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Lafarge Africa Success Shows Technocrats Better Economy Managers Than Politicians

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If the board of directors of Lafarge Africa were to run Nigeria, the country’s debt, inflation rate, and unemployment rate would probably not balloon out of proportion, and of course, the country would have been attracting the desired foreign direct investment needed to avoid a foreign exchange crisis inimical to economic growth.

The management and board of Lafarge Africa were nimble enough to make decisions that helped the cement maker reduce gearing, bolster balance sheet, and strengthen profit, which paves the way for it to surmount the coronavirus crisis that crippled construction activities across the country.

In 2019, the company sold off its South Africa operations for $317 million to Caricement B.V, and it used the proceeds to pay-off a related-party loan, amounting to $293 million.

That brought a new lease of life to the entity as the proportion of debt in the capital structure reduced.

Debt to equity ratio fell to 6.15 percent in December 2021 from 13.83 percent in 2020, 18.61 percent in 2019, and 197.86 percent in 2018. In short, as at 2018 debt was 1.97 times equity.

Debt to Equity Ratio is the metric which shows us the proportion of debt as a percentage of equity in the total capital of the company, thereby bringing to the fore the nature of the current capital structure employed by the company and thus letting the internal and external stakeholders know how well it is performing on the targeted capital structure criteria.

A high debt to equity ratio could be risky if the firm does not have enough cash flow to meet obligations.

Lafarge Africa total debt (long and short term) was reduced to N23.28 billion in December 2021 from N49.73 billion in 2020, N64.18 billion in 2019, and N266.30 billion in 2018.

Finance costs have been reducing since 2018, which means interest payment on outstanding debt can be met. Interest expense dipped to N5.21 billion in 2021, N9.71 billion in 2020, N20.17 billion in 2019, from N41.56 billion in 2018.

Deleveraging the balance sheet also helped boost profitability, which enabled the payment of dividend to shareholders who invested their money in the firm to earn reasonable returns.

Interestingly, the bottom line (profit) has been growing steadily since 2019. Net income spiked by 65.36 percent to N51 billion in December 2021 from 30.84 billion the previous year.

The owners of common stock of Lafarge Africa have received higher returns on their shareholding as return on average equity increased to 17.40 percent in December 2021 from 13.38 percent the previous year.

The net operating cash-flow (NOCF) was up 15.73 percent to N73.76 billion, which was driven by stronger working capital management.

Cash flow from operating activity spiked by 17.16 percent to N76.49 billion in December 2021 from N65.29 billion the previous year. However, a strong cash flow position cannot fund a new plant without external financing.

In 2021, it had earmarked $100 million to capital expenditure (CAPEX), with 60 percent of that going strictly to funding its debottlenecking exercise in Ashaka and Ewekoro II.

The company is strengthening capital expenditure with a view to taking advantage of the government infrastructure spending, and a strong demand for cement is expected to add impetus to earnings.

The government has proposed a highly ambitious CAPEX spending of N5.5 trillion in the 2022 budget, but analysts do not expect implementation to improve significantly.

Analysts are sanguine that the establishment of the public private partnership to bridge the infrastructure gap propitiously bodes well for the cement sector.

Of course, the sub-optimal cement consumption means sector players have to ramp up production and take advantage of the deficit to magnify earnings needed to spur share price appreciation.

On a per capita basis, Nigeria consumes 105kg, a disappointing level when compared to Turkey (720kg), Egypt (570kg), and South Africa (210kg).

On our estimate, if Nigeria were to attain South Africa’s consumption per capita level, then it would have to double its current consumption of 21.3mmt to 48.1 mmt.

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