After being on Pre-tax losses in the 2016-2018 financial years, Lafarge Africa sustained profitability for the third consecutive year, reporting a post-tax profit of NGN51.00 billion (+65.4% y/y) in 2021FY. The company’s earnings performance was underpinned by topline growth and moderation in finance cost. In 2022FY, we expect continued growth in earnings, supported by favourable price/volume mix and low finance cost given its low leverage position (Debt/equity of 0.06x as of 2021FY). However, we expect softer volume growth in 2022E due to slower expansion in private sector demand, given the significant hike in cement prices over the past two years amidst weak public sector demand. That said, we expect continued moderation in finance cost to remain supportive of earnings, as Management guided that the company does not intend to raise debt capital over the short term but rather fund investments using the cash generated from operations. Following the revisions to our forecasts, we have raised our price target to NGN35.72 (previously: NGN34.44); thus, we retain our “BUY” rating. In addition, we find Lafarge attractive at current levels, as the stock trades at a forward P/E of 6.8x, a discount to a four-year average of 17.4x.
Revenue to Grow Slower in 2022E on Moderate Price and Volume Growth: Revenue grew by 27.1% y/y in 2021FY, on the back of improvements in the sales of cement (+26.1% y/y; 97.3% share of revenue) and aggregate and concrete (+61.5% y/y; 2.6% share of revenue). The double-digit growth in cement sales was price-driven, given the higher increase in price per tonne (+18.8% y/y) compared to volumes (+6.1% y/y to 5.5MMT). In addition, we believe demand from builders of individual homes supported volume expansion given the rebound in activities in the real estate sector (2021FY growth of 2.3% vs contraction of 9.2% in 2020FY). Given elevated inflationary pressures and rising energy prices, we expect another round of price increment in 2022FY. However, we do not think Management will be able to implement the magnitude of price hike seen in 2021FY due to increased price sensitivity at the retail segment. As such, we expect slower topline growth in 2022E, more so that the anticipated upward adjustment of lending rates of banks may further constrain activities in the real estate sector in H2-22. Overall, we estimate sales volume will grow by 4.0% y/y to 5.7MMT in 2022E. This, alongside our expectation of a higher price per tonne (+3.0% y/y), translates to revenue of NGN313.47 billion (+7.0% y/y) in 2022E.
Surge in Energy Prices to Exert Downward Pressure on Margins: Gross margin declined marginally by 15bps to 58.9% in 2021FY due to the slightly higher increase in the cost of sales ex-depreciation (+27.6% y/y) compared to revenue (+27.1% y/y). The rise in the cost of sales was due to the pass-through impact of the local currency’s devaluation on energy cost, essential materials such as gypsum, and spare parts associated with maintaining plants. We expect margins to come under pressure given the surge in energy prices and our expectation of a moderate increase in price per tonne (3.0% in 2022E vs 18.8% in 2021FY). Accordingly, we estimate EBITDA growth of 4.9% y/y, but forecast EBITDA margin will moderate by 60bps to 32.7% in 2022E.
Low Leverage to Remain Supportive of Earnings: The growth in PBT (+ 65.7% y/y) in 2021FY was also supported by the deceleration in finance cost (-45.7% y/y), which is reflective of the company’s deleveraged balance sheet. Notably, gross debt declined by 53.2% y/y to NGN23.28 billion in 2021FY, following the redemption of its NGN34.08 billion bond and repayment of NGN2.00 billion loan from the Bank of Industry (BOI). During the conference call, Management noted that there are no plans to tap into debt financing in the short term. As a result, we do not expect a material increase in leverage (Debt/Equity ratio of 0.06x as of 2021FY). Overall, we forecast 2022E interest expense to decline by 26.7% y/y.
Valuation: The net impact of our changes is a marginal increase in our target price to NGN35.72 (previously; NGN34.44/share), implying a potential upside of 51.0%. Consequently, we retain our “BUY” rating on the stock. On our 2022E EPS of NGN3.52 (+11.1% y/y), we estimate a DPS of N2.22/share, implying a dividend yield of 9.3% based on the price of NGN23.85/share (March 23).
