Lafarge Africa: Improved leverage to soften impact of COVID-19 induced headwinds

Lafarge Africa Q1 2020 revenue was up 9.8% y/y to N63.7bn, driven by higher Cement Sales (up 11% y/y to N62.3bn) which offset the weakness in Aggregate and Concrete (down 21% y/y to N1.4bn). The growth in Cement sales was driven by increased volumes (up 8% y/y to 1.4MT) and price increment (c.2%) implemented by management at the start of the year.

Buoyed by a steep decline in Finance Cost (down 69% y/y), PBT rose significantly, up 104% y/y to N9.4bn in Q1 2020 compared with N4.6bn in Q1 2019. EPS rose by 1.56x to N0.50 in Q1 2020 (Q1 2019; N0.20).

Management noted that the sale of cement weakened significantly in the month of April due to the outbreak of COVID-19. Consequently, we expect Revenue in Q2 to be affected by slowdown in cement volumes, owing to subdued activities in the construction sector caused by the social distancing measures.

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Despite our expectation of weaker Q2 Revenue, we expect earnings to receive a boost from significantly lower finance cost due to the improved leverage position of the company (Debt/equity ratio moderated to 0.19x in FY 2019 compared with 2.25x in FY 2018 and 1.83x in FY 2017). The key risk to our outlook is the possibility of a second wave of lockdown due to growing numbers of new cases of COVID 19.

We have updated our model and the overall impact is a marginal downward adjustment of our price target to N23.9/s from N24.4/s previously. However, we maintain a Buy rating given the 117% upside potential implied by our target price from the latest closing price of N11.0/s.

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We believe the steep decline in the stock price (down c.28% since the start of the year) presents an attractive entry point for investors. Lafarge is currently trading at a FY2020e P/E and EV/EBITDA of 4.7x and 2.9x respectively, a discount to EM peers average of 11.5x and 6.5x respectively.

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