Buying Lafarge’s Recovery Story as Profit Jumps by 158.96%…

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Lafarge Africa Plc recorded strong operating performance in H1 2020 as its Profit After Tax (PAT) rose by 158.96% to N23.33 billion due to significant declines in finance costs and administrative expenses.

Lafarge Africa’s impressive performance was despite the COVID-19 pandemic which nearly shut-down economic activity, especially in the cement sector, amid Federal Government’s imposed lockdown on some states such as Lagos, Ogun, Abuja and Kano where daily consumption of cement is relatively high; and, the dwindling revenue from its cementitious products such as aggregate and ready-mix concrete.

The cement company’s revenue increased marginally by 2.25% to N120.54 billion in H1 2020, hence increasing profit margin to 19.35% from 13.44% printed in H1 2019.

The increase in revenue was chiefly from the company’s segment revenue from cement (constituting 98.38% of the total revenue) which rose by 3.47% to N118.58 billion; however, segment revenue from aggregate and ready-mix concrete (comprising 1.62% of the total revenue) plunged by 26.20% to N1.44 billion in H1 2020.

Notably, the third largest cement company in Nigeria stepped on the path of recovery after disposing its foreign subsidiary, Lafarge South Africa Holdings (Proprietary) Limited – which was a drain on the group’s profitability given its relatively thin gross margins –, in July 2019 at a gain of N108.97 billion.

Lafarge South Africa Holdings, before it was sold in July 2019, printed loss after tax of N6.83 billion in H1 2019, despite the N42.41 billion revenue recorded in the same period.

Going forward, we expect WAPCO’s increased profitability to be sustained, amid further ease in restriction of movements – which should stimulate the use of cement – and reduced cost lines, especially finance costs.

Hence, our “MODERATE BUY” recommendation on WAPCO’s shares.

Nigeria’s Huge Infrastructural Gap Presents Opportunity for Lafarge

The huge infrastructral gap in Nigeria presents huge opportunity for Lafarge Africa Plc, especially for its ready-mix concrete which is well suited for road construction – Lagos State Government constructed part of the Bus Rapid Transport (BRT) roads with WAPCO’s ready-mix concrete.

Given the relatively bad state of the roads in Nigeria today, coupled with the quest for stronger and durable roads by the Federal and State governments, we see increasing opportunity for Lafarge Africa Plc to further grow its revenue.

Also, the use of cement is expcetd to be stimulated by the need to bridge the significant housing deficit in Nigeria in the face of a large population size and the worsened insecurity.

…Sale of Foreign Subsidiary Strengthened Balance Sheet Position

WAPCO significantly reduced its debt position to N54.95 billion as at H1 2020 from the humongous N275.26 billion printed as at H1 2019, using the proceeds from the sale of its foreign subsidiary (USD317 million).

Hence, the group’s total liability effectively fell to N143.66 billion from a high of N406.78 billion, even as its net debt position crashed to N15.07 billion as at H1 2020, from N255.72 billion as at H1 2019 amid improved cash position.

The reduced debt position accounted for the lower finance costs, which stood at N4.42 billion in H1 2020 from N13.33 billion in H1 2019 – we expect the company to further widen its margin amid lower interest rate environment and low debt level.

Similarly, with the sale of Lafarge South Africa Holdings, and the N89.2 billion rights issue in 2019, shareholder value increased to N352.14 billion, up from N139.38 billion, thus, lifting its shareholders value per share to N21.86 as at H1 2020 from N8.65 as at H1 2019.

The recent positive develoments boosted Lafarge Africa’s financial performance to earn our ‘Bb’ rating, as it ranked favourably compared to other players in its industry.

…Where in the Midst of Players Does WAPCO Stands?

With cement production plants in Ewekoro and Sagamu in the South West (4.5MMT production capacity), Mfamosing in the South South (5MMT production capacity) and Ashaka (1MMT production capacity) in the North East of Nigeria, totaling 10.5MMT, WAPCO is well positioned across the country to further increase its revenue.

Also, Lafarge Readynix Nigeria Limited, one of the subsidiaries of the group and a market leader in quality concrete solutions, operates in three strategic regions of the country: Lagos, Port-Harcourt and Abuja.

However, Lafarge Africa still needs to up its competitive startegy in order to gain more market share from its competitors such as Dangote Cement Plc (with 29.3MMT production capacity and 60.6% market share) and BUA which is ramping up production capacity to 14MMT by 2021.

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