NIGERIA|CEMENT| LAFARGE AFRICA

Price drives growth in Revenue.

Lafarge Africa reported Revenue growth of 8.6% y/y to N405.50bn for FY 2023 from N373.25bn in the prior period (FY 2022). Similarly, on a q/q basis, Revenue was up by 27.4% to N116.42bn in Q4 2023 from N91.40bn in Q3 2023. The broad-based growth in cement sales (up 8.5% to N392.57bn), aggregate and concrete sales (up 12% to N12.25bn), and other products (up 97.4% to N680m) contributed to the rise in topline growth in 2023.

In 2023, the average cement price from Lafarge Africa increased by 18.52% to N78,700 from N66,400 in 2022, while sales volume grew by 8.5% y/y to 5.04 million metric tonnes from 5.51 million metric tonnes in 2022. We anticipate that pricing will remain responsive to macroeconomic conditions, with a trend towards higher prices, particularly given the seller's market dynamics and the priority placed on margin protection. Therefore, our projection indicates a 7% y/y increase in price.

We also expect that the several distortions that affected growth in volumes in 2023 will be minimized in 2024, making us project a 10.6% increase in sales volume to average 5.58 million MT in 2024. Overall, driven by an increase in both price and volume, we project FY Revenue of N479.22bn in 2024e, an 18.2% y/y increase compared with the previous year (2023; N405.50bn). We forecast an increase in Net Finance Cost to N24.50bn in 2024bn from N21.04bn in 2023 assuming a 37.38% devaluation. Overall, we forecast growth in PBT of 29% to N101.75bn in 2024. An upside risk to our forecast would be a less pronounced devaluation of the Naira or even an appreciation compared to its closing position in 2023.

We maintain our price target of N45.96/s and a BUY recommendation as we believe the market is yet to fully price in the firm's improved operating performance. Our price target implies a 27.67% upside potential from the last closing price of N36.00/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. The stock currently trades at an EV/EBITDA ratio of 3.29x, significantly lower than its industry average of 11.98x.

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Source: Company Data, CSL Research

Revenue growth solely driven by Increases in Price

In its recently released FY 2023 results, Lafarge Africa reported Revenue growth of 8.6% y/y to N405.50bn in FY 2023 from N373.25bn in the prior period (FY 2022). Similarly, on a q/q basis, Revenue was up by 27.4% to N116.42bn in Q4 2023 from N91.40bn in Q3 2023. The broad-based growth in cement sales (up 8.5% to N392.57bn), aggregate and concrete sales (up 12% to N12.25bn), and other products (up 97.4% to N680m) contributed to the rise in topline growth in FY 2023.

Despite decreased sales volumes, there was marginal Revenue growth (+8.6% y/y) driven by higher prices. The average cement price from Lafarge Africa increased by 18.52% to N78,700 in 2023 from N66,400 in 2022. Looking ahead, despite the government's intervention to reduce cement prices, we expect cement prices to continue rising in 2024, albeit at a slower pace, as we expect the country's macroeconomic realities to improve in 2024. We forecast a 7.0% y/y increase in cement price to average N83,357 in 2024.

In 2023, the company's sales volume dropped by 8.5% y/y to 5.04 million MT from 5.51 million MT in 2022. The management noted that the company's sales volume in 2023 was mostly impacted by the distortions caused by the 2023 general elections and the Naira cash shortage in Q1 2023. Also, the company's Mfamosing Cross River plant which caters for about 50% of the company's total production volumes was stopped for a planned maintenance in Q3, impacting volume growth.

Due to the challenging macroeconomic conditions in 2023, which hindered private sector involvement in the cement market due to reduced purchasing power and the low government capital expenditure (CAPEX), the company experienced a setback in volume growth. Looking ahead to 2024, we anticipate that the various factors that hindered sales volume growth in 2023 will be mitigated, leading to an improvement in sales volumes. Our projection suggests a 10.6% increase in sales volumes, averaging 5.58 million metric tonnes in 2024. Overall, driven by expected increases in both price and volume, we forecast FY Revenue of N479.22bn in 2024, 18.2% y/y higher than the previous year's sales volume (2023: N405.50 billion).

Reduced cost pressures lift EBITDA margin.

