Lafarge Africa:  On the verge of a rebound

Lafarge Africa:  On the verge of a rebound

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Tides seem to be turning in favour of Lafarge Africa after management announced plans to clean its slate marred by debt, and showed significant improvement in its latest financial reports.

Overview

Lagos-based cement maker, Lafarge Africa Plc, commenced operations in Nigeria 58 years ago. The company is in the business of manufacturing and marketing of cement and other related products such as Ready Mix Concrete, Aggregates and Fly-Ash.

Formerly known as Lafarge Cement Wapco Plc, the company changed its name following a resolution passed by shareholders at its July 2014 Annual General Meeting. The company’s change of name was effected following the acquisition of shares in Lafarge South Africa Holdings Limited, United Cement Company of Nigeria Limited, AshakaCem Plc and Atlas Plc.

In 2015, Lafarge S.A France and Switzerland-based Holcim Limited entered into a merger worth £41 billion to form a combined entity, LafargeHolcim, the parent company of Lafarge Africa Plc.

After the 2019 right issues, the Zurich-based parent firm now hold 84 percent stake in the cement maker through Associated International Cement Limited (23%), Lafarge Associated Nigeria Limited (5%) and Caricement BV (56%).

Management Team

The day-to-day affairs of the cement maker are overseen by Michel Puchercos, the company’s Managing Director and Chief Executive Officer. Puchercos, a graduate of Ecole Polytechnic, joined Lafarge as Head of Strategy and Purchasing in Orsan, and in 1998 became the Director of Cement Strategy and Information Systems, Lafarge Gypsum. He later became the Director of Cement Strategy, Lafarge Group in France, and later moved into cement operations in Kenya and Uganda while doubling as the chairman of Tanzania operations.

The company’s board of directors is chaired by Mobolaji Balogun, with Adenike Ogunlesi, Adebode Adefioye, Uzan Mercie, Jean-Phillipe Benard, Rossen Papazov, Christof Hassig, Elenda Giwa-Amu, Geraldine Picaud as non-executive directors.

Lafarge and Nigeria’s Cement Industry

Nigeria’s cement industry has grown at a compound annual growth rate of 8.9 percent (vs. economy 2.0%) over the last six (6) years as growth steadily tottered from as high as 39.2 percent in 2013 to -5.4 percent in 2016, and subsequently rebounded in 2018.

The sector which had grown at a more rapid pace than the broader economy before the 2016 recession, lost its steam, recording negative annual growth in both 2016 and 2017, even though the broader economy exited recession in 2017.

Supporting sectors; Real Estate and Construction have recorded similar trajectory, plunging from a growth level of 14.2 and 12 percent respectively in 2013 to 2.3 and -4.7 percent respectively in 2018.

The performance of the cement sector has been affected by the tepid momentum of Nigeria’s economy while the currency devaluation in 2016 has left a bitter aftertaste and increased cost for players in the sector.

The cement sector expanded 2.81 percent in Q1 2019, faster than the economy (2.01 percent) but less than it had grown in quarters preceding Q4 in 2018.

Volumes of sales for cement makers dipped to about 18.6 Mt/a in 2017 from 22.7Mt/a in 2016 an unsuccessful cement price hike to offset exchange rate induced cost while cement consumption per capita in Nigeria fell from 122.0kg in 2016 to 97kg in 2017, below estimates for peer countries, according to Afrinvest Research.

Despite the constraints facing the Cement industry which saw Nigeria’s housing deficit (size) and infrastructure gap (size) show opportunity for increased private and public investment in the sector to drive expansion and reduce excess capacity.

Lafarge Africa is the second biggest listed cement maker in Nigeria, with a market share of 25 percent as at the end of 2018. The industrial goods company has its plants in Ewekoro, Sagamu in South West Nigeria and also has plants in Mfamosing in the South-South and Ashaka in the North Eastern part of Nigeria.

Lafarge Africa currently has the second biggest installed capacity among cement makers, which measures up to 10.5 Mt/a in Nigeria while it has an additional 3.6 Mt/a in South Africa.

Woes of the cement maker began in 2016 when attacks on oil and gas facilities coupled with currency devaluation, led to an upsurge in cost of energy at an average of 34.1 percent of total production cost between 2016 and 2017.

In 2017, Lafarge Africa acquired Unicem and consequently absorbed the dollar denominated debt of the latter-which was its subsidiary. The debt along with foreign vendor transactions and intercompany transactions weighed on Lafarge’s performance.

Management of Lafarge Africa is looking to settle its dollar denominate debt worth 293 million due July 31 and its naira short-term overdraft.

2019 Right Issues

Following the resolution passed by the company’s shareholders at Extra-Ordinary General Meeting held on 25th September 2018, the company proceeded to raise N89.21 billion by a way of right issue of 7.43 billion ordinary shares at N12 per share, by issuing six new shares for every seven shares held by shareholders as at December 4 2018, being the qualification date. The offer opened December 17, 2018 and closed January 28, 2019.

