By Temilade Aduroja,
WED, MARCH 21 2018-theG&BJournal-On 19 March 2018, Lafarge Africa (Lafarge) announced the successful completion of its rights issue, which raised NGN131.6bn ($366mn) through the issuance of 3,097mn new shares. Of the proceeds, $258mn will be used to convert part of its shareholders’ loan to equity, with the balance to be deployed for working capital requirements and expansion. Although the successful completion of the rights issue was in doubt until now, the use of the cash is as we expected. We upgrade Lafarge to BUY (from Sell), as we see value in the stock at current levels owing to: 1) the company’s stronger cash and balance-sheet position; and 2) growth in the Nigerian cement market, bolstered by the recovery in the economy. Our forecasts incorporate our SSA economist’s reviewed 2019 Nigeria GDP growth forecast of 3%. We increase our TP to NGN66 (from NGN48) as our long-term growth rate rises to 8% (from 5%). Lafarge trades on 7.9x and 12.8x 2018E EV/EBITDA and P/E, respectively, on our estimates.
Rights issue 100% subscribed
Lafarge has announced the completion of its capital call, issuing 3,097mn new common shares at NGN42.50/share, representing 36% of its current share capital. A total of 3,577 applications were received and processed successfully, leading to a 100% subscription of the issue. Of the NGN131.6bn ($366mn) proceeds, 71% will be used to convert $258mn of Lafarge’s $595mn shareholder loan to equity, leaving a cash balance of $108mn on its balance sheet for working capital requirements. Post the rights issue, Lafarge still has $337mn in shareholder loans, which as we expected will be converted to a naira loan at the prevailing NAFEX rate.
A promising cement outlook indicates some potential upside
We downgraded Lafarge to Sell in our report 27% cut in TP on capital call, published 10 October 2017, given the arbitrage that the rights issue presented at an exercise price of NGN42.5 vs the market price of NGN57. As such, it was cheaper to buy the rights and exercise them. Following the rights issue we now see value in Lafarge and think this is a good time to buy. Although on our estimates EPS reduces by 21% over the next three years compared with our previous forecasts, due to the dilution from the new shares, average debt to EBITDA reduces by 43% over the same period. Lafarge’s stronger balance-sheet position – supported by c. $108mn new cash for working capital and capex – is significant, in our view. We also think the market is not capturing the strong growth of 9% we expect in the Nigerian cement market in 2018, buoyed by a recovering economy and higher government capex.
Upgrading Lafarge to BUY
Our TP increases to NGN66 (implying 25% potential upside at current levels) following the completion of Lafarge’s rights issue as we: 1) increase our long-term growth rate to 8% (from 5%); 2) incorporate new cash of $108mn for working capital and capex requirements; and 3) increase our EBITDA estimates over the next three years by 3%. Lafarge is trading at 17% and 9% discounts to peers on 2018E EV/EBITDA and P/E, respectively. We expect the stock to re-rate post the FY17 and 1Q18 results. We upgrade Lafarge to BUY (from Sell) as we now see value in the stock. Downside risk to our estimates are lower-than-expected cement growth, a drop in cement prices and the inability to convert remaining dollar debt to naira.
Aduroja is research analyst at Renaissance Capital