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Thursday, August 11, 2022

Deleveraging Balance Sheet Keeps Lafarge Africa’s Profit Sturdy

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A significant reduction in debt has underpinned Lafarge Africa’s profit while a low leverage ratio gives it the leeway to tap the debt market and raise capital needed to fund the acquisition of a new plant.

For the first nine months through September 2021, Lafarge Africa’s net income spiked by 43.30 percent to N40.39 billion from N28.19 billion the previous year.

Return on average equity (ROAE) 14.50 percent in the period under review from 10.30 percent the previous year.

The cement maker is taking advantage of the country’s infrastructure deficit to magnify earnings and the reopening of the economy spurred construction activities

The company has been recording double digit growth in profit since 2019 after the disposal of a South Africa unit helped de-risk its balance sheet.It has now completed the divestment of its 35 percent holding from Continental Blue Investment Ghana (CBI), cementing its position as an exclusively Nigerian cement company.

Analysts at Chapel Hill Denham expect the cement maker to end the year with a return on invested capital of 4.20 percent, which will act as the much-needed catalyst for the stocks.

Lafarge Africa’s total debt (long and short) now stands at N22.40 billion as at September 2021, that compares with N252.34 billion in 2017, N266.20 billion in 2018, N64.57 billion in 2019, and N49.72 billion in 2020.

It has enough to pay interest on its remaining debt as the times coverage ratio of 8.54 times is higher than the 1.50 global benchmark, according to MoneyCentral calculations.

There are fewer debts in its capital structure than owners’ money as debt to equity ratio fell to 5.84 percent as at September 2021, according to MoneyCentral calculations.

That compares with 142.29 percent debt to equity ratio recorded in 2017, 198 percent in 2018, 18.35 percent in 2019, and 13.83 percent in 2020.

The good news is that the very low leverage position of the cement maker makes it easier to borrow more because its cash flows are not strong enough to finance the construction of new plants needed to compete favorably with peer rivals.

Cash flow from operating activities stood at N40.39 billion as at September 2021 while it had free cash flow of N59.88 billion.

“Without additional installed capacity, Lafarge volume performance will continue to lag peers, with volume growth expected to average 0.6% over 2022-25E,” said analysts at Chapel Hill Denham.

The company has earmarked $100mn to capital expenditure (CAPEX) in FY-21E, with 60 percent of that going strictly to funding its debottlenecking exercise in Ashaka and Ewekoro II.

It spent N10.18 billion on the acquisition of property, plant and equipment as at third quarter, and that A surge of 109.10 percent from 2020’s N5.17 billion.

The company will have to borrow $100 million to purchase a plant worth N144 billion if it wishes to jerk up production capacity to 3 million metric tons, according to Chapel Hill Denham.

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