Event: Lafarge Africa reports Q3 2017 results
Implications: Downward revisions to consensus 2017E PBT forecasts a given
Positives: Sales up 28% y/y
Negatives: Lafarge reported a pretax loss of -N17.1bn, driven mainly by a q/q contraction in gross margin and spikes in opex and net interest expense
Late on Friday of last week, Lafarge Africa (Lafarge) published its Q3 2017 results which surprised negatively. The results showed a pre-tax loss of –N17.1bn (vs. –N10.2bn in Q3 2016). Further down the P&L, the after tax loss widened to -N21.2bn, mainly due to a negative result of -N2.3bn in other comprehensive income (OCI).
Given significant negative base effects in Q3 2016 and the marked improvements seen in Lafarge’s H1 2017 results, we believe that the sequential comparisons are more relevant than the y/y trends. Sequentially, sales declined by 6% q/q. However, the key drivers behind the pre-tax loss include a gross margin contraction of -1,248bps q/q to 19.6%, a 35% q/q rise in opex and 22% q/q increase in net interest expense. A negative result of –N9.3bn in other operating expense (vs. +N1.4bn in Q2 2017) also contributed. In terms of the y/y trends, sales were up by 28% y/y. However, significant spikes in opex, net interest expense and other operating expense which were up by 73% y/y, 159% y/y and 300% y/y respectively were the major factors underpinning the pre-tax loss of –N17.1bn.
Compared with our forecasts, sales were in line with our N68.7bn estimate. However, we had expected the company to deliver PBT and PAT of N5.1bn and N3.5bn respectively, compared with the pre-tax and after tax loss of -N17.1bn and –N21.2bn. Our forecasts were driven by higher cement prices (+22% ytd) and improved industrial performance for the plants in Nigeria.
Pending management comments, we believe that the dismal Q3 results were most likely driven by operational issues (i.e. a slow-down in plant performance) during the quarter. We expect the sharp reduction in gross margins q/q, and the spikes in opex and net interest margin to be the focal point of discussions on the company’s conference call which is slated to hold later today.
Consensus 2017 PBT forecast for Lafarge Africa is N36.9bn. Given the weak set of results, we expect to see a marked reduction to this forecast. Lafarge shares have broadly tracked the ASI this year. Ytd the shares have gained 36.8% compared with the 36.1% return delivered by the index. Following the underwhelming Q3 2017 results, we expect to see a sell-off in the shares over the next few days.
We rate Lafarge Neutral. Our estimates are under review.