• We recently had a meeting with Bruno Bayet, the CFO of Lafarge Africa Plc at the company’s head office. Among other things, discussions were focused on the company’s ongoing energy flexibility campaign, other cost rationalizations,  sales volume, level of FX liquidity, classification of quasi equity in balance sheet, and future coal mine investment.

Key highlights

• Pricing had net positive impact on top-line: According to the CFO, even though Nigerian cement volumes declined by about 15% in Q1 17, impact of sustained price increases remained net positive for the business as was the case in Q4 16 with the company finely poised to declare another strong growth in revenue over the first three months of 2017.

• Momentum of energy substitution was maintained in Q1 17: In line with its objective of delivering energy flexibility, high reliability, autonomous control of energy sources, and energy decorrelation with FX, Bruno highlighted a rise in energy substitution to 37% in Saganmu (Q4 16: 25%). With plans to also invest in alternative non-LPFO back-up in Ashaka and coal in Mfamosing in the pipeline, management has set its sight on reaching 40-50% energy substitution in 2017. This would be complemented by intended acquisition of coal mill—with negotiations set to commence in the coming months. In the more immediate term, the company is looking to reduce the correlation of energy mix to dollar by 6ppts to just above 40%.

• South Africa remains relatively challenging: According to the CFO, a combination of dour macro growth and intense market competition continue to make operating in South Africa tough. Lafarge had raised prices in Q4 16 with other players delaying their responses. This was believed to have affected market share in the last quarter. However, a few cement players are now responding by also nudging prices upwards.

• On quasi equity classification: After obtaining $88 million shareholder dollar loan to prepay its syndicated dollar debt from Nigerian commercial banks, the company hedged same with non-deliverable futures at N274.5/$ with only an outstanding $17million left unhedged. The company recorded the difference between closing spot rate and the strike price of the non-deliverable future as exchange gain in Q4 16. Management is hoping for a recurrence in 2017.

• On ease of sourcing FX: Management highlighted improvements in naira at the parallel market as laudable and useful but refused to reveal the proportion of FX sourced from non-official channels. It however noted that its parent remains a useful outlet for FX sourcing for the company. Currently, the company has no backlog of unmet dollar demand.

• Lafarge is looking beyond Nigeria and South Africa:Plans are on ground to also expand the business to other African markets, with management targeting a 2.2 MTPA cement grinding facility in Ghana.

• 2017 is shaping up to be better: In addition to the net positive impact of higher prices and gains from energy flexibility, management guided to the possibility of more tax writebacks from UNICEM. In addition, following the expiration of tax concessions at UNICEM line 1, Ewekoro, and Ashaka’s coal mill, management applied for tax concession at the newly commissioned UNICEM line 2, leaving scope for subdued taxes in Q1 17 and beyond. In addition to this, reducing scope for FX-induced losses marks significant improvement from last year with prospect of exchange gains even on the cards in the event of further naira down-leg.

• However, our FVE of N44.42, which already factors in a possible dilution, is currently at a 6% discount to the stock’s last market price following a rally in the company’s share price. This movement now implies a SELL recommendation by our rating system.