Lafarge Africa Plc: Ridding on tax write-back to profit

By Emeka Anaeto, Business Editor

WE begin a review of First Half 2017 (H1’17) corporate scorecards with some form of spotlights on some select companies.
Lafarge Africa Plc which announced a second quarter 2017 (Q2’17) result last week, has excited investors amidst its controversial recapitalisation program. Revenue grew by 33.8 per cent Year-on-Year (YoY) while net profit was N14.57 billion, moving sharply from a loss of N28.37 billion same period of last year. Compared to Q1’17, however, revenue and profit before tax (PBT) were down 9.6 per cent and 7.7 per cent respectively.

Exponential growth

Though net profit show exponential growth of 182.3 per cent, a closer look indicates it was largely as a result of a N6.2 billion deferred tax credit.
Analysts at Cordros Capital Limited, a Lagos based investment house, said the revenue of N73.5 billion was in line with consensus while the net profit of N14.6 billion almost doubled consensus’ N7.7 billion.

Industry observers also said the YoY revenue growth was expected, as relatively higher Nigerian and South African cement prices continue to compensate for softer demand.

But given the stability of prices (especially in Nigeria) since the increases implemented thus far this year, including in April, analysts link the Quarter-on-Quarter revenue contraction to lower sales volume. They also believe that in addition to the impact of rising prices on demand, the long, heavy rainy season in Nigeria between April and June may have contributed to lower cement consumption.

On segment basis, cement revenue declined by 16 per cent QoQ while aggregate/concrete and other revenues grew by 19 per cent and 29 per cent QoQ respectively.
Noteworthy from the second quarter result is the strong rebound in gross margin to 32 per cent, from 25.7 per cent in Q1’17 and 14.9 per cent in Q1’16.
Analysts at Cordros, while noting possibly transmission from additional increase in cement price and underlying exchange rate-related cost savings, said they would seek management guidance on this line, given that similar growth in Q4’16 was subsequently attributed (by the management of LAFARGE) to higher by one-offs relating to accounting treatment of some costs and gas contracts.

Meanwhile, they suspect from the significant increase in variable cost (84% QoQ), notwithstanding lower sales volume, that LAFARGE is still faced with production cost challenges. They also suspect that the company’s South West operation had issues with energy.

On the negative, operating expenses increased by 77.3 per cent YoY and 22.4 per cent QoQ, driven by admin expenses which increased by 21 per cent YoY (42% QoQ), in continuation from the 53 per cent YoY increase recorded in Q1’17.

Also on the negative, net finance charge increased 200.6 per cent YoY, driven by declines in interest income on short term fixed deposits and loan receivable, but principally, by the increase in interest expenses on borrowings (+42.7% QoQ and +77.3% YoY).

Total borrowings at the end of the period was N244.7 billion, up from N127.6 billion at the end of 2016FY and N142.1 billion in Q1’17. LAFARGE is in the process of raising N140 billion via Rights Issue, the proceeds of which would be utilized for the repayment of shareholder loans worth USD581 million at the end of 2016FY.
As stated earlier, LAFARGE’s recognition of a deferred tax credit of N6.2 billion was a major boost to net profit. Recall that the company recognized sizeable tax credits in the third and final quarters of 2016.

Overall, over H1, LAFARGE has reported net profit of N19.7 billion, well-ahead of consensus’ N12.9 billion. Cordros stated: “We look for positive reaction to the latest result on expected upward revision to forecasts. Our estimates are under review.”

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