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LAFARGE AFRICA PLC H1'17 - Earnings beat on strong Q2 numbers

Earnings beat on strong Q2 numbers
Lafarge Africa wrapped up the first half of the year on a strong note, reporting H1’17 PAT of ₦19.7 billion. This result is not only impressive from a y/y perspective (H1’16: ₦30.2 billion loss), but also when compared to estimates – Vetiva: ₦17.5 billion, Consensus: ₦12.9 billion. Q2 standalone generated a bottom line of ₦14.6 billion, thanks to a ₦5.9 billion tax credit recognized over the quarter. However, even without the tax credit, earnings would still have come in very decent with PBT printing 8% above consensus. Although administrative expenses (up 52% y/y) and net finance costs (up 118% y/y) served as pressure points over the half-year, amidst a faster rise in Q2, the impact was largely muted on bottom-line due to strong earnings from operations and the tax credit boost.

Whilst potential economic recovery and expected increase in FG’s building and construction activities post-budget approval provide some upside to Nigeria’s cement consumption in H2’17, we believe strong cement prices and the intense rainfall outlook would significantly cap volume roll out at Q2 levels. We also expect South Africa volumes to remain depressed amidst tough economic conditions.As such, we cut our FY’17 volume for Nigeria to 4.8 million MT (Previous: 5.5 million MT; Ytd: 2.5 million MT). Despite the volume pressure, we expect topline to remain strong, driven by increased prices in Q2 and forecast FY’17 revenue growth of 34% to ₦294.4 billion (previous: ₦294.9 billion). We revise our FY’17 EBITDA higher to ₦72.1 billion (Previous: ₦63.4 billion) amidst increasing traction in the use of cheaper alternative fuels as well as strong cement price outlook, but our PBT lower to ₦31.6 billion (Previous: ₦33.2 billion) after revising our debt projections. Although management highlighted that there are more capital allowances available to be recognized, we however take a more conservative approach in our H2’17 forecast and thus subject total expected earnings to tax. We therefore revise our FY’17 tax forecast lower to ₦2.5 billion (previous: ₦5.2 billion) after adjusting for the effect of tax credit in H1’17.Consequently, we revise our FY’17 PAT slightly higher to ₦29.1 billion (Previous: ₦28.0 billion). After updating our model, we revise our target price to ₦79.26 (Previous: ₦77.32) and maintain a BUY rating on WAPCO.