Goddy Egene’s writes that the high cost of doing business in Nigeria is affecting the efforts of Lafarge Africa to improve its bottom line
“The overwhelming majority of our minority shareholders were strongly supportive, which reflects that they see the strong value opportunity in the creation of Lafarge Africa. Lafarge Africa is not only a value enhancing transaction for shareholders but it will provide significant value to all stakeholders through the creation of a Nigerian listed Sub-Saharan Africa building materials giant that will be better able to support the development needs of our continent.”
The foregoing were the words of former Chairman of Lafarge Africa Plc, Chief Olusegun Osunkeye, last year shortly after the company got the approval of shareholders to consolidate its operations in Africa. After consolidating its businesses, the company made Nigeria the hub of its operations in Africa. The nine months results of Lafarge indicate that the decision to make Nigeria its hub is paying off.
Corporate profile
Lafarge Africa Plc is a product of the consolidation of Lafarge S.A indirect assets in Nigeria and South Africa into the erstwhile Lafarge Cement WAPCO Nigeria Plc. The assets that were transferred to Lafarge Cement WAPCO Nigeria Plc included: Lafarge South Africa Holdings (Pty) Limited; United Cement Company of Nigeria Limited, through Egyptian Cement Holding B.V.; Ashaka Cement Plc; and Atlas Cement Company Limited.
Following the transactions, the name of the company was changed to Lafarge Africa Plc in order to reflect its new reach and positioning.
Lafarge Africa Plc was incorporated on February 26, 1959 to carry out the business of manufacturing and marketing of cement in Nigeria and has grown into one of leading Sub-Saharan Africa building materials company.
At present, the company has a presence in Africa’s two largest economies of Nigeria and South Africa. It has an installed cement capacity of 12 metric tonnes per annum(mtpa), aggregates capacity of more than five mtpa, Ready-Mix Concrete capacity of about 3.5 million mtpa and a market leading position in Pulverized Fly Ash.
Lafarge S.A. of France, controls 72.74 per cent of Lafarge Africa the remaining 27.26 l is held by Nigerian and foreign, institutional and individual investors. Lafarge S.A. of France is a world leader in building materials with a presence in 62 countries across the globe.
Nine Months Performance
Lafarge Africa recorded revenue of N168.14 billion, up by 5.4 per cent from N159 billion in the corresponding of 2014. Growth in cost of sales dampened gross profit. However, the growth in the company’s cost of sale (COS) and others affected the company’s bottom line. Lafarge Africa’s COS N113.75 billion was up by 9.34 per cent compared to the N104.04billion recorded in the preceding year. Costs emanating from plant maintenance and energy were the key drivers of COS.
Apart from COS, Lafarge operating expenses of N20.30billion increased by 23.41 per cent compared to N16.45billion recorded in 2014. As a result, the company’s core operating profit declined by 12.37 per cent to N34.10billion, won from N38.9 billion in 2014.
The company ended the period with a lower pre-tax and post-tax profits. Specifically, Lafarge posted pre-tax profit of N33.67billion, a decrease of 11.61 per cent, down from the N38.1 billion in 2014. Key drivers of the decline in PBT were resurging costs and decrease in finance and investment income.
However, assessing the results, analysts at Dunn Loren Merrifield (DLM), said they expect energy cost to decline in the years ahead given their anticipation of a higher coal utilisation as the company works to increase power supply to its plants in various parts of the country, having only recently constructed 220 megawatts power plant at Ewekoro, Ogun State.
They said the company is also planning to raise production capacity in the North East, Nigeria to 4mt from 0.9mt, including a 64mw coal power plant by 2018 for Ashaka Cement Plc.
DLM said the growth in operating expenses is reflective of the company’s effort to boost marketing and distribution networks.
Healthy Balance Sheet
Lafarge’s borrowings increased by 73.1 per cent to N23.94 billion from N13.83 billion in the prior year. According the analysts though, the current level of borrowings is the lowest in the industry when compared to its major competitor Dangote Cement with current debt of N278.56 billion.
They said: “We note that he current debt level was driven largely by short term debt as the company soured for funds to meet working capital needs particularly as net working capital remains negative. However, we applaud management’s effort to gradually reduce the company’s payables and long term debt. Consequently, debt-to-equity ratio increased to 0.13x from 0.08x and the debt-to-assets ratio also rose to 0.08x from 0.05x in the prior year. These in our opinion are relatively insignificant compared to industry peers.
The current debt level indicates that the company financed just eight per cent of its assets with debt. The low debt/assets and debt/equity ratios coupled with strong cash flow from operation, show that the firm has a low financial risk profile and is well positioned to repay its loans, interests and meet other financial obligations given its strong debt service cover ratio of 15.56.”
Lafarge/ Holcim Merger
Holcim Limited and Lafarge SA completed the much awaited merger in July, 2015 after a significant percentage of Lafarge shareholders offered their shares and the French financial regulator approved the deal. We note that in the deal, 87.46 per cent of Lafarge's share capital, representing 83.94 per cent of voting rights, were offered by shareholders fulfilling the conditions for the merger. Hence, former Holcim shareholders now control 59 per cent of the new company and former Lafarge investors controls 41 per cent.
DLM said overall, investment in LafargeHolcim provides opportunity for investors to capture global growth with high operating leverage.
“In our view, the company offers a strong likelihood to return cash to shareholders given the lowest need for expansion capital expenditure (capex). In Nigeria, the company is seeking to increase its plant capacity and overall business operations. For example, it planned to expand its South Eastern operation to 5mt from its 2.5mt with an investment of N120 billion. For the United Cement (Unicem) plant, plans are underway to increase production capacity to 12mt by 2018 from 8.5mt,” they said.
Recommendation
According to the DLM analysts, they update their view and re-establish their short term hold recommendation on the stock of Lafarge Africa Plc having evaluated the company’s performance in line with the prevailing business cycle and near term market outlook.
“Though, we see a positive outlook and prospects for future growth but the current economic weakness in the economy presents a divergent view on overall company performance. Lafarge’s nine months results exceeded our estimates albeit marginal as sales revenue for the period grew by five even as cement demand, which is very sensitive to business cycle and consumer sending’s remains lukewarm. Meanwhile, we believe the company can sustain its market share and production for the remaining half of the year despite the reduction in price initiated by competitors given the company’s production capacity. Lafarge’s inventory remains high recording an increase of 10 per cent as at 9M2015 to N26.71billion, representing inventory turnover days of 85.70 days, (9M’14, 85.12days).
While cement demand in Nigeria remains largely weak, a lower-than-expected sale may pile up inventory again. In addition, we believe that cement prices is yet to bottom out should the prevailing competition in the industry persist. Lafarge remains financially defensive and enjoys strong balance sheet with N12.45billion cash balance and 12.75 per cent net gearing at the end of September 2015.
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