Lafarge Africa Plc Q3'18 results - Lower finance costs moderate losses

17 October, 2018

Good afternoon,

Lafarge Africa Plc (WAPCO) 9M'18 results "" revenue for the period increased, albeit marginally, by 4.8% YoY to settle at N234.3 billion. Despite the advancement recorded in sales, higher costs, emanating from cost of sales (+7.5% YoY), SGA expenses (+15.3% YoY) and finance costs (+22.5% YoY) weighed on profitability, as the group posted a loss after tax of N10.4 billion during the period (vs. 9M'17 after-tax earnings: N937.9 million.)

Other highlights:

·     In Q3'18, sales grew by 4.6% YoY to print at N72.0 billion, owing principally to higher sales in the cement segment (+6.7% YoY), as Aggregate and Concrete sales dipped 2.0% YoY. However, on a QoQ basis, revenue declined by 11.8%, largely attributable to the seasonality effect in Q3 (demand is typically lower during the rainy season).

·     In the same vein, some level of cost efficiency was observed during the quarter, as costs of sales moderated by 0.9% YoY in the period, specifically due to lower production costs (-40.9% YoY) and maintenance costs (-38.3% YoY). Consequently, gross margin expanded by 4.2 ppts YoY to print at 23.8%; however, this was 1.9 ppts lower on a QoQ basis.

·     Similarly, we highlight some measure of respite on finance costs. For context, the company booked a total of N11.2 billion in finance costs in Q3'18, representing a decline of 34.0% YoY and 26.8% QoQ. Although borrowings reduced in the period by 2.8% QoQ, it is pertinent to note that much of the decline in finance costs is attributable to lower FX losses of N2.5 billion (-73.3% YoY). We recall that in the corresponding period last year, the company recorded significant FX losses arising from the conversion of its $220 million related-party debt into naira at N385/$.

·     Consequently, loss before tax moderated in the period to N8.0 billion (vs. loss after tax of N17.1 billion in Q3'17. ) Overall, loss after tax stood at N6.5 billion in the period (vs. a LAT of N18.8 billion in Q3'17), on the back of tax credit amounting to N1.5.

Analyst take: We recall that WAPCO recorded significant one-off costs in 9M'17, as such, we see the corresponding period in the past year as a high base. For context, we recall that the company booked one-off costs associated with the Ashaka delisting, restructuring and inventory write-offs in South Africa in 9M'17, which amounted to circa N2.3 billion.

Elsewhere, the shareholders of WAPCO recently approved the proposed rights issue, in which the management guided that the proceeds will be used to pay down some expensive short-term local currency debt. Meanwhile, the firm plans to convert some of its related-party obligation of about $22.2 (N7.9 billion) to equity. In light of this, we see scope for respite in finance costs going forward. However, the struggling South African operations remain at the forefront of our worries for the business. We will review our projections after further discussion with management.

Lafarge Africa Plc will be hosting a conference call with investors/analysts on the 9M'18 Financial Results today, October 17th, 2018, at 15.00 hours Lagos & London / 10:00 New York / 16.00 Johannesburg.

Dial in: (UK) +44 (0)33 300 1417; (USA & Canada) 1-508-924-4325; (Other Countries) +27 10 201 6700.

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