April 30, 2021/Cordros Report
Event: WAPCO published Q1-2021 unaudited financials yesterday. The result showed that Profit After Tax grew 13.3% y/y to NGN9.14 billion while EPS settled at NGN0.57/share (+13.3% y/y). The double-digit growth in EPS was driven by topline growth (+12.2% y/y), the decline of 16.3% y/y in operating expenses (excluding depreciation) and reduction in finance cost (-18.2% y/y).
Revenue grew by 12.2% y/y in Q1-2021, on the back of improvement in cement sales (+12.3% y/y) and aggregate and concrete sales (+7.9% y/y). Although we are yet to obtain confirmation from management (as of the time of writing), we believe the growth in cement sales was volume-driven given the wide-scale construction activities taking place across the country. Furthermore, based on our last communication with management, the company does not intend to raise prices in 2021.
However, gross margin weakened by 224bps in Q1-2021, as the increase of 16.3% y/y in cost of sales (excluding depreciation) outpaced the topline growth (+12.2% y/y). The rise in the cost of sales was driven mainly by the variable cost component (+14.5% y/y) – we believe this was due to the pass-through impact of the local currency’s devaluation on gas contracts. Notwithstanding, EBITDA rose by 14.5% y/y to NGN22.10 billion in Q1-2021, following the reduction in operating expenses ex-dep (-16.3% y/y) and a significant jump in the other income line (+441.3% y/y). Accordingly, the EBITDA margin increased by 62bps to 30.9% in Q1-2021.
Earnings also benefitted from the moderation in finance cost (-18.2% y/y), reflecting gains from the reduction in its gross debt (-9.5% y/y to NGN54.38 billion in Q1-2021 vs NGN60.06 billion in Q1-2020). Meanwhile, finance income grew by 49.7% y/y, following the significant growth in cash and cash equivalents (+44.0% YTD to NGN76.79 billion).
Overall, PBT grew by 36.1% y/y to NGN12.77 billion, while PAT grew slower by 13.3% y/y, following the significant increase in tax expense (+176.4% y/y) which pushed the effective tax rate higher to 28.5% in Q1-2021 vs 14% in Q1-2020.
Comment: We like that the company kicked off 2021 with double-digit growth in the bottom line, a trend that we had observed since Q3-2019 when the loss-making South African subsidiary was sold. We are also impressed that the company was operationally efficient during the quarter, given the improvement in OPEX/sales ratio (-211bps to 6.2%) despite the elevated inflationary pressures in the broad economy. Looking ahead, our concern stems from the impact of the retracement in yields on activities in the real estate sector, as this would force an upward repricing of mortgage financing. In addition, the effect of the local currency’s weakening on energy cost is also a concern. Our estimates are under review.