Lafarge Africa Plc Q1 2020 Results: An All-round Positive Performance

May 20, 2020/InvestmentOne Report

Turnover: up 27.54% q/q, 9.79% y/y.

·         Gross margin performance: rose to 27.67% from 9.37% in Q4 2019; down from 30.32% in Q1 2019.

·         OPEX/Sales ratio: down to 9.28% from 12.86% in Q4 2019 and 10.63% in Q1 2019.

·         PBT Margin: rose to 14.73% from -4.58% in Q4 2019 and 7.91% in Q1 2019.

The Q1 2020 Lafarge Africa results showed that the cement producer recorded commendable increase in topline performance combined with decline in operating expenditure, which bolstered bottom-line performance. 

An All-round Decent Performance

Revenue generated by the cement producer in Q1 2020 came in at N63.69billion, rising by 9.79% y/y. Looking at the numbers, revenue performance was on the back of 8% increase in volume sales as well as a 2% rise in average cement price during the quarter. 

Despite the improvement in price, increase in cost of sales owing to a 52.04%y/y jump in cost of fuel and power as well as a 22.82% rise in distribution cost put pressure on gross profit margin which fell by 265bps y/y to 27.67% in Q1 2020. The increase in energy cost may have resulted from the devaluation in naira, leading to increased cost on its Mfamosing Plant gas contracts which are priced in dollars. Furthermore, management highlighted that the firm is currently incurring expenses in the expansion of its distribution network. 

However, the cement producer continues to enjoy the benefits from the sale of its loss-making SA operations as OPEX/sales ratio fell by 135bps y/y to 9.28% in Q1 2020. The improvement in OPEX/sales ratio was also partly as a result of decline in technical services fee paid to the parent company (down 16.57% to N1.04billion). 

Despite the c.91% decline in finance income, owing to fall in FX gains, the cement producer recorded a decline of 64.56% y/y in its net finance cost to N2.45billion on the back of a 73.26% plunge in interest on borrowings. We highlight that this is as a result of decline in total borrowings which were paid off with the proceeds of the sale of its South African factory. The drop in net finance cost, in addition to improvements in OPEX/sales ratio, drove PBT margin up to 14.73% from a PBT margin of 7.91% in Q1 2019.  

On a sequential basis, revenue generated in Q1 2020 came in higher by 27.54% compared to Q4 2019 on the back of low base effect as sales in Q4 2019 came in low. While the cement producer recorded an improvement (up from 9.37% in Q4 2019) in gross profit margin on a quarterly basis, it also improved in cost efficiency as its OPEX/sales ratio was down 357bps q/q. As a result of the improvement in gross profit margin and lower OPEX/sales which offset the jump in net finance cost (up 51.82% q/q), the company recorded a PBT margin of 14.73% from a negative margin of 4.58% in Q4 2019. 

Going forward, management pinpointed that cement prices are expected to be stable. While volume sales in Q2 2020 is expected to be affected by slowdown in construction activities according to management, they expressed confidence in the potential bounce back in volume demand as Nigeria exits economic lockdown with activities picking up gradually. However, we remain concerned about the prospects of volume demand from the public sector as revenue generation for the rest of the year comes under pressure. We believe the downward review of government revenue will have a negative impact on its capital budget implementation. Another downside risk to topline performance is the possibility of a second wave of coronavirus which may once again push the economy to another lockdown, limiting construction activities by both private and public sector. 

We expect the cement producer’s expansion in distribution network to pay off in the medium to long term as cement demand rises. Furthermore, we highlight that lower finance cost will continue to be positive for bottom-line performance; this should combine favorably with low OPEX, which management affirmed will continue to be under strict control. In addition, the firm’s capital expenditure is expected to be low in 2020, according to management guidance; we opine that this should be positive for the company’s leverage position (current debt/equity stands at 0.17x) as they may not be taking huge debts in the near term.

YE(DEC)

Q1 2020

Q/Q

Y/Y

Sales

63,696

27.54%

9.79%

Cost of Sales

(46,069)

1.78%

13.97%

Gross Profit

17,627

276.61%

0.19%

Gross margin

27.67%

1830bps

-265bps

OPEX

(5,912)

-7.91%

-4.11%

Opex/sales

9.28%

-357bps

-135bps

Net Finance Cost

(2,457)

51.82%

-64.56%

PBT

9,382

-510.25%

104.52%

PBT margin

14.73%

1930bps

682bps

Tax Credit/ (Expense)

(1,315)

-53.17%

-176.74%

PAT

8,067

-258.31%

28.01%

PAT margin

12.66%

2286bps

180bps

Source: Company Financials, Investment One Research

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