Lafarge Africa Plc (Lafarge) released its Full Year (FY, 2017) financial statements to the Nigerian Stock Exchange last week and the results showed a 36.2 percent increase in revenue from N219.7 billion in 2016 to N299.2 billion in 2017.
However, bottom line showed depressing numbers as FY-17 pre-tax and post-tax losses worsened to N34.0bn and N34.6bn respectively in comparison with PBT of -N22.8bn and PAT of N16.9bn in FY-16. Despite the 46 percent increase in losses, the cement maker declared a dividend of N1.50k per every 50kobo share held to be paid from their 2012/2013 pioneer profit
Analysts at United Capital, commenting on the result, explained that Lafarge’s revenue recovery was mainly due to price increases implemented in Nigeria and South Africa.
“Cost-to-Sales ratio rose to 83.0% as Cost of Sales spiked to N248.4bn in FY-17 from N179.1bn in FY-16. This is attributed to a N19.2bn impairment loss (recognized in Q4-17) emanating from the construction of Mfamsoing evacuation road at UNICEM in Calabar which failed as well as a full impairment taken on a Pre-heater project in ASHAKACEM which the cement maker hinted it has discontinued. Also linked to the massive jump in cost is the sharp increase in variable cost of production (+22.4%y/y) which as mainly driven by 73.8% increase distribution wages & salaries to N10.5bn. Thus, gross margin tumbled to 16.97% while EBITDA margin settled at 2.6%.
N13.5bn exchange rate loss obliterates pre-tax profit: Total borrowings leaped 145%y/y to N256.5bn in FY-17, compared to N104.7bn in FY-16, largely driven by the intercompany loan of $88.4m received from Holderfin B.V. on 28th Dec-2016, converted at N314/$ and rolled over alongside the accumulated interest of $7.79m (representing a total of $96.19m as at Dec-17).
According to management, this was used for the payment of UNICEM’s syndicated loan. This effectively drove interest cost to N43.2bn, inclusive of a N13.5bn FX translation loss, its highest level in the past seven years. This wiped out operating profit (the N7.9bn) and resulted in over N34.0bn pre-tax and post-tax losses. Following the analysis the analyst’s downgraded its valuations on the company but declared an overall positive outlook for Lafarge by the end of the 2018 financial year.
“We expect revenue growth to be sustained amid a faster recovery in Nigeria, thanks to increased government infrastructure spending ahead of the 2019 general election notwithstanding stiff competition.
However, paltry operations of the South African arm is a concern. Cost of production should improve in 2018 given that the one-off impairment loss is not likely to recur.
Also, FX losses, largely tied to intercompany borrowing, should be obliterated in 2018 following the recent conversion of N112.2bn quasi-equity loan for rights in Dec-17, but pressure on margins due to high finance charges will persist given the huge shareholder loan, negative cash flow position and the need to finance working capital. Juxtaposing the foregoing with the cement maker’s post right issue turnaround plan, and its impact on its Q1-18 numbers, we downgrade the ticker to a HOLD, revising our year-end target price to N49.5 (previously N77.7).” the researchers noted.
Report by Adesola Afolabi
