Lafarge Africa Turns the Corner

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Goddy Egene writes that after two years of losses, Lafarge Africa Plc has returned to profitability, rewarding shareholders with dividend

The 2017 and 2018 financial years, were very bad for Lafarge Cement Plc, an old cement manufacturing company in Nigeria. Those years the company went through a rough patch, with losses. The firm, formerly known as WAPC Cement Company Plc, posted a loss of N35 billion in 2017 and N8.8 billion in 2018.

However, going by the 2019 audited results, Lafarge has turned the corner and bounced back to profitability. It has also recommended a dividend of 100 kobo per share for the shareholders.

Specifically, Lafarge Africa Plc reported a revenue of N213 billion for the year ended December 31, 2019, as against N218 billion in 2018.Operating expenses were reduced from N29.89 billion to N23.42 billion. Financing cost fell 51 per cent from N41,6 billion to N20.2 billion.

Other income improved 70 per cent from N1.38 billion to N2.35 billion. The company ended 2019 with a profit after tax (PAT) of N15.5 billion compared with a loss of N8.1 billion in 2018. Based on the positive performance, the board has recommended a dividend of 100 kobo per share.
A further analysis of the results showed that Lafarge Africa reduced its total debt from N208 billion in 2018 to N52.6 billion in 2019, while total equity jumped from N135 billion to N345 billion in 2019.

Commenting on the performance, the Managing Director/Chief Executive Officer of Lafarge Africa Plc, Mr. Khaled El Dokani, said: “Our turnaround and cost-reduction strategy in 2019 and the divestment of the South African business, have delivered strong results. The decrease in net debt has significantly strengthened our balance sheet and has placed us in a vantage position to face the future.”

Looking ahead, Dokani said the COVID-19 pandemic now impacts Nigeria, Lafarge Africa had taken the necessary measures to protect the health of its employees, customers, suppliers and other stakeholders.

He said: “As the coronavirus pandemic now impacts Nigeria, Lafarge Africa has taken the necessary measures to protect the health of its employees, customers, suppliers and other stakeholders. The construction sector and construction sites are generally more resilient than other sectors and Lafarge Africa has a strengthened balance sheet and is well equipped to weather the storm. However, we are closely monitoring the evolving situation and the impact of the COVID-19 pandemic on the Nigerian market.

“The Nigerian cement industry growth momentum is expected to slow down in FY 2020 compared to 2019 on the back of the COVID-19 pandemic and the challenging global macro-economic environment.”
We have launched an action plan “Health, cost & cash” and will continue to focus on the implementation of our cost optimisation initiatives during this period to minimise the impact on the business.”

Analysts’ assessment
Assessing the results, analysts at Cordros Securities Limited, said the result showed that the company’s 2019FY earnings per share (EPS) settled N7.15 per cent, up from a loss position in the previous year.
According to Cordos Securities, the positive out turn was driven by the one-off gain from the sale of Lafarge South Africa Holdco (LSAH) in the third quarter (Q3) of 2019.

“We understand that the comparative year now excludes the profit and loss statement of LSAH. Adjusting for the gains from the discontinued operation, Lafarge’s core EPS grew marginally by 2.8 per cent, supported by the blend of lower finance charges, higher other operating income, and lower operating expenses. On the 2019FY reported EPS, the board has proposed a final dividend of NGN1.00/share, which implies a dividend yield of 10.2 per cent on today’s closing price (N9.80 per share),” the analysts added.

According to them, Lafarge Africa’s impressive 2019 standalone earnings cemented their long-held view that Lafarge South Africa Holdco. (LSAH) has been the major drag to the group’s business over the last few years.

“Prior to the disengagement, LSAH had reported a loss of N9.4 billion over seven months -19. At that run-rate and assuming no divestment, the group would have reported another loss after tax of N570.0 million, by our estimate. Nonetheless, unlike the start of the year, we are now cautious about the company’s earnings outlook, owing to the COVID-19 induced economic downturn, with its negative pass through to private sector cement demand. More so, we believe the recent fiscal pressures faced by the federal government due to the collapse in the price of Brent crude oil, should lead to the rescheduling of infrastructure projects, and subsequently weigh on public investments,” Cordros Securities said.

The analysts explained that the disengagement from the margin-dilutive LSAH will allow management of Lafarge Africa to fully focus on the more profitable Nigerian business in 2020.
“Nonetheless, the COVID-19-induced economic downturn is expected to significantly affect volume this year. The company anticipates the impact of the economic shutdown on cement volume to be more evident from Q2-20, since it’s volume growth in Q1-20 are already ahead of last year,” they said.

The analysts noted that the repayment of all the company’s forex related borrowings means that its earnings are now less volatile despite the recent oil price collapse-induced currency pressure.

“The proceeds from LSAH disengagement have been used to offset all its FCY debt of $293 million, including accrued interest of $23 million. From N266.20 billion in 2018FY, debt (ex-overdraft) has declined to N64.19 billion, paving the way for a 56.1 per cent decline in finance charges over 2019FY. We forecast total debt to reduce further to N48.2 billion, due to the maturity of one of its bonds in 2019 (N26 billion). Thus, we forecast 2020E interest expense to decline further by 69.8 per cent,” Cordros Securities said.

Way out of losses
The company’s return to profitability came after its auditors, KPMG Professional Services, expressed concerns about the high level of liabilities of Lafarge Africa Plc last year.

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 Lafarge to LSAH was a major rescue strategy.
“The disposal was negotiated and the sales price was agreed at $ 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.

The company raised equity through a right issue last year. The combination the proceeds from the rights issue and divestment deleveraged Lafarge Africa significantly.

Chairman of Lafarge Africa Plc, Mr. Bolaji Balogun had last year assured shareholders of better performance going forward following the reduction in its debt to very low level.

He had said with the proceeds from the divestment, Lafarge Africa’s shareholder loan as at July 31, 2019, will be completely paid off. According to him, the loan represents the only existing foreign currency loan in the books of the company.
Balogun, explained that the balance restructuring would impact on the company positively as cost of finance will reduce by N168 billion, while net debt at the end of July 2019 will be about N56 billion.

“With the sale of LSAH as proposed by the Board to shareholders the only debt that will remain on the books of the company will be the second tranche of the corporate bond due for redemption in June 2021 and the subsidised loan in respect of Central Bank of Nigeria (CBN) Power Intervention Funds through the Bank of Industry(BoI). This significant reduction in debt holds prospects for dividend distribution in future,” he said