LAFARGE AFRICA REBOUNDS IN Q2, MOVES TO SUSTAIN 2017 POSITIVE PERFORMANCE

A few weeks ago, cement manufacturer giant, Lafarge Africa Plc presented an un-audited score card, which revealed yet another inconsistence in performance, a situation that has so far reflected on its share price over the years, especially against the backdrop of Nigeria’s economic situation, which in line with the decision of its major competition led to the merger of its sister companies in Nigeria, as well as the South African operation of its parent company. All of these have kept investors thinking: What is next.

It must however be noted that the company, in all of these, the company has remained consistent in releasing the timely release of its earnings reports, in line with the post-listing requirements of the Nigerian Stock Exchange (NSE), while keeping to its high level of good corporate governance.

The management of Lafarge Africa in the half year financial performance statistics under consideration swam above waters as it announced positive figures as against the negative earnings reported in the corresponding period of 2016.

Total revenue from sales increased by 44.23% from N107.36bnin the first half of 2016 to N154.84bn, while profit before tax stood at N18.16bn, compared with the loss before tax of N30.18bn in 2016, with net profit of N19.73bnas against the N30.246bnloss in 2016. Judging by the comparison as shown in the table below, it will be safe to conclude that the company largely improved on its profitability in the first half of 2017

Assets elements grew across board, beginning with the Non-Current Assets valued at N465.67bn, which was higher than the N409.606bn reported in 2016; just as Current Assets improved to N141.82bn from N82.93bn.

Looking at the company efficiency ratio, the management in the first six months of 2017 has done well, judging from the Total Assets turnover for the period at 25.49%, which is 16.93% above the 21.80% turnover estimated in 2016. At similar rate, the total sales for the period were 81.53% of the total equity appreciably above the 76.72% yielded in 2016. At 3.2x, equity multiplier implies that 31.2% of the company’s assets is financed by shareholders’ equity, while 48.8% is financed by debt. See the table below for other key financial statistics.

LAFARGE AFRICA  PLC
HALF-YEAR REPORT
COY	2016	2017
	(N)	(N)	% Chg
Date Released	July 20, 2016	July 20, 2017
Price As At Released Date	62.94	52.00	-17.36
Turnover	107,364,799,000	154,839,943,000	44.23
Profit After Tax	-30,248,243,000	19,732,391,000	165.24
Shareholders' Fund	139,948,574,000	189,917,453,000	35.71
ESTIMATED RATIOS
Earnings Per Share	-6.64	3.60	154.22
PE Ratio	-2.37	3.61	252.32
Earnings Yield	-10.55	6.92	165.92
Book Value	30.72	34.65	12.79
Price To Book	2.05	1.50	-26.83
ROE (%)	-21.61	10.39	148.08
Profit Margin	-28.17	12.74	145.23
Year End	December	December

All investment ratios above are good when compared with those of the same period of 2016, especially given that the comparison is done between positive and negative figures. Meanwhile, the current earnings is N3.60 per share of Lafarge. Total Comprehensive Income per share doubled to N6.34. The estimated earnings per share is 6.58% of the current market price at release date. Conversely, the price is 3.80% of the earnings, in other words, the P/E-Ratio is 3.61x, which is lower than the N52 per share market valuation of Lafarge as at the time the result was unveiled. We have estimated the Book Value of every unit of its shares at N34.65.

In conclusion, profit margin for the period is still below international standard of 15% at 12.74% despite moving from negative 28.17% last year.

Technical View

Price action for Lafarge in the last one year has continued to trend downwards, making lower lows to a strong support level of N34.16 in March 2017 before rebounding on positive sentiments for the full year 2016 financials. This momentum has remained as it continues to trend up by forming a rising channel.

Lafarge Africa closed below the upper band by 16.9%.  Bollinger Bands are 20% narrower than normal.  The narrow width of the bands suggests low volatility as compared to Wapco’s normal range.  Therefore, the probability of volatility increasing with a sharp price move has increased for the near-term. However, a short-term retracement inside the bands is likely, as other indicators like RSI current value is at 61.13, while MACD has been bullish in the last 33 trading days. CCI and OS are indicating sell, while RSI and MACD are signaling buy.

Findings/Recommendations

The company seems to be going through a growth period, given the above figures and ratio interpretations. Competition in the sector looks tight and the company may not be healthy, going by its unnecessarily debt element. We are of the opinion that the company stands reasonable chances of posting impressive figures when its nine-month results are released. If this becomes a reality, investors will definitely revalue its share price. We therefore expect such moves to balloon the company’s share price to three digits region.

