA ratio of 2.83x, which is lower than its industry average of 10.45x.
Lafarge records strong topline growth.
In its recently released unaudited H1 2024 results, Lafarge Africa reported a 49.5% y/y Revenue growth to N295.58bn in H1 2024 from N197.68bn in the prior period (H1 2023). Similarly, on a q/q basis, Revenue was up by 14.5% to N157.80bn in Q2 2024 from N137.77bn recorded in Q1 2024. The broad-based growth in cement sales (up 49.6% to N287.01bn), aggregate and concrete sales (up 47.25% to N8.23bn), and other products (up 79.59% to N335m) drove the topline growth in H1 2024.
A mix of price and volume growth drove the company’s revenue. The increase in sales volume reflects growing demand, driven by higher government capital expenditure (CAPEX) and increased private-sector activity. As the government continues to prioritize infrastructure development, demand for cement is expected to remain robust. Furthermore, despite government intervention, we anticipate that cement prices will continue to rise in 2024, as pricing is likely to remain responsive to macroeconomic conditions.
With a seller’s market dynamics and a strong focus on margin protection, there is likely to be an ongoing trend toward higher prices. We forecast a 20% y/y increase in cement price to average N93,484 in 2024. We also forecast a 21.1% increase in sales volumes, averaging 6.10 million metric tonnes in 2024. Overall, driven by expected increases in both price and volume, we forecast FY Revenue of N584.70bn in 2024, 44.2% y/y higher than the previous year’s sales volume (2023: N405.50 billion).
Increased cost pressures drag EBITDA margin in H1.
Given a y/y increase in variable costs (up 63.1% y/y to N96.19bn), production fixed costs (up 53.58% y/y to N20.81bn) and maintenance fixed costs (up 109.65% y/y to N17.81bn), Cost of Sales (adjusted for depreciation) increased by 66.4% y/y to N134.81bn in H1 2024 from N81.02bn in H1 2023. We attribute the rise in cost to the impact of the steep devaluation of the currency, elevated inflationary pressures, and rising energy costs. Despite the increase in Cost of Sales, Gross Profit grew by 37.8% y/y to N160.76bn in H1 2024. However, the Gross Margin declined by 4.6 ppts to 54.39% in H1 2024, down from 59.01% in H1 2023. In H1 2024, Operating Expenses (adjusted for depreciation) increased by 36.58% y/y to N69.85bn, up from N51.14bn in H1 2023.
This rise in OPEX was driven by a 33.2% increase in Selling & Distribution Expenses (adjusted for depreciation), which reached N53.65bn, and a 49.1% rise in Administrative Expenses (adjusted for depreciation), totaling N16.20bn. Despite these cost pressures, EBITDA grew by 40.4% to N92.59bn in H1 2024, up from N65.93bn in H1 2023. However, the EBITDA margin decreased by 2.0ppts to 31.32% in H1 2024 down from 33.35% in H1 2023. Depreciation and Amortisation rose slightly by 0.3% to N13.68bn. Other Income, which includes gains from the disposal of property, plant, and equipment, government grants, sale of scraps, and other miscellaneous sources, surged by 290.0% to N1.66bn from N425m in H1 2023. The company’s Operating Profit increased by 50.9% y/y to N78.91bn from N52.29bn in H1 2023. In H1 2024, the company faced significant cost pressures due to the elevated inflationary environment and rising energy prices.
However, the commencement of the Ashaka Power Plant is expected to mitigate the impact of these rising energy costs in the medium to long term. Additionally, the company plans to expand its use of CNG buses, which we anticipate will help reduce selling and distribution costs. Considering these factors, we forecast EBITDA of N152.85 billion in 2024, up from N129.24 billion in 2023. However, this translates to an EBITDA margin of 26% in 2024, lower than the 32% recorded in 2023.
Increased Net Finance Cost drags PBT
In H1 2024, Lafarge reported a Net Finance Cost of N32.28bn, a significant shift from the Net Finance Income of N3.03bn recorded in H1 2023. This sharp increase in Net Finance Cost was driven by a rise in Finance Cost to N33.31bn, up from N1.41bn in H1 2023, coupled with a decline in Finance Income to N1.03bn from N4.44bn in H1 2023.
The growth in Finance Cost was due to a substantial increase in Net FX losses. In H1 2024, the company reported total FX loss of N19.91bn. In Q2 2024, the company reported an FX gain of N1.89 billion, with the FX loss stemming solely from Q1 2024. The company has confirmed that all foreign-denominated obligations were settled by the end of H1 2024 and has committed to prioritizing locally sourced materials to avoid further FX losses.
Based on this, we do not expect the company to incur any additional FX losses this year. However, we anticipate that Net Finance Costs, driven by increased interest on local borrowings, will rise to N40.22 billion in 2024, up from N21.04 billion in 2023. Pre-tax profit decreased by 15.7% y/y to N46.63bn in H1 2024, down from N55.32bn in H1 2023 while Net Income fell by 17.3% y/y to N29.35bn in H1 2024, compared to N35.48bn in H1 2023. Earnings per share also declined by 17.3% y/y to N1.82 in H1 2024, down from N2.20 in H1 2023. Looking ahead, we believe profitability will improve in 2024 and we forecast a growth in PBT of 9.0% to N85.84bn in 2024.
Valuation
We have revised our price target upwards from N45.96/s previously to N47.81/s. However, we maintain our BUY recommendation. Our price target implies a 28.87% upside potential from the last closing price of N37.10/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. The stock currently trades at an EV/EBITDA ratio of 2.83x, which is lower than its industry average of 10.45x.
Kindly click on the below link to download the full report. Lafarge Africa H1 2024 Earnings Review. docx.pdf
