LAFARGE AFRICA PLC Q1’23 Earnings Release – Higher tax expenses pressure bottom line

Global: Throughout the week, the US financial markets showed a mixed performance as investors monitored key economic indicators and earnings reports from major companies. While Wednesday saw markets mostly in the green amid tech giants’ updates and lower-than-expected inflation data, Thursday’s disappointing jobless claims and Walt Disney’s second-quarter earnings report led to mostly lower market closes. However, markets started with gains on Friday ahead of the preliminary consumer sentiment report for May. Negotiations between US President Biden and lawmakers on the debt ceiling were postponed but will continue after the G7 summit. Stay tuned for updates.

Major European stock markets had a mixed performance throughout the week, with Monday’s mostly higher closes following the latest economic data, and Tuesday’s negative territory as markets awaited inflation data from Germany, the UK’s monetary policy decision, and GDP data. Wednesday’s closing saw lower market closes after the ECB confirmed future interest rate increases to combat inflation, and Thursday’s closing was mixed with varying earnings and inflation predictions. The week ended on a positive note, with European stock exchanges wrapping up gains after the ECB’s policy decision and data releases, which included a 25-basis point interest rate increase, while business activity in the euro area showed gradual improvement.

The week in Asian financial markets saw mixed trading as investors awaited inflation data from the US that could impact the Federal Reserve’s policy decisions. However, markets were buoyed on Monday by Wall Street’s strong gains, while China reported higher-than-expected export figures. Inflation data released later in the week showed a slowdown in China’s consumer prices, but higher-than-expected inflation in the US. Major stock markets in the Asia-Pacific region closed mostly lower on Friday after a week of earnings reports.

Domestic Economy:  According to data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), oil production declined for the second consecutive month in April.  Total oil output, including condensates, fell (-18% m/m) to a seven-month low of 1.24 million barrels per day (mb/d). The drop in output was widespread, with output at the largest oil terminals, Forcados and Bonny, falling by (-10% m/m) and (-26% m/m), respectively. The ExxonMobil workers strike and a two-week maintenance shutdown on the Forcados terminal for sectional replacements of damaged parts both contributed to the April slowdown. While we expect further increases in oil production, frequent maintenance shutdowns and unrest in the Niger delta may dampen output. We note that oil revenue remains our primary source of foreign exchange inflows, so the performance of the oil sector, as well as the impending removal of fuel subsidies, will be critical to the accumulation of foreign reserves and performance of the Naira.

Equities: During the week, Nigerian equities market underperformed as the All-Share Index (ASI) shed 0.36% week-on-week to close at 52,214.62pts. In the banking sector, losses were recorded, with Access Bank (-12.00% w/w) contributing to the sector’s decline of 0.99% w/w. Similarly, the Industrial Goods sector recorded losses due to a decline of 8.02% w/w in BUA Cement, resulting in a 3.36% w/w decline for the sector. The Consumer Goods sector, however, remained buoyant with mid-cap names boosting the sector’s performance. Additionally, the oil marketing space pushed the Oil and Gas sector up by 5.02% w/w.

Fixed Income:  The Nigerian secondary market traded mixed sentiments as trading activity remained subdued, with limited liquidity levels dampening buy-side interest in the space. In the bonds market witnessed a rise in yields on benchmark tenors by 10bps on average, driven by selling pressure at the short-long ends of the bonds curve. Notably, the 12.50% FGN-JAN-2026 bond yielded 51bps to settle at 12.90%, while the 14.80% FGN-APR-2049 and 12.98% FGN-MAR-2050 papers rose 22bps and 38bps to settle at 15.60% and 15.84%, respectively.

Equity market: The significant decline recorded on Wednesday, due to the 8.02% in BUAFOODS led to a negative w/w close. We expect the market to maintain today’s positive market breadth, as investors continue to favor fundamentally sound stocks.

Fixed Income: We expect the market to kick-off the week on a positive note as liquidity levels ought to drive activity in the market.

LAFARGE AFRICA PLC Q1’23 Earnings Release – Higher tax expenses pressure bottom line

Lafarge Africa PLC recently released its Q1’23 results, reporting a 15% y/y decline in PAT, majorly driven by higher tax expenses.

Lafarge recorded flattish revenue growth of 1% y/y (₦91.8 billion) during the Q1’23 period, attributable to the nationwide cash shortage and slowdown in capital projects due to the election of a new administration.

On the other hand, cost of sales declined by 6% y/y to ₦45.3 billion, amid the continuous cost pressures fueled by the rising inflation and FX liquidity issues. This contraction aligns with management’s aim to optimize costs through the adoption of a more efficient energy mix. Consequently, gross profit improved 10% y/y to ₦46.4 billion, with gross profit margin increasing by 4ppts to 51%.

Operating expenses surged 21% higher y/y to ₦24.4 billion, with most pressure exerted by the selling and distribution expenses (+24% y/y to ₦18.6 billion). As such, EBIT margin remained flat at 24%, while EBIT inched up slightly by 1% to ₦22.2 billion.

Moving on, net finance cost declined by 137% to ₦242 million, supported by a 11x surge in finance income to ₦913 million. That said, the passthrough effects from the higher finance income propped PBT by 5% y/y to ₦22.4 billion. On the other hand, PAT declined for the third consecutive quarter to ₦14.9 billion (-15% y/y), weighed by a 93% increase in tax expenses following the expiration of the pioneer tax status on its Mfamosing Plant.

Cost optimization strategies to further quell cost pressures

Although the rising levels of rainfall may dampen cement demand in the Q2 period, we expect a rebound in volumes following the calmed political climate and the easing of the cash crunch.

Additionally, we expect management to sustain its cost reduction strategies, through the optimization of its energy mix and the use of cheaper Compressed Natural Gas for its distribution. However, there are still lingering concerns on consistent FX challenges and the upward trend in inflation. Nonetheless, we forecast a revenue and PAT growth of 5.7% y/y and 8% y/y to ₦394 billion and ₦57 billion, respectively. We estimate a 12-month target price of ₦31.92 and place a BUY rating on the stock.