…Redeems N26.4 .25 percent, 3 year fixed rate Seies 1 Bond due June 15 2019
THUR, JUNE 20 2019-theG&BJournal- Lafarge (WAPCO) posted its second consecutive net loss in 2018FY (NGN8.80 billion) on account of sizeable finance charges of NGN45.97 billion (+6.4% y/y), which neutered a 620bps expansion in gross margin.
The 2018FY and Q1 19 result was published yesterday as the leading Sub-Saharan Africa building materials company announced the redemption of its matured N26.4 billion 14.25 percent, 3 year fixed rate Seres 1 Bond due June 15 2019.
‘’While the company recorded a loss in its 2018FY financial result, as expected, we witnessed improved performance in its core operations, with gross margin and EBITDA margin expanding by 6.2 pps y/y and 5.3 pps, respectively,’’ says analysts at Cordros Capital research.
Compared to the prior year (NGN34.6 billion), the reported loss after tax was marginal, primarily due to the tax credit reported (NGN10.7 billion), relating to the pioneer tax relief granted on one of the company’s production lines – Mfamosing plant – which had an effective production date from 1 January 2018.
According to Cordros Capital research, excluding the tax credit, Lafarge would have reported NGN19.5 billion net loss, which would still have been an improvement on the loss reported in 2017FY. In our opinion, the ongoing restructuring/turnaround activities across the group is yielding results, albeit, slowly.
Lafarge’s core operating performance improved markedly in Q4 18, with cost of sales (-28.3% y/y) declining faster than revenue (-1.8% y/y), setting the stage for a significant leap in gross margin to +18.33% y/y, from -11.84% y/y reported in the corresponding quarter of the previous year.
Given the still elevated finance charges (NGN11.04 billion), the company reported another loss before tax (NGN5.15 billion) in the review period.
However, the impact of the tax credit helped the company return to profitability after five consecutive quarters of negative net income (NGN1.57 billion vs. a loss of NGN6.47 billion in Q3 18). Over Q1 19, despite the healthy volume growth (+5% y/y) achieved, competition-induced price erosion, acted to drive a 2.6% y/y moderation in revenue. Nonetheless, cost of sales decelerated faster (-3.7% y/y) owing to the sizeable declines in power (-46% y/y) and production (-37% y/y) costs. Thus, gross profit expanded by 1% y/y, with related margin improving by 84bps to 23.16%.
The company’s revenue breakdown in Q1 19 shows that net sales in Nigeria (+0.6% y/y) stayed flat from a year ago. This, according to management, was as a result of price discounting in the period, which largely offset increased volume sold. In our view, the moderation in price – which was akin to the previous quarter – was necessitated by the intense competition faced by the company, thanks to capacity build-up in the industry.
Meanwhile, in a still challenged South African operation, management said that volumes were flat even as Aggregate and ready mix (RMX) volumes were still down due to the continued delay in infrastructure spending. On pricing, despite the hike in selling price in February and March, prices were affected by the impact of FX translation. Overall, net sales in South Africa declined by 10.8% y/y.
Further down, operating expense moderated by 16.7% y/y stemming from the combination of lower selling and marketing expenses (-3.4% y/y) and administrative expenses (-18.6% y/y); a development we tie to management’s improved efficiency and cost management. OPEX to sales ratio declined to 12.5% (-210bp), which – combined with improved gross margin – translated to 34.7 y/y expansion in EBIT. However, higher finance expenses (+0.7% y/y to NGN9.5 billion) partially offset the operating profit achieved in the period. Set against the foregoing, PBT came in at NGN123 million (Q1 18: NGN2.95 billion loss). However, given another tax credit of NGN3.02 billion recorded in Q1 19, the company posted a net profit of NGN3.14 billion in the period.
Lafarge announced its intention to discontinue its South African operations.
This is long overdue, in our opinion, says Cordros Capital research, since the segment has consistently dragged the group’s profitability following years of negative EBITDA. Management stated that it has agreed with an affiliate of LafargeHolcim Group, Caricement B.V., to divest its entire holdings, with an agreed consideration of USD317 million for the wholly-owned subsidiary.
The company’s management stated that it planned to utilize the proceeds from the deal, together with the proceeds from the recently concluded rights issue, to deleverage its balance sheet by c.NGN246 billion.
‘’While we believe more ground certainly need to be covered, Lafarge’s performance signals continued improvements, in our view. That, together with the plan to divest from the margin dilutive South African operation should help to drive positive reaction to the stock in today’s trading session. In our last communication, we rated the stock a HOLD.’’
|twitter:@theGBJournal|email: info@govandbusinessjournal.com.ng|
