Over Q1 17, Lafarge Africa Plc. recorded its strongest revenue growth since consolidation (+55% YoY to N81billion) with Q1 17 EPS of 92 kobo already equaling 26% of our FY 17 forecast.

Revenue blazes trail on higher prices…: According to breakdowns, Q1 17 revenue growth was supported by a strong showing in Lafarge’s Nigerian (+51% YoY to N59.5 billion) and South African (+68% YoY to N23 billion) businesses. On both fronts, price increases were the fulcrums for top-line growth with the Nigerian operation cumulatively adjusting prices to N43,323 (Q1 16: N23,630) with two of the price changes effected in the review quarter. Although the northward shift in prices came at the expense of volume declines in Nigeria (-17.5% YoY) and South Africa (-31% YoY), pass-through to top-line remained solid.

…though lofty energy gains were hard to replicate:Elsewhere, while the price-induced increase in sales led to substantial decline in cost to sales ratio (-10.9pps) on a YoY basis, breakdown shows the company struggled to match the gains from investments in energy flexibility seen in Q4 16 as its cost to sales ratio printed at 74.3% relative to 61.6% in Q4 16 despite further upward price adjustments (+9% QoQ in Q1 17). This position is consistent with management’s noted concerns on gas availability in the period. Irrespective, aided by higher YoY pricing, gross profit printed at a high N20.9 billion (+169% YoY) in Q1 17 to narrowly miss our forecast by 3%.

FY 17 sales to break historical bounds on favorable pricing: Going forward, management projects Nigerian cement market growth of 0-2% over FY 17 (vs. -18% YoY over Q1 17), with expected recovery over H2 17 premised on hopes of Nigeria’s rebound out of current recession. For South Africa however, management expects the tough business environment, with competitive forces from within and without, to place restraint on scope for top-line gains. That said, we have factored in 5% and 28% YoY decline for cement volumes in Nigeria and South Africa to 5MT and 1.6MT respectively owing to higher prices in the domestic market and tight environment in the latter. Notwithstanding our expectation for volumes decline, stronger YoY pricing and historical patterns in quarterly revenue distribution now inform a revision in our FY 2017 revenue target to N292 billion (vs. N264 billion in previous forecast).

Net adjustment to our model, which also incorporates a revision of our South African cement price estimate to ~N27,428, now leaves our new FVE (N50.55) at 2% upside to the stock’s last market price. The company now trades on estimated 2017 EV/EBITDA of 5.9x relative 7.6x for Bloomberg EMEA peers. We have a NEUTRAL rating on the stock.