July 2, 2019/FBNQuest Research
Material upward revisions to our EPS forecasts and price target
We upgrade our recommendation on Lafarge Africa (Lafarge) shares to Outperform from Neutral with a new price target of N22.1 and an implied potential upside of 79% from current levels. Our upgrades are underpinned by substantial increases (+175%) to our 2019-20E EPS forecasts. Our new price target of N22.1 is also considerably (+25%) higher. The key drivers of the upward revisions to our earnings forecasts are a) average margin expansion of c.670bps post the divestment of the (margin dilutive) South-African (SA) business b) the deleveraging of c.US$293m of shareholder loans from its balance sheet and c) a 500bp increase to the terminal EBIT margin driving our DCF model.
The deleveraging is expected to result in a reduction of c.N10.bn from Lafarge’s annual interest expense and enable it to reinvest in plants in Nigeria. Following the divestment, we see Lafarge Africa’s (including SA for H1) EBITDA margin rising to c.25% in 2019E from c23.8% (based on IFRS 16) in Q1 2019. Beyond 2019E, we forecast average EBITDA margin of c.30% over the 2020-21E period. Our 2019E sales forecast of N262.1bn is 15% lower than that of the prior year because we have excluded SA from our H2 2019E forecasts. Nevertheless, we expect 2019E PBT to improve markedly to c. N13.9bn from a pre-tax loss of -N19.5bn in 2018 due to the boost to margins from the divestment and the elimination of one-off restructuring costs from the P&L.
Slight improvement in PBT in Q1 2019 after sizable loss in Q4 2018
Although Lafarge’s Q1 2019 sales were down by -3% y/y, PBT improved to N123m (vs -N2.9bn in Q1 2018). A combination of factors including declines of 10% y/y and 17% y/y in net interest expense and opex respectively, and a gross margin expansion of 84bps y/y to 23.2% were the key drivers behind the y/y improvement in PBT. Thanks to a tax credit of N3.0bn, PAT improved to N2.6bn (vs –N835m in Q1 2018). Relative to our forecasts, while sales missed by c.5%, PBT came in significantly below the N1.6bn that we were modelling. The company’s Q4 2018 results also came in much weaker than our expectations.
The firm posted a pre-tax loss of –N5.1bn vs.–N35.1bn in Q1 2018. The loss was driven primarily by net interest expense of –N10.8bn, which although declined y/y, was still material enough to offset a significant (+3017bps y/y) gross margin expansion. Similar to the Q1 2019 results, PAT advanced to N1.3bn vs. –N30.2bn Q4 2018 on the back of a tax credit of N6.7bn. Sales in Q4 2018 were c.5% behind our forecast. However, the pre-tax loss of –N5.2bn was significantly more than our –N981m estimate.