Lafarge Africa Plc - Parent highlights modest recovery in Nigeria
- Price increase was net positive for Nigerian operations in Q4: Ahead of Lafarge Africa’s result release for FY 16, its parent company (Lafarge Holcim) provided a glimpse into the performance of the Nigerian and South African operations on Friday. In the release, Lafarge Holcim noted that cement price increase had a net positive impact on Nigerian revenues in Q4 16 with further gains on the energy savings front driving 10pps QoQ expansion in EBITDA margin in the quarter. The report however noted sustained weakness in South Africa, where volumes and prices contracted sizably over 2016. Overall, group revenue should remain close to our FY 16 estimate at
N215 billion (2015:N267 billion) largely reflecting lower pricing over much of 9M 16.
- Energy recovery arrive late to the party: Lafarge Holcim confirmed improvements in Lafarge’s energy flexibility campaign with Ewekoro II reportedly going from 0% use of alternative fuels to 40% in 2 months. Whilst these gains reportedly tapered pressures over Q4, sizable energy pressures in the first 10 months of the year should keep gross margin pressures intact over full year. (2016E: -17pps YoY to 13.5%)
- Currency concerns to drive first FY loss: Overall, despite the implied net positive impact of price increase in Nigeria, emerging information suggest that South African weakness may limit top-line gains in Q4. In addition, energy pressures for most of 2016, as well as documented logistic concerns and huge FX loss over 9M 16, should leave the company in loss position over FY 16which we forecast at
N41 billion (vs PAT ofN27 billion in 2015).
- Following the FX induced loss in June 2016, Lafarge succumbed to bearish sentiment with the stock down 35% in the last six months (vs NSEASI: -11%). In addition, investors priced in prospects of dilution following the conversion of its $493 million shareholder loan to quasi-equity in Q3 16. The stock trades on 2016E EV/EBITDA of 29.5x (forward: 9.9x) vs. 8.2x (forward 7.8x) for Bloomberg peers. We have a NEUTRAL rating on the stock with FVE of
N40.11 as we think an improving energy picture in Nigeria with stability in gas supplies and reduction in gearing point to a rebound in earnings in 2017.
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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