Maintaining Neutral rating
- Positive earnings outlook in 2018E: Lafarge Africa’s (Lafarge) Q3 2017 results surprised negatively, mainly due to a net fx loss of –N9.9bn, arising from the hedging cost of N2.6bn from the US$220m shareholder loan that was converted to quasi-equity and settled at N385/US$ vs an initial rate of N375/US$, a net fx loss of N4.6bn related to the settlement of fx liabilities and a quasi-equity loan conversion cost of N2.7bn. Furthermore, one-off costs of N2.3bn related to the restructuring and the delisting of Ashaka Cement also contributed. Given the magnitude of the one-off items in the Q3 results, our models exclude the impact of further one-offs in Q4 2017. As such, our Q4 forecasts imply PBT of N6.3bn for N2017E (vs. a pretax loss of –N22.8bn in 2016). We see sales growth of 35% y/y to N297.5bn in 2017E. Beyond 2017, we forecast healthy sales growth of 13% y/y to N335.6bn, underpinned by an 11% y/y growth in unit volumes. Further down the P&L, we see PBT growing by 277% y/y to N23.6bn on the back of base effects. We await management’s communication of the results of its rights issue of N131.65bn. Consequently, our new price target of N72.5 excludes the impact of the anticipated issue proceeds of N38.5bn. According to the rights circular, the issue proceeds will be used to deleverage the firm’s balance sheet, effectively paying down c.US$270m of its shareholder loans. Despite the sizable upside implied by our new price target, we are keeping our Neutral recommendation because the shares have not yet been adjusted for the rights issue which was priced at N42.50. Assuming full subscription, we estimate a +30% reduction to our price target.
- Pre-tax loss of –N17bn in Q3 2018 due to spike in costs: Lafarge’s Q3 2017 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, 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.