With Lafarge Africa reporting a profit of N20 billion for the half year ended June 30, 2017, up from a loss of N30 billion in the corresponding period of 2016, its turn around has raised shareholders’ hopes for improved returns, writes Goddy Egene
The devaluation of the naira by the Central Bank of Nigeria (CBN) in 2016 had negative impact on many companies, especially those that have foreign currency loans. The devaluation increased the cost of servicing those loans due to foreign exchange loss. Lafarge Africa Plc, one of the leading cement and building solutions providers in Nigeria, did not escape from the negative impact of the currency devaluation.
In fact, last year, the company, like many others, issued a profit warning that its second quarter (Q2) financial performance for 2016 would be affected by an unrealised foreign exchange loss of N28 billion.
“The impact of the naira devaluation is expected to be a N28 billion unrealised exchange loss arising from the USD borrowings, which at the time of the devaluation, consisted of $310 million shareholders loans and $85 million external loans. These loans relate to the United Cement Company of Nigeria Limited (Unicem) and were mainly set up prior to the acquisition by Lafarge Africa of its original 35 per cent stake in Unicem,†the company said.
The company ended 2016 with a full year a profit after tax (PAT) of N16.898 billion, showing a decline of 38 per cent from N27.163 billion in 2015. Lafarge Africa would have ended the year with loss before tax of N22.818 billion compared with a profit before tax of N29.286 billion. However, a N39.717 billion tax credit, which came mainly from deferred tax assets generated from Unicem operations, lifted the company’s PAT to N16.898 billion for 2016.
But going by the half year results ended June 30, 2017, Lafarge has turned the corner and is set to make profit at the end of the financial year and deliver higher returns to shareholders.
Half year results
The unaudited results released to the Nigerian Stock Exchange (NSE) last week, showed a revenue of N154.8 billion, indicating an increase of 44.2 per cent from N107.3 billion in 2016. Cost of sale grew by 19.7 per cent from N92.2 billion to N110 billion, while sales and marketing expenses followed same uptrend to hit N2.12 billion, from N1.98 billion. Administrative expenses rose from N10.23 billion to N16.3 billion.
A further analysis of the administrative expenses showed that an upsurge in technical fees shot up the expenses.
Technical fees soared by 202 per cent from N1.584 billion in 2016 to N4.798 billion in 2017. While technical fees accounted for 15 per cent of the administrative expenses in 2016, it rose to 29 per cent in 2017.
Another cost element that affected the bottom-line is the cost of finance that more than doubled to stand at N10 billion in 2017, up from N4.6 billion in 2016. Interest on overdraft shot up by 161 per cent from N527 million to N1.379 billion, while interest on borrowings rose by 77 per cent from N5.025 billion to N8.941 billion in 2017.
In all, the company ended the H1 with a profit before tax (PBT) of N18.2 billion, compared a loss of N30.2 billion in 2016, while PAT stood at N19.7 billion.
In terms of margin, Lafarge Africa gross profit margin improved from 14.1 per cent to 28.7 per cent, while net margin improved from a negative 28.2 per cent to a positive 12.7 per cent in 2017.However, the company has a debt to equity ratio of 128.8 per cent to 51.2 per cent, indicating that Lafarge is in need of equity capital.
Analysts’ comments
Assessing the second quarter (Q2), analysts at FBN Quest said PBT grew to N8.7 billion compared with a pre-tax loss of N28 billion in Q2 2016.
“The key drivers of the PBT growth were sales growth of 34 per cent and a 18.64 per cent expansion in gross margin to 32 per cent. These positives completely offset a 78 per cent rise in opex and a 138 per cent spike in net interest expense. Thanks to a tax credit of N5.9 billion and a positive result of N5.8 billion on the other comprehensive income (OCI) line, PAT accelerated to N20.3 billion.
Sequentially, sales and PBT were down by 10 per cent quarter/quarter (q/q) and eight per cent q/q respectively. However, PAT expanded by 44 per cent q/q thanks to the positive results on the tax and OCI lines. Compared to our forecasts, sales missed by 11 per cent; although, PBT was in line with our N8.6 billion forecast, PAT beat by 260 per cent mainly due to the tax rebate of N5.9 billion and the positive result of N5.8 billion on the OCI line,†they said.
In terms of the H1 performance, said while sales were missed by around six per cent, the PBT was in line with their forecast.
“However, thanks to a positive result of N15.1 billion on the OCI line and a tax credit of N1.6 billion, PAT came in around 74 per cent higher than our forecast. We had expected significantly improved results in Q2/H1 2017, driven by base effects due in part to an unrealised foreign exchange loss of N27.5 billion that the company reported in Q2 2016. However, we note that the earnings were also underpinned by a marked expansion in gross margin driven by significantly higher pricing (+40 per cent ) and a noticeable reduction in energy costs (due to a higher gas-to-total fuel ratio) following improvements in gas supply.
Rights Issue
In order to reduce its exposure to adverse foreign currency translation losses as experienced in 2016, shareholders of the company last month approved a Rights Issue of N140 billion.
Approving the rights issue, the shareholders charged the directors to make sure that the company remained listed on the Nigerian Stock Exchange (NSE).
Speaking on rights issue, the first since 2005, Chairman of Lafarge Africa Plc, Mr. Mobolaji Balogun, said it represents an important step in resolving the company’s foreign currency exposure and impact on its earnings.
According to him, apart from reducing debt of the company, the right issue provides all shareholders opportunity to increase their investment in the company.
“The recapitalisation is positive and our largest shareholder, LafargeHolcim has committed to subscribing to their rights in full through a conversion of existing shareholder loans. This investment is a strong indication of the groups’ continued belief in the Nigerian story. It is the largest right issue and the largest investment in a listed company by an investor. It reduces our foreign currency exposure by approximately half, improves our cash flow and positions the company for our future capacity expansion plans,†he said.
Responding to request by the shareholders that the company should not be delisted after the right issue, Balogun said if the LafargeHolcim was considering that option, it would not commit to make such huge investment in the company.
Speaking on the company’s turn-around plan launched in the third quarter of 2016, the chairman said it has started yielding results.
“The plan revolves around achieving high reliability across our production facilities, increasing the use of alternative fuel(biomass) and locally sourced coal as a way to mitigate disruption of production by gas supply shortages and the impact of devaluation on cost of gas. We have increased local sourcing of critical materials to lower foreign exchange component of our operational costs. Finally, we are working on a new route to market initiative and improvements in logistics with increased vehicle turn-around and size of fleet of third party providers,†Balogun said.
