MON, 26 OCT, 2020-theGBJournal- Lafarge Africa grew its Profit After Tax by 37.1% y/y while EPS settled at NGN1.75/share, up 37.1% y/y after adjusting for gains from discontinued operations in 9M-2019.
The 9M-2020 unaudited financials published on Friday shows that the growth in bottom line was supported by the increase in revenue (+10.3% y/y) and deceleration in finance cost (-54.5% y/y), both of which overshadowed the substantial increase in cost of sales (+11.6% y/y).
Profit Before Tax however weakened significantly (-71.4% q/q to NGN5.50 billion) in Q3-20, due to pressure on the cost of sales (+40.8% q/q), operating expenses (+95.6% q/q) and finance cost (+67.6% q/q) lines.
Revenue grew by 10.3% y/y in 9M 2020, on the back of improvement in cement sales (+11.4% y/y) which offset the weakness in aggregate and concrete (-29.9% y/y).
Khaled El Dokani, CEO of Lafarge Africa Plc said, “Our robust results for the first 9 months reflect the strong recovery of the demand in Q3 and the successful implementation of our “HEALTH, COST & CASH” initiatives. Both have delivered considerable improvement in recurring EBIT, net income and free cash flow, despite the impact of the COVID-19 pandemic and Naira devaluation, particularly in Q3.”
Cordros Research believes the relaxation of lockdown measures in May enabled the restart of construction activities on sites and supported cement sales in Q3-20 (+3.3% q/q) following the pandemic induced dip in Q2-20 (-9.5% q/q).
‘’We highlight that demand for new orders for the cement subsector averaged 61.1 points in Q3-20, an improvement from 51.8 points in Q2-20, based on PMI data published by the CBN.’’
Gross margin deteriorated by 65bps in 9M 2020, following an 11.6% y/y expansion in cost of sales (excluding depreciation) compared to the growth in revenue (+10.3% y/y). The increase in cost of sales was solely driven by the variable cost component (+20.1% y/y) – although no breakdown was provided, we suspect it was due to the pass-through impact of the devaluation in the local currency on USD denominated cost items.
We note that the cost pressure was more pronounced in Q3-20, as cost of sales margin spiked to 63.1% (vs. 46.8% in Q2-20) which drove EBITDA lower (-41.0% q/q). Elsewhere, operating expenses (excluding depreciation) grew marginally by 1.6% y/y in 9M 2020 but rose substantially in Q3-20 (+95.6% q/q) following the surge in Admin expenses (+101.1% q/q).
Earnings continued to benefit from the deceleration in finance cost (-54.5% y/y), reflective of its deleveraged balance sheet, as the gross debt of the company declined by 17.0% y/y to NGN53.40 billion in 9M 2020. Overall, PBT grew by 70.3% y/y to NGN34.30 billion in 9M 2020, but was substantially lower in Q3 (-71.4% q/q to NGN5.50 billion) due to pressure on cost of sales (+40.8% q/q), operating expenses (+95.6% q/q) and finance cost (+67.6% q/q) lines.
‘’The double-digit growth in Profit Before Tax in 9M 2020 is laudable despite elevated cost pressures. However, the material weakness in earnings during the third quarter suggests the lingering currency challenges are beginning to hurt margins even as gains from the “HEALTH, COST and CASH (HCC)” strategy of the firm appear to be fading away,’’ Cordros Research analysts said.
‘’Notwithstanding, we expect investors’ reactions to be slightly positive in the near term as the company remains on course to deliver another year of positive earnings growth following two consecutive years of pre-tax losses.’’
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