New Telegraph

Lafarge Africa: Retaining special spot amid competition

Developments in recent years have moved Nigeria from import dependent nation to an exportthriving epicentre within Africa, even as Lafarge Africa Plc has maintained a special position in products and stock chains. RHODA OGUNSEYE writes

 

Currently, Nigeria possesses the largest cement industry in West Africa, with at least 12 registered companies amounting to a total cement capacity of 58.9 Mt/yr. Dangote Cement is the largest cement producer in Nigeria and West Africa, manufacturing a combined share of over 28.5 Mt/yr of cement capacity.

 

Also, LafargeHolcim (through its subsidiary, AshakaCem & Lafarge WAPCO) and BUA Group boast 18.9 Mt/yr and 11.5 Mt/yr of integrated cement capacity, respectively. Lafarge Africa Plc is a building materials company. The company’s segments include Nigeria and South Africa. Its subsidiaries include Lafrage Ready Mix Nigeria Limited, AshkaCem Plc, Atlas Cement Company Limited, LSAH, The United Cement Company of Nigeria Ltd (UniCem) and Egyptian Cement Holdings (ECH). Lafrage Ready Mix Nigeria Limited is in the business of producing ready mix concrete for the construction industry.

The company, through its Lafrage Ready Mix Nigeria Limited operations with eight batching plants, is producing concrete and aggregates solutions from its various locations in Nigeria. LSAH is a holding company. AshakaCem Plc is a cement manufacturing company.

UniCem is a cement manufacturer and supplier of cement. UniCem has a production capacity of 2.5 million tonnes. WAPCO Operations is the South-West operations of Lafarge Africa Plc.

The product portfolio includes five products, such as Elephant Cement, Supaset Cement, Powermax, Etex and Sulfate Resistant Cement (SRC).

Background

Lafarge Wapco is traded on the Nigerian Exchange Limited (NGX), under the ticker symbol “WAPCO.” It is currently the 13th most valuable stock on the NGX with a market capitalisation of N386 billion, which is about 1.44 per cent of the Nigerian equity market.

Share price

The current share price of Lafarge Wapco (WAPCO) is N23.95. WAPCO closed its last trading day (Thursday, August 25, 2022) at N23.95 per share on the NGX, recording a 0.2 per cent drop from its previous closing price of N24.00. The share value has however suffered a N1.35 kobo loss in the last seven months from N25.30 per share.

Financials

The third largest cement producers’ Q1’21 unaudited results indicated a profit of N17.55 billion during the period, representing 92.18 per cent increase Y-o-Y.

The company’s sales of cement increased by 25.96 per cent and raked in N87.99 billion, while sales of aggregates and concrete grew by 62.29 per cent generating N2.52 billion during the period. Also, the sale of mortar increased by 60.41per cent, to rake in N98.94 million. The company also made money from income earned from short-term fixed deposit investments, raking in a total of N54.69 million.

“Coming after our very strong FY’21 results, our Q1’22 performance confirms the continued growth trajectory of our business. “We are equally pleased with the progress we are making on sustainability; our use of affordable clean energy and agro-ecology footprint are in accordance with our net zero pledge journey,” said Khaled El Dokani, CEO of Lafarge Africa in a statement.

Revenue climbed 26.9 per cent to N90.6 billion as against N71.4 billion in the previous year. Its total revenue of N90.6 billion was obtained by cement (97 per cent), aggregate & concrete (2.7 per cent) and other products (0.3 per cent) in March 2022.

The cement company saw an increase in its operating profit, which is its total earnings from its core business functions for a given period, excluding the deduction of interest and taxes which stood at N22 billion from N14.7 billion in the comparable period. Total assets jumped 1.6 per cent to reach N535.6 billion, as against N526.8 billion in March 2021.

Selling and distribution costs grew to N15.02 billion as against N12.85 billion in the period under review. The company’s net cash flow generated from operating activities dropped to N946.1 million loss in March 2022 from a gain of N29 billion in March 2021.

Net cash flow used in investing activities recorded a year-on-year loss of N2.44 billion in March 2022 compared from N3.05 billion in March 2021. Net cash flow used in financing activities recorded N7.18 billion from N2.21 billion year on year loss.

Technical service fees increased to N1.41 billion in March 2022 from N573.4 million in March 2021. Other income rose to N165.6 million as against N148 million in the comparable periods.

The cement maker saw its inventories drop in the first quarter of 2022 to N43.3 billion, coming from N45 billion in the first quarter of 2021. Loan and borrowings increased to N24.6 billion from N23.2 billion in the comparable period.

