November 25, 2019
By FBNQuest Research
Retaining OP rating despite cuts to our EPS forecasts & price target
Although Lafarge Africa’s (Lafarge) Q3 2019 PBT of N4.7bn improved markedly on a y/y basis (from a pretax loss of -N4.7bn Q3 2018), PBT missed our forecast by a sizable margin. The variance relative to our forecast was driven by a combination of weaker-than-expected unit volume of c.1.0 million tonnes (mt) vs. our 1.1mt forecast and a negative surprise of 1,633bps in gross margin. Consequently, we have made significant downward revisions to our 2019-21E EPS forecasts.
Our new price target of N25.8 is also c.11% lower. Although management sees a pick-up in demand in Q4, we have cut our unit volume forecast for the quarter by c8% to 1.1mt because we believe that demand is still relatively subdued – recent data from the NBS puts GDP growth for Q3 2019 at 2.3%. Going forward, we expect the level of cement demand to continue to mirror modest economic growth. On the back of our new forecasts, we see unit volume for 2019E at 4.7mt, down -2% y/y. Beyond 2019E, we see average unit volume growth of c.5.5% over the next two years leading to 2021E.
Our forecasts for volume growth imply average sales growth of 4% over the 2019-20E period. Following the deleveraging of the company’s balance sheet with the proceeds of its divestment from Lafarge South Africa, we forecast an improvement in 2019E (adjusted) EPS to N1.18 from -N1.10 in 2018. We also forecast EPS growth of 53% y/y and 7% y/y to N1.80 and N1.93 for 2020E and 2021E respectively, with base effects boosting growth for the former. Despite the cut to our price target, we still see a significant potential upside of 80.3% from current levels. Consequently, we retain our Outperform rating on the shares.
Marked improvement in PBT y/y post balance sheet deleveraging
Lafarge’s 9M 2019 results reflect numbers exclusively for its Nigeria operations. However, the prior year numbers show consolidated numbers (including South-Africa) for the Group. As such, the numbers are not like-for-like. That said, based on headline numbers provided by the company, Q3 2019 sales for Nigeria fell by -7% y/y due to a -5% y/y decline in unit volumes to 1.0 million tonnes.
However, PBT improved to N4.7bn vs. a pre-tax loss of -N4.7bn in Q3 2018, thanks to a -70% y/y reduction in net finance cost due to a substantially deleveraged balance sheet and a 440bp y/y expansion in EBITDA margin to 25.7%. PAT (excluding the N106.5bn gain on discontinued operations) also increased to N4.7bn compared with -N3.7bn in the corresponding quarter of 2018. Compared with our forecasts, sales by 12.
However, PBT and PAT missed by significant margins.