June 3, 2020
by FBNQuest Research
-25% cut to our 2020-21E EPS forecasts
Lafarge Africa’s (Lafarge) Q1 2020 earnings of N8.1bn improved 215% y/y. The primary drivers were a -65% y/y decline in net finance charges following the firm’s deleveraging off its balance sheet via a N90bn rights issue and divestment from its South African Holdings in 2019. The move in our view has positioned the firm to weather headwinds resulting from the covid-19 pandemic through the year. Nonetheless, we expect that the lockdown in Lagos and Ogun States will weigh on unit volume growth in Q2. In Q1, Lafarge reported unit volume growth of 8% y/y to c.1.43 million metric tonnes (mmt).
Although management did not provide significant guidance, what it did state on the Q1 2020 results conference call was more than enough for us to conclude that a y/y unit volume decline in Q2 is inevitable. We estimate unit volumes could decline by 25-30% y/y during the quarter. Looking ahead, we project flattish unit volume growth for 2020E. We do not expect a sharp recovery in volumes as the rains in H2 typically result in subdued cement demand.
We expect stable prices through the year. Overall, we forecast a sales and EPS decline of around -3% y/y and -46% y/y to N250.9bn and N0.96 respectively for 2020E. Our new forecasts imply EBITDA margin of c.31% over the 2020-21E period. As a result, our EPS outlook over the 2020-21E period is down by c.25%. Our new price target of N19.8 is down by a similar magnitude and implies a potential upside of 78% at current levels. As such, we retain our Outperform rating on the stock.
Pre-tax profits of N9.4bn up 105% y/y
Lafarge’s Q1 2020 results surprised positively. Sales of N63.7bn grew 10% y/y while PBT of N9.4bn was up by around 105% y/y. PAT growth was more significant (+215% y/y) because of a loss of â€“N3.5bn in the prior year resulting from discontinued South African operations. Compared with our forecasts, sales and PBT beat by 6% and 18% respectively. Topline growth delivered during the quarter and a -65% y/y decline in net finance charges more than offset a -265bp y/y gross margin contraction to 27.7%. This contraction was driven by a 52% y/y rise in power generation costs. Lafarge’s 2019 annual report show numbers for Nigeria and prior year figures for FY 2018.
However, its prior accounts for 9M 2018 show numbers for the pre-merger entity (including South Africa). As such, we could not derive numbers for Q4 2018. Based on the headline figures from the company’s 9M 2019 presentation.