WAPCO MD, Mr. Joe Hudson
 

Goddy Egene
 
When the profitability of Lafarge Cement WAPCO Plc declined for two consecutive years- 2009 and 2010, some shareholders exited, thinking that the downward trend may continue.

However, those who understood the  reasons for that challenging period for the company,  then and held on are now smiling home with fatter dividends.

The fortunes of the company have not only began to witness growth but also the shareholders are getting higher compensation inform of dividends.  But analysts believe that the rising fortunes of  Lafarge Cement WAPCO is as a result of  the expansion project it embarked upon in 2009.
 
Expansion Project
Known as Lakatabu, the expansion project involved the construction of a new production plant at its Ewekoro, Ogun State site. The 2.5 million metric tonnes  cement plant was  inaugurated by  President Goodluck  Jonathan last December. The plant took Lafarge WAPCO's production capacity to 4.5 million metric tonnes.

However, while the project lasted, the profitability of the company was affected significantly as majority of the earnings was used to service the loan collected  from banks to finance the expansion project.

The company obtained a multi-currency syndicated medium term loan comprising $114.5 million  and N25 billion with a tenor of 45 and 60 months respectively effective May 2009.

The repayment of the loan started last quarter of last year. Given the high interest rate and the pressure the interest payment was having on its bottomline,  the company   raised N11.8 billion bond to refinance the loan.

Assessing the   rational for the bond then, analysts at Meristem Securities Limited, had said  it was a good move.

According to them, given the moratorium period, its implication was that the company will repay the dollar loan (principal  plus  accrued interest) over a period of 15months that is between December 2011 and June 2013.

“Likewise, the naira loan will be repaid over a period of 15 months that between March 2013 and May 2014. Bearing in mind that the project (then) is yet to fully become operational at optimal capacity, the loan repayment as scheduled will be a serious strain on cash flow which might impair their dividend paying ability.    Hence, issuing a bond to refinance the loan will afford the company an opportunity to optimally manage its cash flow since coupon payment will be bi-annual which will be lower than making principal and interest payment on the loan as currently structured. This is also commendable from working capital management perspective,” they said.

The analysts noted that the expansionary activity of would generate enough cash to finance the bond’s coupon payments.

Positive Impact on Results
The impact of the expansion is already being felt going by the financial performance of Lafarge Cement WAPCO for the year ended December 31, 2011.

The company’s turnover rose by 42 per cent  from N43.841 billion in 2010 to N62.502 billion in 2011. Profit before tax grew from N8.464 billion to N10.219 billion, while profit after tax  appreciated by 77 per cent from N4.88 billion to N8.5 billion in  the 2011.

Lafarge Cement WAPCO’s  focus on continuous business process improvement and alignment with best practise also led to a growth in earnings per share. It rose from N1.63 in 2010 to N2.84 in 2011.

Out of the EPS, the   shareholders got a dividend per share of 75 kobo, which is 200 per cent higher than the   25 kobo paid in 2010.
The company was able to generate significant returns to shareholders using the available shareholder equity with net return on shareholders’ funds stood at 16 per cent in 2011. While the return was the same 16 per cent in 2011, it showed an improvement on the 10 per cent recorded in 2010.

Still basking in the euphoria of the impressive 201 results, the company has raised investor’s hope for higher return in the current year going by its unaudited half year performance to June 30, 2012.

The company posted a turnover of N45.9 billion in 2012, up from N29.4 billion in 2011. Profit  rose by 162 per cent from 3.194 billon to N8.8 billion in 2012. Lafarge Cement WAPCO Nigeria Plc has raised investors’ hope for a bumper harvest in the current year as the company announced a growth of 162 per cent in profit for the half year ended June 30, 2012.

The unaudited result of the company released on the floor of the Nigerian Stock Exchange (NSE), showed a profit before tax of N12.1 billion in 2012, up from N4.6 billion in 2011. Profit after tax rose from N3.194 billion to N8.8 billion. EPS  soared by 175 per cent from N1.06 to N2.92 within six months.

Explaining the performance, the Managing Director and Chief Executive Officer, of Lafarge Cement WAPCO, Mr. Joe Hudson, the company had continued to optimise production from its new Ewekoro II Plant.

“In addition, these results demonstrate the impact of a number of internal process improvements and cost efficiency initiatives.  Our new subsidiary, Lafarge ReadyMix Limited has started to operate profitably.  We will continue to provide innovative products and services to our valued customers and consumers as we believe that this is the best way to maintain our heritage, touch the society where we operate and provide good returns to our shareholders,” Hudson said.

Speaking in the same vein, the Finance Director of the company, Mr. Fred Amobi, stated that  through various internal improvements and cost reduction initiatives,  the company had kept fixed cost growth below 50 per cent  of inflation rate.

“The operating margin has doubled from 16 per cent  (during the same period in 2011) to 32 per cent  in 2012 - a reflection of higher volumes and improved cost management. The company’s outlook remains good while it will continuously review its operating environment in order to properly align its strategies and deliver on its promise.
 
Analysts Assessment
Looking at the H1 performance, analysts at FBN  Capital  Limited, said they  have put a price target of N60.80 on the shares of the company. The stock closed at N43 per share last Friday.

“Despite delivering strong double-digit growth in sales and EPS in H1 2012, underpinned by a gradual ramp-up of new capacity, Lafarge Cement WAPCO shares have been flattish this year . We expect this to improve in H2 2012 as earnings should remain strong. Our price target implies upside potential of 40 per cent we retain our outperform rating on the stock”, they said.

According to the analysts, going forward, they expect a slightly more subdued third quarter, due to seasonal trends (the rainy season).

However, the forecast   sales  and EPS growth of 50 per cent year-on-year and 125 per cent to N93.9 billion and N6.37 respectively.
“Lafarge Cement WAPCO’s 2012 estimated price earnings ratio multiple of 6.8x for 22.5 per cent EPS growth in 2013 is more compelling than the 7.5x multiple for 20 per cent EPS growth that the sector is trading on,” they said.

Future Outlook
Looking at opportunities in the construction industry and in order to deliver higher returns in the future, the company has established a subsidiary called Lafarge ReadyMix Nigeria Limited. Hudson said ReadyMix is  a response to the opportunity presented by the local construction industry, explaining that the subsidiary is already making significant in-roads in the construction market of Lagos area with plans to expand its operation to other parts of the country.