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LAFARGE AFRICA PLC Company Update - Capital raise mitigates FX risk but dilutes valuation

Capital raise mitigates FX risk but dilutes valuation                                                   

Given the 100% subscription, we have increased WAPCO’s outstanding shares in our model by 56% to 8,673 million units. The issue proceeds will be used to liquidate the dollar-denominated quasi-equity instrument of c.₦93 billion, support working capital (c.₦19 billion) and fund expansion projects (c.₦19 billion). Meanwhile, given that interest payment (6% annual dividend) on the instrument was treated as a direct charge to Equity (rather than to Income statement), we do not expect any savings in interest expense (post-liquidation). Consequently, we expect significant EPS dilution and thus revise our FY’18 EPS lower to ₦2.86 (Previous: ₦4.85), and post-FY’18 EPS by an average c.40% over our forecast period. Notwithstanding, WAPCO would no longer be required to pay out the 6% dividend previously accruing on the equity instrument, freeing up additional earnings for distribution to shareholders and investment. The restructuring also frees up WAPCO’s financials from volatility that may arise on the instrument’s carrying value due to movement in exchange rate.                                       

In valuing WAPCO post-rights, we back out the ₦93 billion quasi-instrument from WAPCO’s minority interest following the conversion to ordinary shares. Notwithstanding the resulting increase in weight of equity (more expensive than debt) in the new capital mix, our Weighted Average Cost of Capital (WACC) post-rights is revised lower to 14.7% (Previous: 15.3%) on the back of a lower risk-free rate assumption. After updating our model, we cut our target price to ₦63.15 (₦70.58) but maintain a BUY rating on the stock.