Rights details out; price set at N42.50
Following the conclusion of the Extra-Ordinary General Meeting, the Board of Lafarge Africa Plc announced the details of its planned Rights Issue.
Lafarge Africa plans to raise N131.65 billion by issuing 5 new shares for every 9 shares held by investors at a Rights price of N42.50, a 25percent discount to current price of N56.89.
Assuming a completely successful issue, the company’s shares outstanding would increase by 3.1 billion to 8.6 billion units of ordinary shares. As previously approved at the AGM, shareholders are allowed to use any outstanding obligations due to them from Lafarge Africa to offset payment for the Rights taken up.
Earnings Per Share (EPS) dilution remains a risk, but transaction provides some benefits
Whilst EPS dilution is imminent in the near-term amidst the capital raise, we reiterate a couple of upsides from this move, particularly stemming from the expected liquidation of the outstanding $286.7 million quasi-equity instrument (previously shareholder loan) on Lafarge Africa’s balance sheet.
Firstly, the payment of the dollar denominated quasi-equity instrument will make Lafarge Africa less susceptible to the impact of currency volatility.
Also, with earnings just recovering from 2016 lows, the 6percent annual dividend payable to holders of the quasi-equity instrument (FY’17E: N6 billion) would no longer be required-freeing up cash for possible reinvestment.
Meanwhile, we should highlight that excluding quasi-equity instrument, the company still has dollar-denominated obligations of $308.4 million. We understand that the cement giant hedged $88.4 million at N275/USD with one-year non-deliverable forwards. According to management, the balance of $220 million was also hedged at the NAFEX window at an undisclosed rate.
Assuming full subscription to the Rights, we expect a net cash of c.N24 billion which could be used to pay down part of these dollar liabilities. Post-rights, the quasi equity instrument would no longer be treated as part of minority interest.
The consequent increase in our equity valuation would taper the impact of the expected 56percent increase in number of outstanding shares (assuming full subscription to the issue) on our valuation per share (target price).
Upon completion of the issue, we expect FY’17 EPS to fall from our current estimate of N6.50 to N4.20. Modelling a full subscription, our target price would potentially fall to N62.06 from our current N79.26. Pending the conclusion of the Rights, we maintain our current target price.
Business Description:
Lafarge Africa Plc is a subsidiary of LafargeHolcim, a world leader in building materials. The company has operations in Nigeria -Ewekoro and Sagamu plants in Ogun State, Ashakacem in Gombe State, Mfamosing in Cross Rivers State, Atlas cement in Rivers State and Ready-Mix Nigeria and varied operations in South Africa with total group capacity of around 12 million MT
