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Q3 2015 results review: Dim outlook for cement demand on weak macro

​Dim outlook for cement demand on weak macro

• 19% cut to our PT; lowering recommendation to Neutral: Lafarge Africa's (Lafarge) Q3 PBT missed our forecast by 74%; as such, we have cut our EPS forecasts by an average of 35% over the 2015-17E period on the back of a -13% cut to our unit pricing assumption for Nigeria to N28,497 (US$142) per tonne and slight reductions to our unit volume forecasts following weak demand for cement in Nigeria. However, our new price target of N104.7 is only 19% lower because we have cut our capex assumptions by an average of 30% over the 2015-17E period. Our new price target implies a potential upside of 11% from current levels, As such, we lower our recommendation on the stock to Neutral from Outperform.

• Weak Q3 results; PBT down 68% y/y…: Lafarge's Q3 sales were down by -7% y/y to N51.4bn. However PBT and PAT fell by much wider margins of 68% y/y and 67% y/y to N3.9bn and N3.3bn respectively. The y/y decline in sales, a gross margin contraction of -505bps y/y to 28.0%, a 25% y/y spike in opex and a 4.5x increase in net interest expense were the major drivers behind the decline in earnings. Sequentially, sales fell by 14% q/q. However, PBT and PAT both fell by 81% q/q. Compared with our forecasts, sales missed by 10%. PBT and PAT were behind our forecasts by 74% and 73% respectively mainly because of negative surprises in gross margin, opex and net interest expense.

• …driven by pricing pressure and a -9% y/y decline in unit volumes: In addition to a 9% y/y decline in unit volumes in Q3, the weak performance during the quarter was driven by a 10% q/q decline in realised prices in Nigeria to c.N30,212 (US$151) per tonne. Restructuring costs of N1.5bn related to Ashaka and Ewekoro and a spike in net interest expense due to a y/y reduction in interest income also weighed on earnings. The y/y reduction in interest income was due to payment for the acquisition of the 2^nd tranche of UNICEM shares from Flour Mills of Nigeria and dividend payments in Q3 which led to lower investible funds. Going forward, we believe the prevailing macro headwinds will continue to be a drag on cement demand in the near-term. Consequently, we expect unit volumes to come in flattish y/y at 6.5 million tonnes in 2015E. Although we forecast 2015E sales growth of 7% y/y to N219bn, mainly on the back of favorable pricing in H1 2015, we see EPS declining by -4.0% y/y to N7.16.