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Initial View - Lafarge Africa Plc Q3 19 - LSAH Sale… Good riddance

• Lafarge Africa Plc released 9M 19 result, showing the group’s performance ex-South Africa business (LSAH). On the adjusted numbers, Lafarge reported EPS of N28 compared to a loss of N1.20 in 9M 18 (including Lafarge South Africa). The improvement relative to the prior year, largely mirrored impact of the deleveraged balance sheet and improved cost efficiencies. Given that LSAH has largely been EBITDA negative (with a marginal improvement in Q2), the impact of the exclusion was muted on overall performance. On a Q3 basis, EPS printed positive at N0.29, compared to loss of N0.75 same period last year. Reported revenue and EBIT came in line with expectation, however, a lower than expected net finance cost and tax credits pushed earnings higher, with Q3 EPS close to our H2 19 forecast of N0.30. WAPCO also reported a N106 billion gain on disposal of LSAH in discontinued operations, being the excess of the purchase consideration (N114 billion) over the impaired net asset value (N7 billion).
• The N134 billion shareholder loans was extinguished from the books as purchase consideration for the sale of LSAH. This leaves only N56 billion worth of loans as outstanding in Lafarge Africa, comprising of the BOI Power fund and 2^nd tranche of the 2021 bond and translates to a lower debt-to-capital ratio of 15% in Q3 19 from 66% as at FY 2018. As expected, this drove finance cost lower significantly by 137% YoY to N2 billion and gave significant boost to the bottom line.
• On a not-too-impressive note, the Nigeria standalone business witnessed paring sales in the quarter by 7% YoY to N45 billion. Management alluded the decline in sales to sluggish recovery of public consumption post-election, as well as prolonged rainy season compared to last year. Notably, volume declined 17% YoY, to 1.2MT, which neutered the relatively higher prices (+11% YoY to N38,310). We note that the impact of the slash in price over Q3 (-11% QoQ), was largely clouded in the Q3 numbers.
• Meanwhile, cashflow positions also improved significantly post LSAH-sale. In particular, FCF over 9M 19 (Nigeria standalone business) jumped 2.1x the value of 9M 18 (includes LSAH), driven by a 64% YoY jump in CFO. However, the FCF/share was only 14% higher YoY given the dilutive impact of the new shares added from the rights issue (wherein 7.4 billon units were added), while FCF yield is up 5ppts YoY to 14%. CFO margin also printed 17ppts higher YoY to 29%.
• While the LSAH sale has played quite favourably to the new WAPCO, our concerns regarding the continued delay of the capex plans (particularly the Ashaka power plant and debottlenecking) lingers. As noted over the conference call yesterday, management stated that the $20 million Ashaka power plant project which was scheduled for completion Q4 this year has been postponed. Meanwhile, Management still affirms scheduled completion of the Ashaka debottlenecking for Q4 2020. Our FVE of N23.59, presents upside potential of 58% compared to current market price of N14.95 and translates to a BUY rating. WAPCO currently trades at a P/E and P/FCF of 10.3x and 11.5x which trades at a discount to domestic peer average of 10.9x and 14.7x, respectively.