Sizable cuts to analyst's 2018-20E EPS forecasts

27 July 2018 ( Lagos ) : Lafarge Africa’s Q2 2018 ( WAPCO ) earnings missed analyst's forecasts across all key headline items, making it the fourth consecutive quarter of negative earnings surprises by the company. Similar to Q1, the variance was mainly driven by a 92% y/y spike in net interest expense due to Lafarge’s higher leverage y/y (debt/equity of 2.2x vs. 1.3x Q2 2017). Given the company’s elevated leverage and the negative outlook for interest expense, analysts have made material cuts to their 2018-20E EPS forecasts. 

Despite these sizable cuts, analyst's new price target of N37.0 is only 2% lower than their previous price target because analysts have rolled forward their valuation to 2019E. On its Q2 2018 conference call, management disclosed plans to undertake a second rights issue of N90bn before the end of the year (recall that Lafarge concluded a rights issue of N131.65bn in Q4 2017). 

Proceeds will be used to deleverage its balance sheet in the form of a) the reduction of US$ denominated loans to US$293m from US$315 and b) the refinancing of short term naira borrowings and the funding working capital needs. Although their new price target implies a potential upside of 35% from current levels, analysts maintain their Neutral rating on the stock due to the negative outlook for earnings in the near-team and the potential dilution to earnings from the proposed rights issue. 

Assuming the proposed rights are priced at the current share price of N27.5 and the issue is fully subscribed, analysts estimate a 27% dilution to their 2019E earnings estimate.

Pre-tax loss of –N3.4bn in Q2 due to spike in costs & interest exp.

Similar to Q1, Lafarge’s Q2 2018 results showed that company reported pre-tax and post-tax losses of –N3.4bn and –N3.7bn respectively. The weak earnings were underscored by a gross margin contraction of -636bps y/y to 25.7% and a 92% y/y spike in net interest expense. 

Further down the P&L, a negative result of -N1.8bn in other comprehensive income also contributed to the weakness in the results. Although sales grew by 11% y/y, the negatives proved significant, completely offsetting the top line growth. Sequentially, sales came in flat q/q. However, the pre-tax and after-tax losses compare with pre-tax and after-tax losses of –N2.9bn and –N835m that the company reported in Q1 2017. 

Compared with analyst's forecasts, sales were broadly in line. However, the pre-tax and post-tax losses missed their PBT and PAT forecasts of N1.5bn and N1.3bn because of the negative surprise in net interest expense.

Source : Tunde Abidoye from FBNQuest Capital Limited.

Reporting for EasyKobo on Friday, 27 July 2018 in Lagos, Nigeria