FREE

LAFARGE AFRICA PLC FY'16 - Charged up for FY’17 earnings recovery

Strong Q4 numbers, tax credit raise FY’16 bottom-line to positive

Lafarge Africa PLC (WAPCO) reported FY’16 EBITDA of N29.0 billion, beating Consensus estimate of N24.2 billion following a better than expected Q4 performance. FY’16 bottom-line also humbled market expectations, coming in at N16.9 billion profit vs Consensus estimate of N30.3 billion loss, singlehandedly buoyed by a N36.8 billion tax credit - relating to prior losses in UNICEM. Proposed dividend payment of N1.05 per share (FY’15: N3.00) by the Board of Directors further compounds the positive earnings surprise. WAPCO has rallied 14% since the release of the result and is poised for further gains.

 

Q4 margins surge on turnaround in Nigeria operations

Although we note that FY’16 PAT would have come in negative save for the year-end tax credit, we highlight that loss before tax beat market expectations (N22.8 billion loss vs Consensus estimates of N39 billion loss), driven by strong earnings recovery in Q4, particularly from Nigeria operations. In line with our expectation, capacity utilization in the region improved significantly over the 3-month period following the slump in Q3 (caused by various forms of disruptions). And coupled with volume rollout from UNICEM Line 2 (commenced operation in Q4) cement sales in the Q4 period increased 42% q/q to 1.5 million MT.

Valuation revised higher on improved earnings outlook

We believe strong price outlook (in Nigeria) for 2017 would cap demand, and in fact, expect the sector-wide volume growth to decline on a y/y basis. Nonetheless, we expect WAPCO’s Nigerian volume to grow 7% y/y, buoyed by the relatively low base of 2016 (due to production disruptions) and increasing ramp up in UNICEM line II. We expect volume roll out to remain challenging in South Africa as the operating environment remains highly competitive. Overall, we forecast Group FY’17 revenue at N246.1 billion (FY’16: N219.7 billion), largely on the back of strong Nigeria prices. With the energy diversification gaining traction faster than we had expected, we have revised our FY’17 EBITDA margin to 24% (Previous: 18%). Overall, we revise our target price to N74.63 (Previous: N68.42). Notwithstanding our improved view on WAPCO, we again highlight that potential conversion of its quasi-equity instrument to ordinary shares might significantly dilute EPS and limit gains from operational improvement.