Why Lafarge Africa is Currently Undervalued—Analysts

By Modupe Gbadeyanka

Analysts at United Capital Research have said shares of Lafarge Africa Plc are currently being traded at the Nigerian Stock Exchange (NSE) at a price below its real value.

Business Post reports that as at the time of filing this article on Monday noon, Lafarge Africa was up by 10 kobo or 0.85 per cent, selling at N11.85 per share compared with N11.75 per share it closed last Friday at the market.

In their analysis of the half-year earnings of the cement manufacturer in Nigeria, United Capital Research analysts argued that shares of Lafarge Africa should be trading around N14 per unit.

“WAPCO (Lafarge Africa) currently trades at a forward EV/EBITDA of 4.3x, which is well below both the local and EM peers average of 5.13x and 10.9x, respectively implying that the ticker is currently undervalued.

“Putting the above together, we update our valuation assumption and revised our 12M-TP to N14.4/share (from prior N16.6/share) with a potential upside of 23.1 per cent when compared to the current price of N11.70/share,” a report from the firm said.

United Capital Research noted that it is positive about the short-term outlook for the cement maker, especially at a moment it was restructuring its balance sheet to improve performance.

It said the opening of the economy by the federal government will help the company because construction activities will resume, which will, in turn, boost its revenue.

“Accordingly, we have estimated a Revenue growth of 3.3 per cent y/y in FY-2020E. Also, we expect the cost of sales growth to come lower compare to revenue growth, hence, gross margin is expected to be strengthened.

“Our expectation for lower cost of sales rests on the back of the aggressive cost optimization strategy that the company has embarked on since the beginning of the year which has resulted into a 17.8 per cent reduction in production cost.

“However, our concern remains the continued increase in energy cost. Also, we have estimated an uptick in OPEX as the company resumes promotional activities in a bid to drive volumes and compensate for

Q2-2020 shortfalls.

“In all, we expect the surge in PAT to be sustained, fuelled by the lower base effect of the 2019 performance,” the analysts said in the report.

In the first six months of 2020, Lafarge Africa grew its revenue grew by 2.3 per cent despite apparent challenges that characterized Q2-2020 amid the COVID-19 induced lockdown.

According to the management, this growth was because of an increase in volume sold and better average prices in H1-2020 when compared to the corresponding period in 2019.

Also, a sharp decline in Operating Expenses (OPEX) by 27.9 per cent y/y to N9.4 billion supported the overall bottom-line performance in H1-2020.

This was as Administrative/Selling and Marketing expenses fell 30.6 per cent and 9.9 per cent y/y to N7.8 billion and N1.5 billion, respectively. Similarly, Net finance cost tumbled 67.3 per cent resulting in 86.1 per cent y/y surge in pre-tax profit to N28.8 billion.

However, a 1.5x jump in tax expense brought post-tax profit growth to 47.3 per cent y/y to settle at N23.3 billion. Notably, the jump in tax expense was a fallout of tax credit accessed by the company in 2019.