By Kirk Leigh
When analysts tipped Lafarge to outperform the market in their March forecast, they had predicted a median price of N60. The current price of N62.20 is only N2.20 shy of that, heightening optimism that the price will rise further especially as the cement maker has had a good run in the first half of the year and also because the economy is inching out of recession.
Analysts polled by the Financial Times maintain their ‘outperform’ forecast for the company, offering median target of N70.21. They have held this position since November 11, 2016.
“As of Jul 14, 2017, the consensus forecast amongst 8 polled investment analysts covering Lafarge Africa PLC advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on Nov 11, 2016. The previous consensus forecast advised investors to hold their position in Lafarge Africa PLC.
“The 10 analysts offering 12 month price targets for Lafarge Africa PLC have a median target of N70.21, with a high estimate of N113.27 and a low estimate of N50.55. The median estimate represents a 17.02% increase from the last price of N60.00”.
The low estimates of N50.55 may not be tenable given that the stock, being a cyclical one, is poised to rise with the economy, predicted to grow more than one Percent by the World Bank and the International Monetary Fund (IMF). Investors who put their money today may be in for capital gains of 12.88 percent in the near term based on the median target of N70.21.
Fuelling analysts and investors’ expectations is that the stock outperformed the All Share Index in the last six months, returning over 40 percent where the market returned 30percent. This is against the background that the market trounced the stock in the last one year, returning 20 percent where the stock delivered zero returns. It is testament to how fast the stock has grown in the last couple of weeks.
Trading at PE ratio of 4.68 compared to Dangote Cement, the biggest player in the cement market, which trades at PE ratio of 17.01, according to data compiled by Bloomberg. This could mean that investors in Lafarge are likely to get Payback of their investment earlier than investors in Dangote Cement.
The company’s half year results indicate that there is more room for growth in its stock price as revenues and profits improved significantly. Revenues were up 44.2 percent to N154.8 billion from N107.4 billion in reflection of improvement in demand and growth in the construction business. Despite a rise in cost of goods sold (COGS), gross profit jumped a whopping 193.7 percent to N44.4 billion from N15.1 billion, doubling gross margin to 28.68 percent from 14.1 percent.
Though operating expenses were fleet footed at 52.5 percent rising to N18.6 billion from N12.2 billion, Earnings Before Interests and Taxes (EBIT) vaulted to a positive N28.1 billion were it recorded a negative N25.6 billion in the equivalent period in 2016. And despite a high finance cost of 118.4 percent from N4.6 billion to N10 billion, mostly due to a rise in laibilities by 64.7 percent, pre-tax profits were positive at N18.2 billion where it lost N30.2 billion in the equivalent period in 2016. The positive position helped buoy net profit to N19.7 billion where it lost N30.2 billion the year before thus making 12.73 percent in net profit margin where it lost 28.2 percent in the equivalent period last year.
The company had inventories in its warehouses the equivalent of N57.2 billion compared to N44.5 billion in the equivalent quarter and may need to liquidate them quicker to improve its liquidity position especially as trade receivables sprang up in the period to N42.5 billion from N25.8 billion, a 64.5 percent crise.
This is a carryover from the previous financial year when the company’s ability to meet short term obligations deteriorated in the period just as its solvency was a tad stronger; current ratio slipped to 0.56 times from 0.78 in the previous period. Much of the weakness comes from heightened borrowing, increased dividend payments and bank overdrafts.
Still on the last financial year, the second largest cement producer lost revenue by 17.78 percent to push down revenues to N219.71bn from N267.23bn achieved in 2015. This along with an increase in the cost of goods sold expense has contributed to a reduction in net income from N28.80bn to N16.60bn, a -42.37% decrease.
Bottom line was impacted by Gross profit which halved to N40.7 billion from N82.6 billion. There was even an operating loss N10.97 billion from gains of N38 billion. These had a contracting effect on profit margins.
Gross profit margins slipped to 18.5 percent from 31 percent while net profit margin dropped to 7.7 percent from 10.2 percent. The southward travelling margins indicates that the company may be losing grip on efficiency of operations hence the hefty dip in operating profits highlighted earlier.