Analysts at Renaissance Capital Limited have upgraded Lafarge Africa to Buy following the completion of a rights issue as the cement maker seeks to reduce debt and strengthen working capital.
“We downgraded Lafarge to Sell in our report 27 percent 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 N57,” said Temilade Aduroja, analysts at Renaissance Capital in a note to client.
“Following the rights issue we now see value in Lafarge and think this is a good time to buy,” said Aduroja.
Lafarge Africa had on November 24, 2017 launched an offer to raise N131.65 billion through a rights issue of about 3.1 billion ordinary shares of 50 kobo each at N42.50 per share.
The company said the proceeds from the rights issue will be used to reduce the company’s debt meet working capital requirement and fund future expansion plans
A total of 3,577 applications were received and processed successfully, leading to a 100 percent subscription of the issue. Of the N131.6bn ($366mn) proceeds, 71 percent will be used to convert $258mn of Lafarge’s $595mn shareholder loan to equity, leaving cash balance of $108mn on its balance sheet for working capital requirements, according to the Rencap report.
Lafarge Africa has a total of N252.34 billion in debts as at September 2017, a 49.44 percent increase from N168.85 billion incurred the previous year.
Finance costs spiked by 134.05 percent to N17.31 billion in September 2017 as against N7.39 billion the previous year.
Interest coverage ratio of 1.06 times operating profit means the company’s ability to generate sufficient revenue to cover interest expense is questionable.
Net margins stood at 0.15 percent in September 2017, this compares with Dagote Cement’s 32 percent net margin.
Lafarge Africa has been grappling with rising cost of production and interest expense which are responsible for the squeeze in margins.
The Nigerian cement marker has generated N8.59 billion in net cash flow from operating activities while total assets stood at N609.52 billion as at September 2017.
“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%),” said Aduroja.
Analysts at Rencap said that they ungraded Lafarge to BUY (From SELL) because they see value in the stock at current levels owing to the company’s stronger cash and balance-sheet position and growth in the Nigerian cement market, bolstered by the recovery in the economy.
The gross domestic product of Africa’s largest oil producer expanded for three straight quarters last year after a 1.6 percent contraction in 2016, with year-on-year growth reaching 1.9 percent in the final three months of 2017.
Analysts are upbeat that the speedy passage of the 2018 budget, ease in the foreign exchange market and government’s borrowing to fund capital expenditure will spur cement makers to growth this year.
Lafarge Africa’s shares have gained 11.38 percebnt since start of the year, outperforming the NSE ASI.
BALA AUGIE
