Hope Rises for Lafarge Africa Shareholders


Lafarge Africa Plc is embarking on aggressive business and capital restructuring exercise that will enable it deliver value to shareholders in the medium term, writes Goddy Egene

Lafarge Cement Plc, which is an old cement manufacturing company in Nigeria has not lived up to expectations in recent times due to its poor financial performance. The company has been posting losses in its operations. In 2017 for instance, Lafarge Africa Plc, which was formerly known as Lafarge WAPCO Plc, recorded a loss of N35 billion, mostly due to foreign currency and domestic loans.

And in a bid to reduce the reliance on debt borrowing, the company embarked on equity fund raising in 2018 and early this year. The company also embarked on other financial engineering exercise, which in addition to tax credits reduced the loss in 2018. Also, the decision of the company to divest from its South Africa subsidiary is expected to finally take it out of the woods in the short to medium term.

Financial performance
In its audited results 2018, Lafarge Africa Plc recorded a revenue of N308 billion as against N299 billion in 2017. Finance cost rose to N45.973 billion, from N43.217 billion, while loss before tax stood at N19.508 billion. But a tax credit of N10.707 billion reduced the loss after tax to N8.802 billion. Also, Lafarge Africa Plc has posted a profit after tax (PAT) of N3.14 billion for the first quarter (Q1) ended March 31, 2019, showing a recovery from a loss of N2 billion recorded in the corresponding period of 2018. However, the N3.14 billion Q1 profit resulted from a tax credit enjoyed by Lafarge Africa Plc. An analysis of the result showed that the cement manufacturing firm recorded a revenue of N78.512 billion revenue in Q1 of 2019, compared with N80.643 billion in the corresponding period of 2018. Cost of sale was reduced from N62.642 billion to N60.328 billion, bringing gross profit to N18.184 billion, up from N18 billion in 2018.

Sales and marketing expenses also fell from N1.505 billion to N1.454 billion, while administrative expenses was reduced from N10.259 billion to N8.351 billion. Finance cost increased marginally from N9.510 billion to N9.576 billion. Consequently, profit before tax stood at N122 million as against a loss of N2 billion. However, a tax credit of N3.021 billion boosted the profit after tax in Q1 of 2019 to N3.14 billion.

Concern by Auditors
The auditors of the company, KPMG Professional Services, recently expressed concerns about the high level of liabilities of Lafarge Africa Plc. According to the auditors, the group incurred a loss after tax for the year ended 31 December 2018 of N8.8 billion (2017: N34.6 billion), noting that as of that date, the Group’s current liabilities exceeded its current assets by N119.3 billion (2017: N189.6 billion) while the company’s current liabilities exceeded its current assets by N114.2billion (2017: N174.1 billion). However, the auditors said the decision of the company to the company is to sell 100 per cent of the issued share capital in Lafarge South Africa Holdings Limited to Caricement B.V, a subsidiary of LafargeHolcim for $316.3 million will boost its balance sheet.

“The disposal was negotiated and the sales price was agreed at USD 316.3 million (N115.2 billion). The proceeds from the sale will be used to settle the company’s shareholder loan which represents the only existing foreign currency loan in the books of the company. “The full repayment of the shareholder loan will result in a significant reduction in debt, interest charges and foreign exchange exposures which will in turn enhance the company’s profitability, financial position and cash flows.

“Additionally, the deconsolidation of LSAH which has been loss making and in a net current liabilities position will further enhance the Group’s financial performance and position,” the auditors said.

“Based on the foregoing, the directors believe that the Group and company will continue to be able to meet their obligations as they become due in the normal course of business. Accordingly, these financial statements have been prepared on the basis of accounting policies applicable to a going concern,” they added.

CEO explains performance
But commenting on the Q1 performance, the Chief Executive Officer of Lafarge Africa Plc, Michel Puchercos, said the company’s momentum is very positive and would be sustained in 2019.
“Our Strategy 2022 , ‘Building for Growth’ in Nigeria is delivering the expected results with strong increase in operating earnings before interest taxation depreciation and amortisation(EBITDA) and profit.

Our momentum is very positive and is expected to be sustained in 2019. South Africa continued the turnaround plan with significant improvement in Q1 2019 compared to prior year.Our strategic decision to divest South Africa with a sale to another affiliate of the LafargeHolcim Group, will strengthen our balance sheet,” he said.

