Lafarge Cement Q3 22 Results: High Opex drags earnings

High Opex drags on Q3 22 earnings despite low finance costs and pioneer incentives.

Stock Rating: BUY
Price Target: N39.23
Price (01-Nov2022): N22.25
Potential Upside / Downside: +76.3%
Lafarge Africa (WAPCO) released its 9M 22 unaudited results after trading hours last week Friday (28 October). The company reported an EPS decline of 38.7% y/y in Q3 22, however 9M 22 EPS grew by 11.2% y/y. 

Earnings were pressured by surging Selling and Distribution costs despite lowered foreign exchange losses and income tax relief from pioneer status. When annualised, the achieved EPS is 39.5% below our forecasts and 57.3% below consensus forecasts for FY 22. 

The market’s reaction to the results has been neutral. Year-to-date, the stock is down 7.1%.Price growth offsets volume slump to drive revenue The company’s revenue grew by 12.2% y/y in Q3 22 (9M 22: 23.1% y/y). When annualised, the achieved revenue is slightly above our FY 22 forecasts (+1.6% variance) owing to higher-than-expected price growth. The quarter saw price increases (the average price per tonne rose by 21.5% y/y) which offset a decline in volumes (-7.6% y/y to 1.25Mt).

Like its peers, the volume decline can be attributed to the torrential rainfall and the flooding that characterised the most of the quarter. In addition, high inflation continued to tighten customer wallets. Given the company’s strategy to focus on driving capacity utilisation via debottlenecking exercises in its Ashaka and Ewekoro plants rather than investing in additional capacity, we expect the firm to ramp up its output towards the end of the year as building projects are rounded off, barring  any significant climate-related challenges.
 Selling & distribution costs weigh on EBITDA marginThe company’s Gross margin expanded by 653bps to 46.5% in Q3 22 as Cost of sales was flat (+0.03% y/y). The surge in Production variable costs (+7.0% y/y) was driven by the worsening FX situation as it relates to key imported supplies and and sustained hike in energy costs. These were offset by a slump in Production Fixed costs (-28.0% y/y). As a result, Gross Profits were up 30.6% y/y.

However, the 54.5% y/y rise in Operating expenses was sufficient to erode EBITDA margin by 714bps. EBITDA declined by 21.2% y/y in Q3 22. The culprit across the industry at large was  the cost of Selling and Distribution, up 69.1% y/y. The distribution cost component (accounting for 89% of total Selling & Distribution costs) surged by 65.7% as the sustained high price of diesel in Nigeria remained a major headwind.

In addition, Advertising expenses, up 180.1%, contributed to overall EBITDA erosion. While the company remains committed to its sustainability ambitions by utilizing affordable clean energy in its operations and optimizing its green logistics strategy (recall that the company recently acquired 50 Compressed Natural Gas-powered trucks), it would seem there are sustained disruptions in its gas supply. This has forced the company to be more reliant on diesel for distribution than it earlier planned.

Nevertheless, in the short term, while these costs are likely to persist for a while, its energy bill is expected to be lower in contrast with its peers.
 Lower foreign exchange losses, pioneer incentives cap earnings declineThe company recorded Net finance costs of N939.38m in Q3 22 from N2.76bn in Q3 21( down 66.0% y/y), as the company efficiently managed its FX exposure with foreign exchange losses declining 92.3% y/y. In addition, given its low Capex spending policy, the company saw borrowing costs fall by 74.2%. As a result, Profits Before Tax declined slightly by 1.2% y/y. 

Elsewhere, the company continued to benefit from tax relief arising from the pioneer tax relief granted to one of its production lines in the Mfamosing Plant. However, the tax relief contribution to Net Income declined by 91.5% y/y as relief status approaches expiration. Consequently, Net Income fell by 38.0% y/y.

Consequently, Profits Before Tax declined by 42.8% y/y. Despite the decline in tax expense in Q3 22 (-20.2% y/y), Net Income fell by 52.7% y/y.

Lafarge Africa’s revenue performance in 9M 22 was above our expectations (+9.8% variance) when annualised. While  its achieved volume output was below our FY 2022 forecast by 10.7% when annualised, given its focus on capacity utilisation, we note that the company, like its peers, was able to take advantage of elevated prices.

Unlike its peers, we are impressed with its strategy in managing production and operating costs as well as managing its foreign exchange exposure. In the short-run, given industry-wide disruption in gas supply, we expect the company to continue to rely partly on diesel for distribution activities but we do not expect significant pressure on its bottom line in the long term, following investments in Compressed Natural Gas (CNG)-powered trucks. In addition, following the nigh expiration of its pioneer status, we expect its effective tax rate to increase. 

Overall, we maintain our BUY recommendation on the stock. On our estimates, the stock is trading on 2022F P/E and EV/EBITDA multiples of 5.2x and 2.4x, discounts to emerging market peer multiples of 15.7x and 8.6x respectively. SOURCE: Coronation Asset Management

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