Given a y/y increase in Variable Costs (up 9.5% y/y to N121.71bn), Production Fixed Costs (up 20.4% y/y to N30.40bn) and Maintenance Fixed Costs (up 21.8% y/y to N20.66bn), Cost of Sales (adjusted for depreciation) increased 12.6% y/y (vs. Revenue growth of 8.6%) to N172.82bn in FY 2023 from N153.43bn in FY 2022. We attribute the rise in cost to the impact of the steep devaluation of the currency on the cost of imported raw materials, elevated inflationary pressures, and rising energy costs. Consequently, Gross profit grew 5.9% y/y to N232.68bn in FY 2023 while Gross margin declined by 1.5ppts to 57.38% in FY 2023 from 58.89% in FY 2022.

Operating Expenses (adjusted for depreciation) decreased by 6% y/y to N104.36bn in FY 2023 from N110.96 in FY 2022. The decline in OPEX was driven by the decline in Selling & Distribution Expenses adjusted for depreciation (down 12.9% y/y to N78.06bn), despite a rise in Administrative Expenses adjusted for depreciation (up 23% y/y to N26.31bn) Other Income which compromises of gain on disposal of property, plant and Equipment, government grants and sale of scraps, and other miscellaneous income was also up significantly by 59.9% to N892m from N557m in FY 2022. EBITDA increased by 18.6% to N129.24bn in FY 2023. Consequently, EBITDA margin increased by 2.7ppts to 31.87% in FY 2023 from 29.20% in FY 2022. Depreciation and Amortisation grew 9.8% to N27.22bn while Operating Profit grew by 21.2% y/y to N102.02bn from N84.19bn in FY 2022.

We are pleased with the company's efforts to address cost pressures despite challenges posed by the FX crisis and high levels of inflation. The upcoming commencement of the Ashaka Power Plant is expected to alleviate the impact of rising energy prices. Additionally, the company intends to expand its use of CNG buses, which we anticipate will lead to a reduction in selling and distribution costs. With these factors in mind, we forecast EBITDA of N159.13 billion in 2023, translating to an EBITDA margin of 33% in 2024 compared to 32% in 2023.

Increased Net Finance Cost drags PBT

Lafarge recorded a 47.6% increase in Net Finance Income to N21.33bn for FY 2023. The significant increase reflects a 203.38% y/y increase in Finance Income amidst a 62.56% rise in Finance Costs. We note that the growth in Finance Income was driven by a significant increase in interest income from current accounts, while the growth in Finance Costs was due to a significant increase in Net FX losses. The company reported FX losses of N21.04bn in FY 2023 indicating a significant rise of 60.3% from the N13.3m reported in FY 2022. Despite the FX losses recorded by the company, Pre-Tax profit was up by 15.7% y/y to N80.7bn in FY 2023 from N69.75bn in FY 2022.

Despite the company's balance sheet being deleveraged with significantly lower FX-denominated liabilities compared to its competitors, as the company has prioritized locally made materials, the management noted that the 49% devaluation in naira in 2023, impacted the company's profitability. We forecast an increase in Net Finance Cost to N24.50bn in 2024bn from N21.04bn in 2023 assuming a 37.38% devaluation. Overall, we forecast growth in PBT of 29% to N101.75bn in 2024. An upside risk to our forecast would be a less pronounced devaluation of the Naira or even an appreciation compared to its closing position in 2023.

Despite the FX losses recorded by the company, Pre-Tax profit was up by 15.7% y/y to N80.7bn in FY 2023 from N69.75bn in FY 2022. Due to the expiration of its Pioneer Status Incentive in 2022, Tax Expenses increased to N29.55bn in FY 2023 from N16.10bn in FY 2022. Consequently, Net Income declined by 4.7% y/y to N51.14bn in FY 2023 from N53.65bn in FY 2022. Earnings per share also declined by 4.7% y/y to N3.17/s for FY 2023 from N3.33/s in FY 2022. Looking ahead, we believe profitability will improve in 2024 and we forecast a growth in PBT of 29% to N101.75bn in 2024.

Valuation

We maintain our price target of N45.96/s with a BUY recommendation. Our price target implies a 27.67% upside potential from the last closing price of N36.00/s. We still believe the market is yet to fully price in the firm's improved operating performance. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. The stock currently trades at an EV/EBITDA ratio of 3.29x, which is lower than its industry average of 11.98x.

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