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LAFARGE AFRICA - H1'18 Fails To Flatter, Rights Issue To Provide Reprieve

H1 fails to flatter, Rights issue to provide reprieve                                                                         

Lafarge Africa recently released its H1’18 results, reporting weak earnings for the period. In spite of a 5% y/y increase in topline to ₦162.3 billion (Vetiva: ₦157.9 billion), the Group reported a Loss-after-tax of ₦3.9 billion, a long way off H1’17 PAT (₦19.7 billion) and our ₦1.0 billion loss expectation. Notably, the pressure points remained the same; an ailing SA business and high finance costs. The Nigerian business was flattish y/y, with H1’18 EBITDA coming in at ₦35.1 billion, much in line with H1’17 (₦36.2 billion) – albeit at a lower margin (240bps lower y/y to 30%). However, South African operations remain challenged within the quarter, reporting negative EBITDA (-₦3.3 billion) for the fourth consecutive quarter and dragging H1’18 Group EBITDA 25% lower y/y to ₦27.7 billion. In addition, the Group reported a 128% jump in Net finance costs to ₦22.7 billion (Vetiva: ₦16.3 billion), driven by higher borrowing costs as well as a ₦4.3 billion FX loss in Q2’18 standalone. Following this, Group Earnings before tax fell to a ₦6.3 billion loss (Vetiva: ₦1.7 billion loss), whilst after-tax earnings fell to a loss of ₦3.9 billion, softened by a ₦2.4 billion tax credit in Q2.                                                                               

Whilst we remain cautious about the SA operations, we retain our expectation of 2.5% revenue growth in the region, following a price hike in Q2. Overall, we raise our FY’18 group revenue expectation to ₦324 billion (Previous: ₦312 billion), translating to an 8% y/y growth. However, after adjusting our cost estimates to reflect H1’18 run rate, we cut our FY’18 EBITDA expectation from ₦54 billion to ₦48 billion, translating to a margin of 15%. Furthermore, given the huge debt profile and the pressure from high borrowing cost, we expect Finance costs to remain elevated. After accounting for interest and tax, we slash our bottom line expectation to a ₦5 billion loss (Previous: ₦2 billion profit) and our target price to ₦39.16 (Previous: ₦57.63).                                                                             

Lafarge Africa PLC is a subsidiary of LafargeHolcim, a world leader in building materials. The company has operations in Nigeria - Ewekoro and Sagamu plants in Ogun State, Ashakacem in Gombe State, Mfamosing in Cross Rivers State, Atlas cement in Rivers State and Ready-Mix Nigeria and varied operations in South Africa with total group capacity of around 14 million MT.