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Shares of Lafarge Africa have plunged since unsubstantiated reports that the cement maker was under investigation by regulator, the Securities and Exchange Commission (SEC) over allegations of poor corporate governance and abuses, thereby opening a window of opportunity for value investors to snap up the fundamentally-sound company’s shares at a bargain.
Lafarge has since debunked any investigations by SEC after filing a statement Tuesday with the Nigerian Stock Exchange where the company’s secretary said the maker of the building material was “not in receipt of any letter from SEC that would warrant the company to believe that an investigation has been launched against it,” the statement read.
The SEC has also not publicly confirmed any investigation into Lafarge and declined to comment on the matter. When an investigation is being carried out on a company, it is standard procedure that the company receives a notification either by a written letter or a visit by the investigator. For instance, when indigenous oil company, Oando, was under investigation by SEC, the capital markets regulator notified the company and the public of an ongoing forensic audit.
As this not the case with Lafarge Africa, claims of an investigation into the cement company over alleged infractions specifically in the sale of the South African unit to parent company, Lafarge Holcim, seem outlandish at best.
“There is no basis for any investigation in the first place,” an financial analyst at a leading investment bank, commenting on a matter he was not authorised to speak on, said. “They followed the regulatory and legal procedures in their handling of the sale of the South Africa unit and got approvals from shareholders and SEC for which there is evidence, so it is quite strange that there would be any investigation into the deal.
“Also, the argument about whether Lafarge Africa got a better deal from the sale is just meaningless, because for years, the South African unit was a struggling business and it only made sense to spin it off and focus on the Nigerian operation which was in a much better shape.”
Some investors haven’t taken time to question the logic of the matter and that has caused an unwarranted 9 percent decline in Lafarge’s share price to N14.7 from N16 since the October 14 report claiming the firm was under SEC investigation.
The sell-off, which is not driven by fundamentals but by unfounded speculation, has created an opportunity for savvy investors to buy the company, which has a 2019 target price of N25 according to BusinessDay valuation estimates, at a cheap price. Our valuation equates to an upside potential of 70 percent.
The $317 million sale of its South African unit to Lafarge Holcim has been a revelation and helped Lafarge Africa turn the corner in 2019 after recurring losses in the recession-tainted years starting 2016.
Proceeds from the sale were used to completely extinguish Lafarge Africa’s shareholder loan of $293 million and accumulated interests as at July 31, 2019.
That gave a boost to Lafarge Africa’s cash-flow and net income, given the reduction in debt service outflows and enabled it to reinvest in and expand operations in existing plants and strengthen its balance sheets.
The transaction also fully eliminated all foreign currency denominated debt and cut annual interest expense by N9.9 billion on account of the full repayment of the foreign currency shareholder loan.
It hasn’t taken time for the benefits of the sale to materialise.
For only the first time in three years, the company reported a Profit Before Tax of N9.2 billion in the first six months of 2019 from a loss of N6.3 billion in the same period of 2018, while Profit After Tax also swung positive to N9.0 billion from a loss of N3.9 billion.
That pushed its basic earnings per share to N56 from a negative N45 in the period under review, optimising shareholders’ funds.
The firm’s impressive financial turnaround led to a rally in its share price, which has now been abruptly halted by a dubious claim that the deal is being investigated by same SEC that sanctioned it in the first place.
If anything, the sale of the South African unit has been a masterstroke and should leave no room for any shareholder to criticise the deal as it has put the firm on an even firmer financial footing and demonstrates the management’s good intentions for the company.
“Lafarge said it had not received any letter from SEC, so it is hard to conclude if an investigation is going on or not,” an investment banker who did not want to be quoted as he wasn’t authorised by his company to speak, said.
“If SEC is looking into the complaints of any shareholders and has not notified the company, it can not be called an investigation. When the same SEC was doing a forensic audit on Oando last year, Oando received notification and the SEC made its investigation public,” the investment banker said, “So I wouldn’t advise investors to sell, but rather to buy, as the price is most likely to adjust upward once the dust settles on this.”
LOLADE AKINMURELE