The management of Lafarge Africa must however struggle hard for more market share in its operational regions with competition and an operating environment that is not ready yet to drive down cost pressure. Efforts should be made to reduce all costs,even as heightened cautiousness should be adopted while assessing debt instruments. Investors on the other hand should hold the equity’s shares with expectation that the management will unveil more positive financials at the end of both the nine-month and full year.

The need for government at all levels to close the infrastructure gap necessary to support development of the agric, manufacturing and housing sectors are even more pertinent today than at any points in our national history. This demand will drive market share and profit, especially if there is a change in the poor implementation so far witnessed in the 2017 budget, especially now that President Muhammadu Buhari returned to the country on Saturday, August 19, 2017, after 105 days on medical vacation in London for an undisclosed ailment.

We have recommended a HOLD before now, but on the strength of the company's latest numbers we upgrade to BUY position for new entrants, particularly given that the stock is still undervalued.         

Lafarge Africa PLC
Share Holding Structure
Foreign	70.00%
Odua Group of Companies	5.14%
Nigerian Citizens & Associations	24.86%
Other Statistics
Shares Outstanding (MN)	5,480,734,000
Opening Price (2016)	N96.80
Closing Price (2016)	N40.95
Closing Price as at August 18, 2017	N59.00
Date Listed	16/02/1979
Year End	Dec 31st

2016 Performances Analysis

The year 2016 was a bad year for the company as it struggled with loss positions on quarterly basis to reflect the impact of huge debt that was complicated by combination of Nigeria’s economy that was deep in recession and is only now just emerging from the woods, shortage of foreign exchange that negatively impacted cost of operation during the period. These reflected in its share price which it declined by more than 100% as negative sentiments hit the stock.

Despite, the losses witness on quarterly basis, the full year earnings came in positive on the strength of tax credits, following which the company was able to reward shareholders with dividend, regardless of the decline in payout which is an indication of the declined profitlevel for the year.

Please note that the N1.08 dividend reward stands relatively strong, when compared to the selling price and the company’s position, which largely accounted for the renewed investor confidence and sentiments for the equity.

Five-Year Financial Analysis.

Looking at the company's scorecard, performance had been mixed and inconsistent in growing its numbers for the years under review. The regular release of its financials in compliance with the post-listing requirement made the company's corporate governance strong such that investors could forecast and plan their investment.  

Sales revenue of the company for the period under review grew consistently from N87.97bn in the 2012financial year to peak at N267.23bnthree years later in 2015, before declining to N219.71bn by last year to reflect the company’s struggles amidst the harsh economic environment as a result of the recession, representing an increase of 149.76%. Also, bottom-line for the period wasunstable, rising by 14.89% to N16.9bn from N14.71bn in 2012 after hittinga profit level in excess of N60bnin 2013.
Shareholder’s fund for the period was up by 264.17% from N68.36bnin 2012 to N248.95bn in 2016 to reflect the company’s investment in expansion and power infrastructure to boost production.

In the past five year, Lafarge Africa has consistently rewarded shareholders with dividend, despite the undulating numbers posted. A total dividend of N12.18 per share, was distributed excluding the bonus of one new ordinary share for 10 in 2015

Estimated Performance Ratios

The company’s earnings power for the five-year period declined by 37.17% to N3.08 from N4.90 in 2012, after the said earnings per share had recorded all high of N20.31 in 2013 on N3.30 dividend. The company’s earnings trend had been up and down before sliding to lower low in 2016, due to increased investment in its capacity building and harsh business environment. 

The company recorded a Price Earnings ratio of 12.26x in 2016, reducing investors’ waiting period from a high of 13.58x (times) in 2015to a low of 5.37x in 2013.  On the other hand, the said earnings per share was same as 8.16% of its price at the released date. 

Book Value as at 2016 financial was N45.42, the second highest so far in the company's existence after N56.98 in 2013. This is however relatively fair, compared to its market value. The growing Net Asset and robust retained earnings would further boost the company's business to earn more.
The estimated ratio also reveals that Lafarge Africa’s profit margin for the last three years have been inconsistent at below the internationally accepted 15% benchmark. This is not too healthy, as management is expected to reduce cost and in the process support profitability.

LARFARGE AFRICA PLC- ESTIAMATED RATIOS
	2012	2013	2014	2015	2016
Earnings Per Share	4.90	20.31	7.68	5.90	3.08
PE Ratio	8.28	5.37	11.59	13.58	12.26
Earnings Yield	12.07	18.61	8.63	7.36	8.16
Book Value	22.77	56.98	39,87	38.67	45.42
Price To Book	1.78	1.91	2.23	2.09	0.83
ROE	21.52	35.64	19.26	15.42	6.79
Profit Margin	16.72	29.58	12.97	10.16	7.69
Year End	Dec	Dec	Dec	Dec	Dec