EUR 56.22 For Business Accounts Only

LAFARGE AFRICA PLC UPDATE- Restructuring to calm earnings volatility

• Weak earnings, debt restructuring weigh on WAPCO
• WAPCO has declined 50% ytd, much steeper than the Industrial Goods sector (-24%) and the broader market (NSE ASI: -9%). The sell pressure started after the release of H1’16 earnings with a negative PAT exacerbated by ₦28 billion FX loss. By October, WAPCO came under renewed pressure amidst talks of a debt-equity conversion deal for its foreign currency denominated shareholder loans – same liabilities that yielded the FX loss. Whilst we expect modest profitability in Q4 on the back of higher cement prices and cautious optimism on ongoing quick-fixes on energy front, we still expect WAPCO to report a loss for FY’16 amidst FX losses recorded in previous quarters.
  
• Equity instrument – no preference over ordinary shares
• We understand that $493 million of the shareholders’ loan ($510 million) has been converted to an “equity instrument” (as at July 1) which is repayable at borrower’s (WAPCO) discretion. The debt conversion did not result in a change in WAPCO’s shareholding structure, and will bear an average annual interest rate of 6% which is also payable at WAPCO's discretion. Whilst the restructuring does not relieve WAPCO of the obligation to repay principal and interest, it will free-up the income statement from the volatility that may arise from revaluation of the loans amidst currency movement.
  
• Underlying investment to deliver stronger value from FY’17
• On a much brighter note, UNICEM’s Line 2 which is the asset partly financed by the shareholder loans has begun operation. Total installed capacity at the subsidiary has now been effectively doubled to 5 million MT. According to management, the line produced its first clinker on August 28, and would be ready for normal cement production in November. By FY’17, we expect UNICEM to deliver 2.5 million MT (FY’16E: 1.6 million) to be buoyed by Line 2.
  
• WAPCO still a BUY despite cut to valuation
• We believe WAPCO will return to profit by FY’17 as we expect some improvement on energy logistics, coupled with cement volume roll out from UNICEM Line 2. We are much more optimistic on WAPCO from FY’18 as we believe the ongoing own-coal project would have reached meaningful threshold that would significantly reduce reliance on gas. After updating our model, we cut our target price to ₦68.42 (Previous: ₦80.85). Notwithstanding the cut in our valuation, WAPCO still presents upside to current market price of ₦48.00.