Turnover: down 44.77% q/q, down 37.27% y/y.
· Gross margin performance: down 144bps q/q, up 235bps y/y.
· OPEX/Sales ratio: down 52bps q/q, down 995bps y/y.
· PBT Margin: down 82bps q/q, up 2151bps y/y.
Lafarge Africa published its Q3 2019 results on Monday. The results showed that the cement producer has completed its divestment from the Lafarge SA operations and the positive impact was seen in the firm’s finance cost as well as balance sheet position. Nonetheless, the loss of the SA market as well as effects of seasonality reflected in topline performance as revenue dropped on a quarterly and yearly basis.
Reaping Benefits of Divestment
Revenue generated by the cement producer in Q3 2019 came in at N53.91billion (this includes one month revenue from SA operations and N45.17billion from three months in Nigeria) against N72billion in Q3 2018. Looking at the Nigeria numbers, revenue dropped by 7.25%y/y from N48.70billion, this may have been due to the seasonality effect of the rainy season that affects construction and demand for cement during the third quarter.
Nonetheless, a decline in cost of sales as well as price increase in May 2019 provided some cushion for gross profit margin performance. We point out that gross profit margin improved by 235bps y/y to 26.15%. We saw the same movement in the firm’s OPEX/sales ratio.
OPEX/sales ratio contracted to 9.98% from 19.94% in Q3 2018, this is largely in line with our estimates of operating margin improving by c.968bps. This improvement was as a result of the sale of the SA operation, which recorded operating loss in 2018 and 2017.
Furthermore, the cement producer recorded a decline of 71.67% y/y in its net finance cost to N3.06billion. We point out that the proceed of the sale of the SA business was used to settle the related party debts which had since impaired the bottom line performance and leverage position of the firm. The total debt of the company stands at N64.57billion (vs N266billion as at FY2018) with debt to equity ratio at 18.45% as at the end of Q3 2019 vs 197% at FY 2018.
The drop in net finance cost, in addition to improvements in OPEX/sales ratio, drove PBT margin up to 10.37% from a loss before tax margin of 11.13% in Q3 2018.
Seasonality Takes its Toll
On a sequential basis, revenue generated from its Nigeria business in Q3 2019 came in lower by 24.54% compared to Q2 2019. This may be due to slower volume sales in Q3 2019 as a result of seasonality. While the cement producer recorded a decline (down 144bps q/q) in gross profit margin, it recorded improvements in its OPEX/sales ratio (down 52bps q/q). The latter, combined with the decline in net finance cost (down 36.09% q/q), was not enough to shield bottom line performance as PBT margin dropped by 82bps.
In 9M 2019, turnover printed at N163.05billion, down 30.41%y/y compared to 9M 2018. Moving down the P&L the trend was dissimilar as the company recorded an increase in PBT margin (up to 12.35%, from 6.33% LBT margin in 9M 2018) on the back of a 54.01% y/y decline in net finance cost as well as a 585bps y/y decline in OPEX/sales ratio to 9.98%.
Going forward, we expect the firm to improve volume sales as we exit the rainy season and construction activities resume. Also supportive of improved topline performance is the implementation of the capital expenditure of the 2019 budget.
Furthermore, with the sale of the loss-making SA business, we expect the cement producer to close the year on a positive note compared to the previous year. We also expect to see improvements in margin performance as well as cost containment as the firm continues implementation of its turnaround plan.
Our Valuation model is currently under review.