Lafarge Africa Plc will have to spend N144 billion on multi-energy configured integrated plants if it wants to compete favorably with peer rivals and benefit from the fast-growing Nigerian cement market, according to research house Chapel Hill Denham.
The research house said the cement marker will need to raise N100 billion to avoid over straining its cash flow position.
Analysts at Chapel Hill Denham said the company will need to raise additional 3 million metric tons if it wants to position itself for the opportunities in the Nigerian market.
Of course, Lafarge Africa is behind peer rivals Dangote Cement and BUA Cement in terms of installed capacity and other financial metrics.
For instance, Dangote Cement delivered over 33 percent year on year (yoy) volume growth in the second quarter of 2021. Similarly, BUA Cement’s volume growth of 2.7 million metric tons (mmt) was 9.6 percent ahead of last year as the company benefited from the robust cement demand in Nigeria.
However, Lafarge only managed to deliver 5.2 percent year on year (yoy) volume growth over the second quarter, with most of the support stemming from a stronger in the second quarter outturn.
There is light at the end of the Tunnel for Lafarge Africa as it has strong cash flow positions to fund part of fund capital expenditure spending such as the acquisition of plant to increase its share of the market.
Its cash flow from operating cash flow stood at N57.49 billion in June 2021, which represents a 68.83 percent increase from last year’s N34.05 billion.
The cement maker has been able to convert sales into cash as cash margins moved to 39.65 percent in June 2021 from 28.53 billion the previous year, according to MoneyCentral calculations.
It spent N7.55 billion on the acquisition of property, plant and equipment in the period under review, which is 53.57 percent higher than 2020’s N5.17 billion.
Although Lafarge Africa’s has a robust cash position, it is not strong enough to fund the acquisition of the plant as it has to tap the debt market to make up for the short fall.
On our sensitivity analysis, Lafarge can comfortably spread a total of N44 billion of its excess fund to capital expenditure (CAPEX) commitment over the next three years, without missing out on dividend payment and/or overstretching its cash position,’’ said analysts at Chapel Hill Denham Limited. ]
“The balance of our projected plant cost of N100bn can then be sourced from the domestic market,” said the analysts.
The debt market is relatively benign as a lot of bellwether companies are taking advantage of a low yield environment to raise capital and strengthen their working capital position.
Nigerian companies have raised over N800 billion bonds from the capital market in the first half of 2021 (H1) just as predicted by Norrenberger in its 2021 Economic Outlook Report.
The Nigeria 10-year government bond has a 12.019 percent yield as at September 27, 2021, according to World Government Bonds.
There are optimisms that Lafarge Africa’s deleveraging of its balance sheet will continue to underpin earnings and support dividend payment.