N60bn Bond Boost for Lafarge Africa

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Goddy Egene writes that the raising of a N60 billion bond by Lafarge Africa Plc to refinance the debts of its subsidiary, United Cement Company Limited, will enhance its cash flow and bottom-line in the near future

Doing business in Nigeria has been very challenging. Apart from grappling with poor infrastructure, high cost of funds is another big challenge manufacturers contend with. With banks loans attracting interests as high as 20 per cent, companies that finance their operations with bank debts end up with lower bottom-lines. Significant part of their revenues go to the payment of banks interests and charges, leading to lower profits. Lafarge Africa Plc, a leading cement manufacturing company, has been affected by the challenging operating environment and high financing costs.

For instance, the company paid a total of N11 billion as financing costs for the year ended December 31, 2015, with over N8 billion paid as interest charges on bank loans. This development affected the company’s bottom-line for the year.

However, one of the factors that led to the high interest charges is the huge bank borrowing by Lafarge Africa to finance expansion at its subsidiary, United Cement Company Limited (Unicem).
But relief has come for the company following the raising of N60 billion bond by Lafarge Africa, last week.

The N60bn bond
Lafarge Africa successfully concluded the Series I and II N60 billion Bond Issuance. It comprises three year 14.25 per cent bond due 2019 (Series 1 Bond) and N33.614 billion five year 14.75 per cent bond due 2021(Series 11 Bond). The dual-series issuance, the first of its kind and largest ever bond issuance by a corporate in Nigeria’s debt capital markets, was concluded through book building with the order book oversubscribed.

Commenting on the bond issuance, Chairman of Lafarge Africa, Mr. Bolaji Balogun, said: “This largest ever bond issuance by a corporate in Nigeria’s capital markets, affirms Lafarge Africa’s reputation as a prime issuer. We are grateful for the overwhelming support we have received from domestic institutional investors, especially the Nigerian pension funds. We also wish to thank the Securities and Exchange Commission (SEC) for its support on the completion of the transaction.”

Speaking in the same vein, Group Managing Director/CEO, Lafarge Africa, Mr. Michel Puchercos said: “The proceeds of this issue will allow Lafarge Africa Plc part-refinance the debt of its now wholly-owned subsidiary, Unicem. These proceeds will deliver savings in financing costs to Unicem and Lafarge Africa. Unicem is currently undergoing a 2.5mtpa capacity expansion which will be completed by the end of 2016.”

Impact on company
Market analysts said just as the CEO of Lafarge Africa explained the bond, which is long term instrument with lower interest payment, would save financing costs to the company.
“The expansion of the Unicem from 2.5 mtpa to 5 million mtpa has been financed by short terms borrowings. This has been affecting the bottom-line. But the N60 billion will be used to refinance the debt so that cash flow will improve, save costs and eventually enhance its profit,” an analysts said. The source said the bond lower Unicem’s borrowing cost by over four per cent.

2015 full year results

Lafarge Africa, which is a subsidiary of LafargeHolcim, the world’s largest building materials company, ended 2015 with a profit after tax of N27 billion and recommended a cash dividend of 300 kobo per share and a bonus of one new share for every 10 shares already held.

Specifically the audited results of the company showed that it recorded a revenue of N267.2 billion in 2015, up marginally by 2.5 per cent from N260.8 billion in 2014.Gross profit stood at N82.5 billion compared with N83 billion in 2014. Operating expenses grew by 20.5 per cent from N30.6 billion to N36.9 billion, while net financial cost rose by 13 per cent from N7.9 billion to N9.0 billion. Profit before tax fell by 27 per cent from N40.4 billion to N29.3 billion, while profit after tax declined by 20.2 per cent to N27 billion, from N33.8 billion in 2014.

According to the company, South West operations grew by eight per cent behind a number of initiatives such as the Key Distribution Scheme, a strong route to market and solid capacity utilisation. ReadyMix Nigeria continued its strong growth with a 29 per cent increase over prior year. South African revenues grew by seven per cent in the last quarter. Lafarge Africa explained that Ashaka operations are normalised, following the security challenges in the region which affected demand for cement in the North.

“Management remains very optimistic about the long term outlook for Ashaka, which is foreseen to return to strong growth in 2016.
Plant operations were mostly stable with gas utilisation in the 90s in South West and Mfamosing operations. The South African cement operations returned to growth in Q4 with production up by 28 per cent versus last year, following the kiln overhauls in Q1 2015.

“Group after tax profit declined by 20 per cent versus last year, when taking into account the one-off restructuring costs and the unrealised exchange impact on the Mfamosing operations foreign currency borrowings from the parent group, LafargeHolcim, the world’s largest building materials company.

The one-off impact of the adjustment to the naira value of the foreign currency borrowing, due to the deterioration in the naira exchange rate, is to a large extent an accounting exercise as Lafarge Africa PLC is not foreseen to repay the shareholder loans in the foreseeable future, which makes up the majority of the foreign currency borrowing. Excluding these one-off/none operational impacts, profit improved by six per cent versus last year behind the strong underlying fundamentals of Lafarge Africa Plc’s operations. Cash flow from operations was robust at N57.9 billion,” the company said.

According to the company, it continues to deliver good performance with significant upsides to come as new cement and power generation capacities come on stream and synergy benefits from the merger in Nigeria flow through.
“Our business integration process has been successful and as a company we are optimistic to deliver improving performances in 2016 and beyond, improving value to our shareholders,” the company added.

Rosy future
According to the company, the overall Nigerian cement market is foreseen to grow robustly in 2016 behind a strong Individual Home Building Segment.
“The Federal Government of Nigeria has also shown strong indications to support infrastructure growth in the coming year. Lafarge Africa will be able to leverage its unique footprint in 2016 with Ashaka returning to growth, ReadyMix securing high volume contracts to support its eight existing, and new plants to be commissioned as well as the new 2.5 million tons cement line due to be commissioned in Mfamosing in half year of 2016,” it said.

Lafarge Africa added that the South African market will remain challenging, it would will leverage the 2015 investments within the cement operations with a revamped sales team and route to market.

The company noted that in aggregates, it will continue to benefit from its strong network delivering results with two new quarries, being opened in the Gauteng market and Ready-Mix growth.
“Overall, new strategies in penetrating retail, new geographies and the technical segment are expected to allow Lafarge Africa volumes to grow above a flat market in all three product lines. The Lafarge Africa group will continue to seek innovative ways of improving product offerings in the Nigerian cement, concrete and aggregate market in 2016,” it said.

Analysts’ comments
Commenting on the 2015 results, analysts at Afrinvest West Africa said the positive performance in turnover of the group in 2015 was largely supported by 3.3 per cent growth in consolidated Nigerian operations which offset a 2.0 per cent contraction in South Africa sales. The South African market has continued to experience volume and price pressures in a declining economic and industry growth environment and stiffer competition brought about by new entrant (Sephaku Cement) and importations.

They said: “On the contrary, Nigerian operation was resilient due to strong prices of products in H1 of 2015, ramp-up of capacity utilisation in South West operation near optimal level (to 86.4 per cent in FY:2015 from 80.9 per cent in 2014). Ashaka sales was down 17.7 per cent impacted by production disruption in H1:2015; while United Cement sales declined 1.2 per cent on what management attributed to volume shut-in in Q4:2015 due to flooding. In summary, the three cement operations in Nigeria (Ashaka, UNICEM and South West) saw a combined 0.8 per cent increase in capacity utilisation to 80.1 per cent while Ready Mix Concrete (RMC) sales volume was up 26.4 per cent.”