Lafarge Wapco is the 27th most traded stock on the Nigerian Stock Exchange over the past three months (May 26 to August 25, 2022). WAPCO has traded a total volume of 120 million shares — in 6,225 deals — valued at N3.11 billion over the period, with an average of 1.91 million traded shares per session. A volume high of 10.5 million was achieved on June 14, and a low of 281,038 on August 24, for the same period.

Forecast

According to analysis from Cardinalstone, a leading investment banking firm, they have retained buy rating on Lafarge Africa WAPCO share with a 12-month target price of N32.03. At the local bourse, Lafarge WAPCO was valued at about N416 billion on 16.105 billion shares outstanding at a unit price of N25.80, translating to a more than 24 per cent upside at the current price level.

 

In its industry update for the current year, analysts said they are expecting the cement company to deliver a return on equity of 15.4 per cent, higher than the company’s three-year average of 6.9 per cent.

Expectation of a better return has increased in the recent year since Lafarge Africa successfully cleaned up its balance sheet following restructuring programmes. However, it has continued to face increased competition.

A slew of analysts said last year that a delevareg balance sheet and healthy cash position had placed the company on track after it sold off its margin dilutive subsidiary in South Africa few years ago. Despite an expectation that cement industry may become tighter with pre-election spending pattern, CardinalStone analysts said financial year 2022 is likely to be a catch-up time for Lafarge Africa WAPCO.

In the industry report, the investment banking firm hinted that cement company’s nine months 2021 numbers suggested a 1.5 per cent yearon- year contraction in market share. It noted that BUA CEMENT narrowed the gap between the two members of the cement oligarchs from 0.4 Mt in 9M-2020 to 0.2 Mt in nine months of 2021.

Nevertheless, analysts expressed the view that WAPCO was on the right path and on course to have a strong financial year 2022 operating performance, aided by higher volumes and improved cash conversion. The domestic cement sector looks set to extend its positive demand traction into 2022, according to Cardinalstone’s cement industry’s report. Precisely, analysts said they see leg-

room

for a 6.0 per cent year-on-year growth in cement volumes, aided by a projected rise in overall budget implementation. “We also see a possible increase in final dividend, building on its first interim dividend payment in four years that was effected in 2021,” Cardinalstone analysts said. For Lafarge Africa, the investment firm forecasts 8.0 per cent year-onyear growth in the financial year 2022 volumes on the return of the 2Mta Ewekoro Line 1 to full operation in the third quarter (Q3) of 2021.

Operational hitches

It recalled that the line went out of operations in the first half of 2021 due to maintenance delays, which may have inadvertently created a low base from which the company can bounce in the first half of 2022. To this point, WAPCO’s volumes were noted to be flat in Q3-2021 in a market where domestic peers suffered about 3.0 per cent volumes contraction.

Analysts at Cardinalstone said the company is expected to consolidate on the third-quarter traction and grow revenues by 14.0 per cent year on year in 2022. They said: “We are also positive about the company’s cash generation capacity.”

It was noted that Lafarge Africa WAPCO has consistently recorded an operating cash flow to earnings before interest and tax (EBIT) ratio of over 1.7x in the last three years relative to its peer average of 1.0x.

“The strong cash base should support on-going projects – debottlenecking and captive power plant projects at Ashaka — that are expected to improve long term operating performance.”

The analysts said despite the positives, margins were likely to be pressured by higher production costs in the financial year 2022. Specifically, the global rise in freight costs and FX setbacks are expected to impact import-related expenses – typically 35.0 per cent of total production costs-, according to the investment firm’s report.

The investment firm analysts said they are also concerned about the company’s slow expansion efforts. Although the company argues that existing plants are still way below full utilization rates of about 52.1 per cent, analysts said they feel it may be behind its peers over the long term amid industry-wide capacity ramp-up.

 

On a positive note, analysts hinted that Lafarge profit after tax (PAT) growth may be supported by the extension of pioneer tax status on one of the production lines in Mfamosing, Cross River.

Environment hazards

Some Nigerians have, however, faulted Lafarge’s mining operations activities in Mfamosing, a solid mineral- rich community in Akamkpa, Cross River State, describing it as illegal and unhealthy practices, lamenting by Federal Government’s gross regulatory failure.

Last line

Residents lamented that since it began operations in Mfamosing through different consortiums, Lafarge Africa Plc had been blasting rocks to source limestone beneath it at least thrice weekly.

 

The blasting is accompanied by heavy vibration underneath, which causes cracks and compromises the structural integrity of houses and sometimes landslides.

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