AFRICA, Nigeria. Lafarge Wapco: A Comeback Boosted by Investment

Nigeria. Lafarge Wapco: A Comeback Boosted by Investment

In 2011, Lafarge Cement Wapco Nigeria Plc rode on the back of significant increase in sales to improve its overall performance but the company’s profitability outlook was fragile at that time. Its audited report and accounts for the year ended December 31, 2011 showed appreciable improvements in profit and loss performance and balance sheet.

Sales growth of 43 per cent cushioned equally substantial increases in costs and formed the linchpin for the 21 per cent increase in profit before tax, completing a turnaround from the declines in sales and profit witnessed in 2010. That year, the net earnings position of the company was boosted by a 52 per cent reduction in tax provisions. With improved liquidity and less exigent financial structure, the balance sheet position was more amenable and consistent with the recovery outlook of the profit and loss accounts.

2012 Performance
Recently, Lafarge WAPCO Plc released its 2012 full year audited accounts with revenues increasing by 40 per cent to N87.9billion. Operating profit also doubled to N25.7 billion when compared with N13.35 billion recorded in 2011. Operating profits margin for the year went up by an impressive 29 per cent up from the 21 per cent posted a year earlier. Pretax profit also more than doubled to N21.2 billion whilst profit after tax stood at N14.7 billion resulting in a profit margin of 17 per cent. Return on average equity at the end of the period was a 23 per cent or 11 per cent when adjusted for inflation.

Investors Response
So far, traders and investors have responded positively to the result with the share price rising sharply by 6.1 per cent to N74.29 (from N70) when the results were released in March-that was after losing N3.99 a day before. The company’s share price has since moved to between N77.00 and N79.00 

Analysts believe the result is an indication to most investors noting that it is evidence that their expansion programs is now beginning to yield fruit as revenues have continued to increase despite total assets remaining unchanged and expenses also staying nearly flat. In fact the return on assets of 17 per cent was ably boosted by a higher asset turnover of about 58 per cent compared to operating profit margin of about 25.7 per cent. The company, analysts therefore stated, is presently enjoying a ride as its investments are now boosting profits.

Not-so-rosy Cash Flow
Meanwhile, things are not so rosy for Lafarge WAPCO in terms of cash flow. Analysis of the company’s results showed that it currently has a negative working capital of N8 billion and still end up spending almost all of the N22 billion generated in operating cash flows in paying down loans and dividends as well as another N5 billion on investment leaving them with a negative cash generated of N2.2 billion. ‘

Nevertheless cash carried forward from the prior year still provides enough buffers, helping the company end the year with about N8.8 billion in the bank.

Given this, a dividend payout ratio of just 25 per cent of profits is not bad. Last year dividend was 75 kobo or 27 per cent of profits and so achieving that same payout ratio would have cost the company an additional N300 million. On a flip side, this year’s dividend payment is N1.3billion higher than 2011 and their share price has seen a capital appreciation of almost 89 per cent as a result.

2012 Dividend
Lafarge Wapco Plc has proposed a dividend of N1.20 per share to its shareholders for the year ended December 31, 2012. This implies a dividend yield of 1.7 per cent and a payout ratio of 24.5 per cent. However, the dividend per share (DPS) and payout ratios were below analysts’ estimates of N2.1, 40 per cent, but broadly in line with consensus expectations. With earnings and DPS in line with market expectations, the market’s muted response to the results is not surprising.

According analysts at FBN Capital believe the company’s fourth quarter 2012 sales of N18.1 billion came in flattish year-on-year( y/y) and was below the average run rate of N23.3billion delivered by the company for the first three quarters of 2012.

According to FBN Capital, “Profit before tax (PBT) of N4.9 billion was up 177 per cent y/y, largely on the back of a gross margin expansion of 718 basis points and a 35 per cent y/y decline in operating expenses, (Opex). PAT increased 140 per cent y/y, while weaker comparables for Q4 2011 also helped the strong y/y growth in WAPCO’s earnings reflect strong operating leverage as the company ramped up 2.5 million metric tonnes of recently added capacity.

“On a sequential basis, although sales were down 23 per cent quarter-to-quarters, q/q, a gross margin expansion of 1,359bps q/q drove an 18 per cent q/q growth in PBT. WAPCO’s earnings were more or less in line with consensus expectations.”
Continuing, they said, “Our estimates were on the aggressive side. On a full year basis, WAPCO’s 2012 sales grew 40.7 per cent y/y to N88 billion, while PBT and PAT were up by 105 per cent and 70 per cent respectively.”

Governance and Structures
Lafarge Cement Wapco Nigeria Plc is a subsidiary of the Lafarge Group, which altogether holds 60 per cent equity stake through three of its subsidiaries. Lafarge Group is a global leader in building materials with operations in 78 countries. Besides, Lafarge Wapco, Lafarge’s operations in Nigeria also included majority shareholding Ashaka Cement and significant stakes in Atlas Cement, Port Harcourt and Unicem, Calabar. Lafarge’s operations in Africa run through 20 countries. This spread presents cross-selling and economy of scale advantages that provide Lafarge Wapco with access to competitive advantages in the market.

Erstwhile Managing Director of the company, Mr. Samy Abdelkader,  was assigned to new roles within the Lafarge Group and was replaced by Mr. Joe Hudson, who was formerly the regional vice president, human resources and organisation. Meanwhile, Chief Olusegun Osunkeye still chairs the board of directors.

Lafarge Wapco broadly complies with code of corporate governance with relevant board committees and structures to oversee the strategic direction of the company. Besides, Lafarge Group provides a global best practice guide that directs best practices in its operations.

Outlook
The performance of Lafarge Wapco is commendable. The rebound in key growth indices reassures on the positive impact of the recent investments and expansion. With the coming on stream of its 2.2 million metric tonnes new cement plant, which raised the company’s total capacity to 4.4 million metric tonnes per annum, Lafarge Wapco is expected to further consolidate its performance in the years ahead. Investments in power generation and utilisation- a major cost element in cement production, are also expected to provide stable platform for the realization of the growth potential.

But there is a snag in the company’s huge medium-term indebtedness. The company will require fast-paced growth in sales and tight control on costs to muffle the emerging obvious impact of interest expense. Financing structure has always been a major impediment in the growth cycle of Lafarge Wapco and it needs to break this chequered performance trend to truly deliver the benefits of several growth initiatives to shareholders.

The demand-supply outlook for the cement industry remains robust but there is always the lurking threat of the effect of unpredictable weather on building and construction activities. The future outlook of Lafarge Wapco depends on strong sales growth and efficient cost management.