Goddy Egene writes that last week's announcement by Lafarge Group to consolidate its African businesses is a good move that will improve its market share, deliver better returns to investors and most importantly make its presence felt as the second largest cement manufacturer in the world
Dangote Cement Plc and Lafarge Cement WAPCO Nigeria Plc are the leading players in the cement industry in Nigeria. At the Nigerian stock market, Dangote Cement leads in terms of share price and market capitalisation.
For instance, the market capitalisation of Dangote Cement as at last Friday stood at N3.919 trillion, while that of Lafarge WAPCO stood at N345 billion.
Lafarge WAPCO is the eight most capitalised on the stock market while Dangote Cement is most capitalised stock. Dangote Cement has 17 billion outstanding shares, compared to 3.0 billion shares of Lafarge WAPCO.
Also, in terms of product capacity, Dangote Cement is the leader having operations across many countries in Africa.
However, in order to narrow the gap, deepen its operations and expand its market share, Lafarge Cement last week announced plans to consolidate its businesses in Africa.
The consolidation plan
Lafarge said it will consolidate its holdings in Nigeria and South Africa into a new entity to be known as Lafarge Africa. The consolidation is expected to be completed in second half of this year and is subject to shareholders’ and regulatory approval.
Upon consolidation, the new entity, Lafarge Africa, will be 73 per cent owned by Lafarge Group and will remain listed on the Nigerian Stock Exchange (NSE). The transaction is expected to be concluded through a cash consideration of $200 million and the issuance of 1,402,575,984.
Lafarge Africa shares to Lafarge Group.
The company explained that under the proposed transaction terms, Lafarge Group will transfer its direct and indirect shareholdings in Lafarge South Africa Holdings (Pty) Limited (100 per cent - representing 72.4 per cent of underlying companies in South Africa), United Cement Company of Nigeria (UNICEM) Limited (35 per cent), Ashaka Cement (58.61 per cent) and Atlas Cement Company Limited (100) to Lafarge WAPCO.
Implication of transaction
The new company will have a combined upon consolidation. The capacity, is in addition to operations in aggregates, ready-mix and fly ash.
It is expected to have a leading presence leveraging on the two largest economies in sub-Saharan Africa with a combined cement capacity of around 12 metric tonnes per annum (mtpa) as well as operations in aggregates, ready mix concrete and fly ash.
It will have increased product range and services in order to answer the growing building materials demand in sub-Saharan Africa. Lafarge Africa will be the sixth largest on the NSE by market capitalisation, from the eight position that Large WAPCO is currently occupying.
Executive Vice-President Operations/Country CEO Nigeria, Lafarge Group, Mr. Guillaume Roux said the announcement marked a key milestone.
“It adds momentum to our push for differentiation in order to deliver innovation that increases and improves our product portfolio. Our objective is to bring more housing and ever better solutions to contribute to building better cities that are more beautiful, more compact, more connected and more durable,” he said.
Also commenting on the development, Chairman of Lafarge WAPCO, Chief Olusegun Osunkeye said: “I am proud to be part of the creation of this leading African building materials platform. It will provide access to growth in two of the largest economies on the continent. It will mean that our shareholders are invested in a larger and more geographically diverse business; and it will contribute significantly to the economic growth of both our nations."
Analysts’ assessment
Analysts at IBTC Stockbrokers Limited said they see the move by the Lafarge Group to consolidate its interests in Nigeria and South Africa as positive.
“We believe this represents a show of commitment to key markets on the African continent. We think the consolidation of Lafarge Group’s interest in Nigeria is long overdue.
However, we expect this proposed consolidation to provide the investment community with a more centralised communication channel, which has been elusive especially in the case of Ashaka Cement.
In addition, Lafarge Africa will offer investors exposure to the infrastructure growth story of the two largest economies in Africa. On consolidation, we estimate an installed market share of 30 per cent for the Nigerian operations of Lafarge Africa by 2018,” they said.
They explained that a minimum of 7.5mtpa is expected from Nigerian operations, adding that they estimate that the combined entity will have a combined installed capacity of 20mtpa by 2018E.
“We had previously highlighted additional capacity of 2.5mtpa each for Lafarge WAPCO and Ashaka Cement. We also understand that UNICEM is planning to double its capacity to five mtpa by 2016,” they said.
Rating the equities, the analysts said they have upgraded their recommendation on Lafarge WAPCO to a buy (previously sell) on the back of anticipated capacity expansion.
“We also have a Buy rating on Ashaka Cement with a target price of N23.0 hinged on internal efficiencies. We believe both names are well positioned to benefit from the technical expertise and heritage of the Lafarge Group in Africa,” they said.
Higher returns expected
The planned consolidation of the Lafarge Group’s businesses in Africa, which is expected to boost its operations is generating excitement among stakeholders because the development will eventually lead to higher returns for investors.
The company has already given indication for higher returns going by its 2013 financial results. The company recommended a dividend of N3.30 per share for the year ended December 31, 2013, showing a jump of 175 per cent above the N1.20 paid the previous year.
The high dividend followed an impressive profit growth of 92 per cent for the year.
The company grew its revenue by 12 per cent from N87.9 billion in 2012 to N98.79 billion in 2013. Profit before tax rose by 30.3 per cent from N21.2 billion to N27.7 billion.
Profit after tax jumped from N14.7 billion to N28.26 billion. The company ended the year with earnings per share of N9.42 and the board recommended a dividend of N3.30, indicating a pay-out ratio of 35 per cent.
Generally, Lafarge WAPCO has witnessed increased returns, a development analysts at Dunn Loren Merrifield have hailed. Driven by strong profitability, operational efficiency and less leverage, Lafarge‘s returns on asset (ROA) and shareholders‘ equity(ROE), have beaten 2008 peak levels of 15.56 per cent and 27.97 per cent to reach new multiyear highs of 17.55 per cent and 30.40 per cent in 2013.
According to DLM, the company‘s ROA which was last in double-digits in 2008 has -reverted to double-digits in 2013 after four years of being in single digits.
“Quite remarkable about Lafarge‘s ROE and ROA is the fact that they have, over the years, relied less on financial leverage, due to shrinking equity multiplier, and have thus become less risky.
"In recent times, they are driven increasingly by improving profitability – as measured by net profit margins – and growing operating efficiency – as measured by total asset turnover. In 2013, they reached high levels when operating efficiency was highest, profitability was highest and financial leverage was least,” they said.
They said in the years ahead, Lafarge WAPCO’s ROE and ROA to remain less risky, as the firm continually deleverages, and improve on the back of strong operating efficiency and healthy net margins.
Another positive item on the company’s financials in 2013 was its cash flow, which grew by 77.9 per cent. Lafarge WAPCO generated a positive net operating cash flow of N36.94billion, up from N24.97billion posted in 2012.
“Lafarge has been generating positive net operating cash flows since 2011, at the minimum, on the back of improving profitability, favourable tax position, strong activity ratios and optimal credit policy.
"It is our opinion that Lafarge‘s strong and stable operating cash flow puts it in good stead and will provide support for its free cash flows in the event that the company embarks on massive capital expenditure,” the analysts said.
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