Downgrading to Neutral
- Potential EPS dilution likely to weigh on sentiment: Lafarge Africa’s (Lafarge) Q1 2017 results showed that although PBT missed our forecast by around 10%, PAT came in well ahead (+96.9%), thanks to a positive surprise of N9.3bn in other comprehensive income (OCI). Following the results, we have increased our EPS forecasts by around 7% on average over the 2017-19E period. Despite the upward revision to our forecasts, our new price target of N63.3 is 9% lower because we have increased the risk free rate assumption driving our valuation by 100bps to 15.5%. Earlier this week, Lafarge management announced plans to raise N140bn by way of a rights issue. Apart from deleveraging, the new issue is likely to facilitate the conversion of part of Lafarge’s “quasi-equity’ instrument of N139bn to equity. The exact terms of the rights issue have not been disclosed. However, assuming the rights are issued at the current share price of N48.5 and fully taken up, we estimate a potential dilution impact of around 34% to Lafarge’s 2017E EPS. Following the announcement, the shares shed -2.2% yesterday vs. +1.3% ASI. At current levels, the shares are trading on a 2017E P/E multiple of 8.9x for a -6% decline in EPS in 2018E (due to OCI gains in 2016). These compare with the 13.1x multiple for 2018 EPS growth that rival Dangote Cement is trading on. Although our new price target implies a potential upside of 31% from current levels, we have downgraded our rating to Neutral from Outperform because we believe that the size of the proposed issue relative to the stock’s market-cap is likely to weigh on market sentiment in the near term.
- Strong Q1; PBT recovered to N9.4bn vs. –N2.2bn in Q1 2016: Lafarge’s Q1 2017 results showed that PBT grew to N9.4bn compared with a pre-tax loss of –N2.2bn in the corresponding quarter of 2016. The robust PBT growth was driven by stellar sales growth of 55% y/y and a significant gross margin expansion of 1,085bps y/y to 25.7%. Both positives proved significant and completely offset a 29% y/y rise in opex and a 94% y/y spike in net interest expense. Further down the P&L, PAT accelerated by 272% y/y to N14.1bn, thanks to a positive result of N9.3bn (related to fx gains) on the other comprehensive income (OCI) line. Sequentially, sales grew by 39% q/q. However, PBT and PAT declined by 46% q/q and 67% q/q respectively, due to a gross margin contraction of -1,274bps q/q and a 91% q/q reduction in other income. Relative to our forecasts, although sales beat by 7%, PBT missed by 10% due to negative surprises in gross margin, opex and net interest expense. However, thanks to the OCI gains, PAT beat our forecast soundly by 97%.