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Lafarge 2019 FY results vindicate LSAH factor in previous earnings

WAPCO’s impressive 2019FY standalone earnings cement our long-held view that Lafarge South Africa Holdco. (LSAH) has been the major drag to the group’s business over the last few years. Prior to the disengagement, LSAH had reported a loss of NGN9.4 billion over 7M-19. At that run-rate and assuming no divestment, the group would have reported another loss after tax of c.NGN570.0 million, by our estimate. Nonetheless, unlike the start of the year, we are now cautious about the company’s earnings outlook, owing to the COVID-19 induced economic downturn, with its negative passthrough to private sector cement demand. More so, we believe the recent fiscal pressures faced by the FGN, due to the collapse in the price of Brent crude oil, should lead to the rescheduling of infrastructure projects, and subsequently weigh on public investments. Meanwhile, relative to its competitors, we expect WAPCO to keep prices stable despite the recent naira realignment. During our engagement, management appears to favour profitability over volume. Over 2020E, we believe the company’s improving ROIC of 8.0% (although still below WACC) will support the share price to re-rate. That said, we value WAPCO at NGN18.03/share (previously: NGN26.22/share), and so maintain a ‘BUY’ recommendation on the stock.

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Economic Shutdown From COVID-19 to Impact Volume: In our view, the disengagement from the margin-dilutive LSAH will allow management to fully focus on the more profitable Nigerian business in 2020. Management confirmed that it sees massive opportunity in Nigeria and intends to quickly re-gain its previously lost market share. Nonetheless, the COVID-19-induced economic downturn is expected to significantly affect volume this year. Management said it anticipates the impact of the economic shutdown on cement volume to be more evident from Q2-20, since it’s volume growth in Q1-20 are already ahead of last year. Our estimated 4.1% y/y decline in volume (previously: +1.02% y/y), together with flat price growth forecast, translates to a 7.8% y/y decline revenue growth over 2020E.

WAPCO’s Balance sheet is Stronger Owing to Lower Leverage – The repayment of all WAPCO’s FX related borrowings means that the company’s earnings are now less volatile despite the recent oil price collapse-induced currency pressure. The proceeds from LSAH disengagement have been used to offset all its FCY debt of USD293 million, including accrued interest of c.USD23 million. From NGN266.20 billion in 2018FY, debt (ex-overdraft) has declined to NGN64.19 billion, paving the way for a 56.1% y/y decline in finance charges over 2019FY. We forecast total debt to reduce further to NGN48.2 billion, due to the maturity of one of its bonds in 2019 (NGN26 billion). Thus, we forecast 2020E interest expense to decline further by 69.8% y/y.

ValuationWhile we have left our cost of equity unchanged despite the rising risk landscape, the net impact of our adjustment to estimates is 45.5% decline in our fair value estimate. On our TP of NGN18.03, the total expected return (ex-dividend yield) is 67.8%. We have a BUY rating on the stock.