Lafarge Cut to Estimates After Loss in Q3-17

 

 

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November 3, 2017/Cordros Research

We revise forecasts for LAFARGE following 9M-2017 results, and adjust our TP for the stock for the Rights Issue (RI). We cut net profit forecasts by 85% for 2017F and by 3% average for 2018-2019F, increase shares outstanding (NOSH) by 57% to 8.6 billion, and roll-forward valuation to 2018F. The broad industry challenge aside, LAFARGE’s sales volume, among our universe, lags expectation the most. Margin recovery outlook is relatively less assuring. And there is an underlying FX risk on the outstanding sizeable quasi-equity USD borrowings (USD286 million). On the positive, proceeds of the RI will partly address the Group’s debt overhang condition and allow management focus on profitable operations. On net, we reduce TP for the stock by 55% to NGN38.98/share (NGN80.04/share on the old NOSH) and downgrade rating to SELL. LAFARGE’s RI price of NGN42.5/share is trading close (9% premium) to our new TP.

Following Q3-17 result, we raise 2017F volume forecast slightly to 6.2Mts (previously 6.1Mts), representing 18.6% contraction (previously 19.3%), on better-than-expected Nigerian volume (precisely Mfamosing). For 2018 and 2019 however, we revise volume forecast lower to 6.7Mts (previously 7.2Mts) and 6.9Mts (previously 7.6Mts), after cutting expected utilization rates for the West (2,000bps) and North (500 bps) of Nigerian operations. Volume forecast for the South African operation, struggling with high competition and weak infrastructure spending, is unchanged. We retained estimated end-2017 selling price of NGN32,340/bag for the Group (Nigeria: NGN44,800/bag) for 2018F.

Noteworthy from the Q3-17 result was the crashing of gross margin to 19.6%, from 32% in Q2, and also below our conservative estimate of 24%. LAFARGE’s unsteady gross margin between Q4-16 and 9M-17 (compared to DANGCEM’s) does not make for strong reliance on management’s claims of strong contribution from coal, pet-coke, and alternative fuels in cement production. Also, at +60% in 9M-17, OPEX is running at a record-fast rate. Overall, following what we view as an unimpressive run rate – notwithstanding management’s view that some of the costs are one-offs – we cut 2017F EBITDA forecast by 25% and 2018-2019F by 7% on higher OPEX and lower gross margin than previous estimates. Our revised EBITDA forecasts imply EBITDA margin of 18% in 2017F (previously 26%) and 23% in 2018F and 2019F (previously 24%).

The slight cut to 2018-2019 net profit forecast, notwithstanding the above revisions, reflects the potential gain from the part refinancing of debts using RI proceeds. From 9M-17’s NGN267.4 billion, we estimate gross debt will reduce to NGN135.7 billion in 2018F, and consequently reduce finance costs to NGN16.1 billion, from our previous estimate of NGN 23.1 billion, and NGN24.4 billion potentially in 2017F.

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