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LAFARGE AFRICA PLC FY'20 - Post SA period continues positive run

An impressive result despite forecast miss Lafarge Africa released its FY’20 earnings last week, reporting a 99% y/y jump in after tax earnings to ₦30.8 billion (excluding profit from discontinued operations) amidst impressive Revenue growth and cost containment measures. While the bottom line missed our ₦31.6 billion target, we still consider the performance impressive considering the challenges faced in FY’20.  While the lockdowns and subsequent social distancing measures meant to help slow the spread of the virus went a long way in dampening cement demand in Q2’20, rapid capex disbursement from the FG as well as a mini-resurgence in commercial and residential real estate supply supported a rebound in cement demand in H2. Accordingly, WAPCO reported a 6% y/y jump in cement sales to 5.2 million MT, albeit shy of our 5.5 million MT expectation. The miss was driven by a slower-than-expected Q4 volume rollout at 1.1 million MT (Q4’19: 1.2 million MT, Vetiva: 1.4 million MT), amidst manufacturing issues at the Ewekoro and Mfamosing plants in Q4 as well as the total shut down of Ewekoro Line 1 for upgrades at the end of September. Meanwhile, supported by a c.10% y/y jump in average revenue/tonne to ₦43,643, WAPCO reported an 8% y/y growth in topline to ₦230.6 billion, 5% away from our ₦242.3 billion forecast. With public cement demand expected to remain healthy in FY’21 amidst continued spend on transport infrastructure, we forecast a 7% y/y jump in FY’21 volume rollout to 5.5 million MT, supported by the expected reopening of Ewekoro Line 1 in H2’21 and the potential completion of debottlenecking at Ashaka (a potential 0.25 million MT capacity boost).

Rising costs will pressure margins and ultimately, profit After accounting for the FY’20 actuals, we have made a number of changes to our FY’21 forecasts. First, even as FY’20 delivered a 9-year high EBITDA margin at 32.7%, we remain cautious of FY’21 margins, given rising energy costs as well as general inflationary pressures. Notably, Q3’20 and Q4’20 margins came in at 27.0% and 24.4% respectively. That said, we expect the improved scale and efficiency from the reopening of Ewekoro line 1 and the Ashaka debottlenecking to feed through to margins, driving a 28.8% FY’21 EBITDA margin and taking absolute EBITDA mildly 4% lower y/y to ₦72.2 billion. Furthermore, we project a 9% y/y fall in PBT to ₦34.3 billion, dragged by a 9% y/y increase in Net finance costs. Even as the debt balance is expected to fall in FY’21 (c.₦34.1 billion bond matures in FY’21), we expect rising interest rates to overcompensate for this fall and drive the higher Finance charges. Finally, after adjusting for a 23% effective tax rate assumption, we arrive at a PAT of ₦26.4 billion.