AFRICA: Lafarge Contends with High Operations Cost

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.

THAILAND: Moderate growth likely in cement demand next year

Fitch Ratings says demand for cement and building materials in Thailand will accelerate with government's planned infrastructure investments over the near term. However, a slow recovery of demand from the residential segment should soften the pace of overall demand growth in 2016.

The infrastructure investments will continue to be a key driver for cement and building materials over the next few years. The accelerated project implementation in rails, roads, harbours, and airports is worth around Bt1.8trillion from late-2015 through 2021. Fitch expects cement, which holds the largest share of structural building materials in terms of sales value, to recover with a demand growth of 3 to 5 per cent in 2016. 

Overall demand for cement declined in the second half of last year and continued to ease in the first nine months of this year, even though the demand from government projects grew at about 10 per cent year-on-year in the first nine months of this year. The pull-back was felt mainly in the residential segment, which has the highest contribution - of about 50 per cent - in the cement market. The effectiveness of government spending to stimulate demand in late-2015 should be largely offset by weak residential and commercial segments.

Fitch expects demand for cement from government projects to grow at a faster pace next year while that for residential construction should show merely a slight improvement, despite the recent government stimulus scheme for residential properties last month. The measures would rather encourage sales of property developers' inventories than new construction - and, more importantly, the remaining weak purchasing power should outweigh the benefits from the schemes.

The leading cement producers in Thailand - The Siam Cement Plc (A(tha)/Stable), Siam City Cement Plc ( A(tha)/Stable), and TPI Polene Plc (TPIPL, not rated) - should receive the windfall from government projects and be able to enhance their operating performance in 2016. 

These firms reported lower revenue and EBITDA from cement and building materials in the first nine months of this year. Fitch believes the expected rise in domestic demand next year should also partially absorb new capacity from TPIPL's expansion of about four million tonnes per annum.

UK: Breedon to buy Hope Construction for £336m

Aggregates industry veteran Peter Tom is set to lead a major shake up in the industry to create an independent cement, concrete and aggregates producer.

Breedon chairman Tom has struck a deal to pay £336m for Hope Construction Materials, creating a business to rival the major multinational suppliers.

Tom said: “We’re creating a vertically-integrated business with one of the country’s largest cement plants, nearly 60 quarries, more than 200 ready-mixed concrete plants and around 750 million tonnes of mineral reserves and resources – together with access for the first time to the rail-fed sector of the market.

“Together we will be an even stronger business, complementing one another geographically, operationally and culturally.”

Under the deal Amit Bhatia, Hope’s Chairman, will join the Breedon broad and hold a large stake in the business.

Breedon expects to realise £10m in operational improvements after three years.

The firm will pay £202m in cash, supported with a £41m rights issue, and give Hope’s holding company Abicad an 18.4% stake in the enlarged business.

Tom said: “This acquisition is well-timed, with UK construction output forecast to expand by around 15% over the next four years and volumes of all our major products expected to grow strongly.

“We are confident that we will be able to continue delivering significant value for our shareholders in the coming years, with an even stronger platform for growth. We very much look forward to welcoming everyone at Hope to the Breedon family.”

Over the last three years Hope has grown to be a formidable competitor in the UK market. It boasts a national footprint of over 160 operational sites, including the Hope cement works in Derbyshire, five quarries and 152 concrete plants.

In the last 12 months, Hope turned over £286m selling 1.6m tonnes of cement, 4.7m tonnes of aggregates and 2.3m cubic metres of concrete. This generated a pretax and interest profit of £37m.

The deal is conditional upon the approval of the competition and markets authority and is expected to complete before next summer.

DRC: Les agents de la Cinat réclament leurs arriérés de salaire

La délégation syndicale de la Cimenterie nationale (Cinat) s’inquiète du sort de cette entreprise pour laquelle les agents sont impayés depuis près de sept ans. Son président, Bienvenu Mamingi, a indiqué mardi 10 novembre à Radio Okapi que la non-prise en compte des revendications des travailleurs a déjà entrainé beaucoup de conséquences, dont la dislocation de leurs familles.

«La délégation syndicale, face à la pression, n’arrive pas à contenir les agents en désespoir. C’est pourquoi nous demandons au Gouvernement de pouvoir se prononcer clairement sur le sort de cette entreprise et de ses travailleurs. Que les trois mois de salaires à maintes fois sollicités nous soit versé», a-t-il déclaré.

La Cinat est à l’arrêt depuis plus de cinq ans et ses agents impayés.

«Nous avons adressé plusieurs correspondances au Gouvernement qui sont restées sans suite. Et, c’est vraiment déplorable que ça soit les députés nationaux qui nous disent que le Gouvernement n’a pas des solutions pour notre cimenterie», s’est indigné le président de la délégation syndicale de la Cinat.

Radio Okapi a également tenté de joindre le ministère de l’Industrie par rapport à ce dossier, mais la réaction se fait toujours attendre.

La Cimenterie nationale est une société d’économie mixte par action à responsabilité limitée créée le 24 octobre 1970.

Avec une usine d’une capacité de production de 1000 tonnes de ciment par jour, cette cimenterie implantée dans la cité de Kimpese dans le Kongo Central, n’est jamais arrivée à une production correspondant à sa capacité.

Cette contreperformance s’explique par l’absence d’un financement suffisant pour l’acquisition des équipements et infrastructures supplémentaires pour que cette cimenterie fonctionne.

Le Gouvernement a tenté à plusieurs reprises de relancer cet outil de production à travers un partenariat public-privé, sans succès.

La dernière en date est la cession en 2012 d’une partie de ses parts aux privés, dont Nova Cimengola. Cette entreprise angolaise a acquis auprès de l’Etat congolais, 53% de la Cinat pour 40,6 millions USD, devenant ainsi l’actionnaire majoritaire de cette entreprise d’économie mixte.

KENYA: ARM Cement seeks up to $105 mln in bond to retire other debt – paper

Kenya’s ARM Cement aims to raise up to $105 million via a privately placed five-year bond to retire more expensive short-term debt, Kenya’s Business Daily newspaper reported.

The bond offer by east Africa’s second biggest cement producer opened on Thursday and would run until Dec. 2, the newspaper reported.

“The proceeds from the five-year bond will be used to replace existing short term borrowings. There is no increase in total debt only refinancing existing short-term debt,” Pradeep Paunrana, chief executive of ARM Cement, told the paper.

ARM planned to raise $90 million from the debt securities, with an option to take in an extra $15 million should the original amount be oversubscribed, the newspaper reported.

The chief executive told Reuters he would provide information on the bond issue on Tuesday but was not immediately in a position to do so.

ARM Cement posted a pretax loss of 645 million shillings ($6.32 million) for the nine months to September, blaming losses related to the depreciation in regional currencies against the dollar