The right issues was 100 percent successful and a total of 1, 826 applications was received by the company for 7.43 billion new ordinary shares. The additional shares of 7, 434, 367, 256 ordinary shares of 50 kobo each was listed on the Daily Official List of the Nigerian Stock Exchange (NSE) on March 26 2019, elevating the company’s outstanding shares from 8.67 billion units to 16.1 billion units.

Financial Performance

In the recession-tainted 2016, the cement maker’s N39 billion finance cost threatened bottom-line, but recorded N16.9 billion net income, thanks to tax credit worth N40 billion received within the period.

A year later, the revenue jumped 36 percent to N299.1 billion underperforming production cost which surged 38 percent from N179.1 billion in 2016 to N248.4 billion in 2017. Earnings before interest and taxes, otherwise known as operating profit, plunged 36 percent on the heels on administrative expenses which nearly doubled from N23.7 billion to N41.6 billion.

Finance cost, which upped 16 percent from N38.9 billion in 2016 to N43.2 billion in 2017 on the heels of a sharp rise in interest on the company’s bank overdraft, took a toll on the bottom-line, as the cement maker recorded net loss worth N34.6 billion.

Lafarge Africa Plc picked up the pieces of a horrid year in 2017, to improve operating efficiency in 2018 as margin accelerated to its highest level in three years. Operating margin, the ratio of operating profit to revenue, which shows the percentage of profit a company retains after deducting production cost, increased to 8 percent in 2018, an uptick from 2 percent in 2017 and loss margin of 10 percent in 2016.

Lafarge Africa grew revenue to N308.4 billion in full year 2018, 3.1 percent more than N299.2 billion posted in the previous year. The company recorded uptick in proceeds from cement, recording decline in receipts from aggregate & concrete and adxmiture from South African subsidiary.

The cement maker’s finance income surged some 21 percent to N1.7 billion spurred by massive increase on interest on loan receivable. Finance cost also increased 6.9 percent to 46 billion in 2018, making net finance cost up 7.3 percent to N44.2 billion in 2018.

The company’s share of loss from joint ventures accounted for using equity method which slowed to N65.1 million from N140 million in 2017, along with zero-payment of minimum tax and tax credit worth 10.7 billion, helped cut Lafarge’s net losses significantly by 75 percent to N8.8 billion.

Despite revenue contracted 2.6 percent in the first quarter of 2019, Lafarge closed the quarter in green territory with net income of N3.1 billion thanks to strong operating profit, tangible increase in finance income and tax credit worth N3 billion. This compares with N2.2 billion net losses posted in the previous comparable quarter.

The cement maker’s operating profit grew substantially by 35 percent to N8.4 billion in first quarter compared to N6.2 billion posted a year earlier, elevating operating margin to 10.9 percent from 7.7 percent a year prior.

 

Light at the end of the tunnel:

Sale of South Africa Subsidiary

Lafarge Africa signed an agreement with Caricement B.V, subsidiary of parent company Lafarge Holcim, to divest its 100 percent ownership stake in Lafarge South Africa Holdings Limited for a cash consideration of N114 billion ($317mn).

“Our strategic decision to divest South Africa with another affiliate of LafargeHolcim group will strengthen our balance sheet. The right issue along with the divestment of our South African operations will deleverage Lafarge Africa by N246 billion, enabling it to fully repay dollar-denominated loan and short-term naira overdraft” said Michel Puchercos, Lafarge’s chief executive.

According to the company, the divestment move is expected to improve profitability, through the generation of positive cash flows, eliminate foreign indebtedness, enable the firm to expand operations in existing plants and prioritize Nigerian operations.

The proposed sale of the deal is expected to close in the third quarter of the current year, subject to regulatory and shareholders’ approval. The company made this decision to deleverage its balance sheet by repaying shareholders’ loan of $293 million due July 31 2019.

Strategy 2022: Building for Growth

The company underpinned its stellar performance in the first quarter of 2019 to its strategy 2022 themed ‘Building for Growth’. The strategy hinges on four cardinal points – growth, simplification & performance, financial strength and vision & people.

“Our Strategy 2022 in Nigeria is delivering the expected results with a strong increase in operating profit and net income. Our momentum is very positive and expected to be sustained in 2019” said Puchercos.

Going forward, the company expects the execution of strategy 2022 to bolster operational and financial performance in near to mid-term.

Redemption of N26.4 billion series I bond

The company redeemed its 3-year N26.4 billion series I bond (due June 15 2019) at 14.25 percent coupon, from its internally generated cash flows in a bid to deleverage its balance sheet. The second 5-year N33.6billion series II bond at a fixed coupon of 14.75 percent will mature in June 2021.

 

Market Performance

Shares of the cement maker recorded its biggest daily in over two years, at the close of business last Thursday. The stock appreciated 9.95 percent to N10.5 per share, cutting its year-to-date losses to 15.6 percent.

The stock which opened at N10.5 on Friday, recorded the maximum daily gain of 10 percent to N11.55 percent per share.

 

Israel Odubola & Segun Adams



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