Puchercos, explained that the Rights Issue (early this year) together with the divestment of its South African operations will deleverage Lafarge Africa by N246 billion, enabling to fully repay United States dollars Shareholder Loan and short-term naira overdraft.

“This will support Lafarge Africa’s ambition to accelerate the execution of its Strategy 2022 and to fully focus on the development of the Nigerian market,” he said.
The CEO explained that the sale of its South African operations would enhance the value of shareholders’ investments in Lafarge Africa.
According to him, the full repayment of the shareholder loan will protect and preserve Lafarge Africa’s net income and cash flows.

“The improvement in cash-flow and net income, resulting from the reduction in debt service outflows, will enable Lafarge Africa to consider additional investments in cement production capacity and to improve its market share in Nigeria,” he added.

Analyst’s assessment
According to analysts at FSDH Research, Lafarge Africa Plc is embarking on aggressive business and capital restructuring that should deliver great value to its shareholders in the short-to-medium term.
FSDH said the company is selling its loss-making South African subsidiary to its parent company, LafargeHolcim Group. It plans to use the proceeds of this divestment to pay down its foreign loans and its accumulated interest. It also concluded a Rights Issue in March 2019 to reduce its loan and subsequently the interest expenses.

“ FSDH Research believes these initiatives will change the focus of the business going forward and enable the company to deliver a strong financial performance for its shareholders,” they said.

The analysts said their analysis of Lafarge Africa Plc in Q1 2019 showed that the financial performance of the Nigerian operations, as a standalone business, was substantially different and better than the performance of the whole company when combined with that of the South African business operations.

According to FSDH, the Nigerian operations recorded Earnings Before Interest Depreciation and Amortisation (EBITDA) of N20.31 billion while the combined (Nigerian and South African) business recorded N18.69 billion.

“The operating profit for the Nigerian operations stood at N11.49 billion while that of the combined business stood at N8.43 billiion. The Proft Before Tax (PBT) and PAT of the Nigerian operations stood at N4.56 billion and N6.30 billion respectively, that of the combined entity stood at N123 million and N3.15 billion respectively.

“The company recorded tax credit income during the period, therefore the PAT was higher than the PBT. Our analysis shows that the company is better off with the Nigerian operations as a standalone business entity going forward. The company expects to receive $317million from the proposed sale of its South African subsidiary, this will be used to completely pay off the shareholder loan of $293million and the accumulated interest as at 31 July 2019,” they said.

The analysts said Lafarge expects the annual interest expenses for the Nigerian business to drop substantially by about N10 billion, while cashflow and profitability should grow significantly.
“This reorganisation should help the company aggressively pursue measures to expand local operations and deliver better growth than historical growth levels. This should, in turn, increase dividend payments to its shareholders. Lafarge Africa faces stiff competition in Nigeria from a strong competitor, Dangote Cement Plc, which is a market leader in the industry.

“However, Lafarge has years of experience in the business of cement manufacturing and can tap from the technical expertise of its parent company, LafargeHolcim, who is the world leader in cement manufacturing and marketing,” they said.

Explaining further, FSDH Research said the profit margin of Dangote Cement is higher than that of Lafarge, noting that Dangote derives this advantage through the use of modern technology, economies of scale, and plant advantage with respect to availability of raw materials.

“Therefore as a price-setter, Dangote may be able to reduce price which will lower the profitability of Lafarge in the Nigerian market. This is the major risk that Lafarge faces in Nigeria. However, Lafarge competes well in some regional markets in the country. The poor transport network in the country gives players certain advantages in regions where production plants are located,” they added. FSDH Research notes that as the Nigerian economy continues to grow the demand for cement will grow and players in the industry will get a better share of this growth.

“Our forecast and valuation are based on the assumptions that the company will excecute the business and capital restructuring successfully in 2019. Therefore, turnover and interest expenses will drop in 2019 compared with 2018 while profits will increase. We employed relative valuation method using Enterprise Value (EV) to EBITDAmultiple. Applying the EV/EBITDAmultiple of 8.58x on EBITDAfor the forecast period, we arrived at N29.33 per share as the fair value. Our target price for one year investment period is N20.53,” FSDH Research said.