Lafarge Africa Plc. Q1:2023 Earnings Note: Higher Tax Obligations Overshadow Decent Cost Minimization Strategy
Higher Tax Obligations Overshadow Decent Cost Minimization Strategy
Cash Crunch and Electioneering Activities Suppress Topline Growth
Lafarge Africa Plc. witnessed a tepid growth in Revenue amid Domestic headwinds. The major cement players (DANGCEM, BUACEMENT and LAFARGE) were not immune to the adverse effects of Naira scarcity and political uncertainty that prevailed during Q1:2023. Revenue grew marginally by 1.34% (YoY) to NGN91.82bn (vs NGN90.60bn in Q1:2023). On the other hand, Profit After Tax (PAT) for Lafarge Africa Plc declined by -14.94% YoY to NGN14.94bn, which can be attributed to an increase in tax obligations (tax expense rose by 93.05% YoY to NGN7.55bn) due to the expiration of the Pioneer Status Incentive (PSI).
Production Cost Subsides
Cost of sales (adjusted for depreciation) for Lafarge Africa Plc recorded a YoY decline of 8.70% to NGN38.43bn in Q1:2023 from NGN42.10bn. Production Variable Cost and Production Fixed Cost also declined by 10.18% and 7.62% (YoY) respectively to NGN28.19bn and NGN5.10bn. We believe that this is because of a conscious strategy by the management to keep costs low, particularly in the wake of energy supply disruptions that affected the 2022FY.
Decent Net Finance Income – Positive Impacts of Lower Yields and FX gains
Net Finance Income for Lafarge Africa Plc experienced a significant YoY growth of +140.74%, reaching NGN242.31mn. This was primarily due to a remarkable increase in Interest Income from Short-term Fixed Deposits and Current Accounts, which spiked by +1,020.52% YoY to NGN913.88mn from NGN81.56mn in Q1:2022. Additionally, Net Foreign Exchange Gain rebounded impressively, by +455.15% YoY to NGN324.45 from a Net Foreign Exchange loss of NGN91.39mn.
After considering the factors outlined, we have conducted a review of our target price for Lafarge Africa Plc, which has resulted in a downward adjustment to NGN28.11 (representing an attractive 17.13% upside potential as of May 3rd, 2023), accompanied by an "OVERWEIGHT" recommendation. Our revised outlook is predicated on the anticipated growth in revenue in the second quarter of the year, which we expect to drive profitability. Furthermore, we believe that the significant 191.12% increase in Free Cashflow to NGN4.70bn is indicative of the company's strong financial position, which, in turn, translates to robust liquidity, improved dividend prospects, and enhanced value proposition for shareholders.
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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