31 August 2018 : LafargeAfricaPlc(Lafarge) recently released an explanatory note to shareholders on its planned debt restructuring of its parent company’s loan ahead of the extraordinary meeting wherein the company expect to receive approval for its premeditated N90 billion rights issue. While the refinancing plan is in line with analyst's view (See report: Remain Cautious on Near-Term Headwinds), analysts had expected the company would use part of the proceeds of the right issue to reduce the parent company’s loan to N89 billion (from N149 billion), which will be rolled over with an extended maturity of 7 years. 

However, details from the explanatory note showed that management intends to restructure the outstanding total facility of $308 million which is expected to mature in 2018. Precisely, management intends to extend the maturity of $293 million (at a relatively higher cost) to 7.5 years with two years moratorium while the balance of $22.2 million will be converted to equity via the rights issue. Accordingly, analysts have updated  model to reflect the still elevated debt position and the refinancing premium on the extended facility.

Going by details of the explanatory note, there structured loans are being priced at a post moratorium rate of 3-month Libor+6.35% (2-year moratorium rate of 12-month Libor+6.35%), a 64bps premium to the average rate of 3-month Libor+5.71% on the original facility (compared to analyst's earlier estimate of 50bps premium). Accordingly, analysts have raised their interest expense forecast to reflect the higher borrowing rates and revised their debt position estimate higher to N224 billion (prior estimate of N171 billion).

On interest expense, analysts have adjusted their financing cost over the forecast period for the restructuring premium, which necessitated 20bps average upward revision to their forecast interest rate and have thus raised interest expense for FY 18 to N35 billion and associated FX loss of N7.4 billion, with overall net finance cost of N40.9 billion (previously: N39.2 billion). Net adjustment of the revision culminated into a loss after tax of N9.5 billion (prior: N8.3 billion).

With the company’s loan from its parent conveniently aligned via restructuring, the management is now seeking approval from shareholders for a N90 billion rights issue. In one part, N40 billion of the proceeds of the issue will be used to finance short term obligation with First Bank (FBN) and N20 billion will be used to refinance the company’s CP programme (with N10 billion already issued, management guided to additional N10 billion before the end of the year with maturity of both series matching the conclusion of the rights issue). On another part, the company’s short-term obligation of $22.2 million (N7.9 billion) to Caricement BV. will be converted into equity via the rights issue. Accordingly, analysts estimate net proceed from right issue of N21.6 billion.

With the first tranche (N26.4billion) of the N60 billion bond issued in 2016 due for maturity in Q1 2019, analysts expect the company to issue additional N10 billion CP which combined with excess of the proceeds from the rights issue should be sufficient to cover the repayment. On balance, post rights issue, with management expected to drawdown another $20 million from Caricement BV. to bridge working capital requirements, analysts expect the parent company’s loans to remain much of the same at $313 million (current: $315 million), albeit with a longer maturity profile.

Beyond 2018, analysts expect the impact of the rights issue to have more telling impact as the company refinance its expensive short-term borrowings, especially its obligation to FBN and part of the corporate bond – priced at 17% and 17.2% respectively – with cheaper financing. Coalescing this with analyst's expectation of lower borrowings over their forecast period, save for short term working capital needs, analysts expect average debt position of N163 billion over their forecast period and thus forecast a gradual moderation in financing cost. Specifically, in 2019, analysts expect a 38.5% YoY decline in net finance expense to N24.9 billion (prior: N26.8 billion). Accordingly, analysts have raised their FY 19 PAT estimate higher to N13.3 billion (prior: N11.4 billion).

With the above adjustment to analyst's model unlocking additional N4.29 for their FVE to N27.94, analysts now have a NEUTRAL (prior: SELL) rating on the company at current price of N25.50. Overlaying their FVE on the planned N90 billion rights issue, analysts expect circa N0.61 average EPS dilution over their forecast period. However, analysts are yet to incorporate the additional shares in their estimate. Lafarge trades at 2018 EV/EBITDA of 7.6x which compared to Bloomberg EMEA peers of 13.4x.

Reporting for EasyKobo on Friday ,31 August 2018 in Lagos, Nigeria

Source:  Oluwasegun Akinwale from ARM Securities Limited

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