CardinalStone Sees WAPCO Good Deal with 25.2% Upside



CardinalStone Sees WAPCO Good Deal with 25.2% Upside
Lafarge WAPCO

CardinalStone Sees WAPCO Good Deal with 25.2% Upside

Lafarge Africa Plc (Ticker: WAPCO) has been rated a buy on an estimated 25.2% upside potential at a reference price of N27.50, according to CardinalStone Securities equity report update on the cement company.

The investment firm expects Lafarge Africa’s volume sales to drop by 5.0% to 5.2MMT in the financial year 2023 but forecasts a 22.5% year-on-year growth in earnings per share to N4.08 in 2023

Then, its target price was downgraded amidst an uptight earnings outlook in 2023 on the cash-rich member of the cement oligarchs in Nigeria.  In the report, analysts said the adjusted sales estimate followed a relatively lacklustre result churned out in the first half of the year. The period was characterised by challenges like the cash crunch in the first quarter of the year and the Naira devaluation in the second quarter.

For cement operators, the operating environment has been tough. Lafarge is not alone, as other members of cement oligarchs are facing similar pressures – including forex losses which spooked earnings performance in the first half of 2023.

“We revise our financial year 2023 cement price estimate to N77,658 per tonne from N75,683 to reflect producers’ ongoing reactions to elevated cost inflation”, CardinalStone analysts said in the equity report.

In 2023, analysts said they expect the company’s revenue to rise by 8.5% year on year to N417.09 billion from N445.00 billion estimated before, saying they are encouraged by the controlled growth in operating expenses, particularly distribution costs.

The investment firm attributed the positive trend to the company’s adoption of more efficient gas-powered trucks fueled by Liquified Natural Gas (LNG) for distribution, as opposed to diesel.

However, they noted the return to a higher effective tax rate due to the expiration of pioneer incentives on the Mfamosing Line II plant is expected to exert pressure on earnings in the short to medium term.

Balancing these factors, CardinalStone analysts said they have set a new 12-month target price (TP) of N34.44, a downgrade from N35.71 previously set. 

They expect that an elevated price environment would drive revenue growth as debottlenecking exercise slows. In the first half of 2023, Lafarge Africa recorded a 5.9% surge in revenue, primarily bolstered by higher prices which overshadowed the impact of weaker volumes, according to the report.

In the period, the cement company’s price rose 15.5%, while in ability to control both demand and supply caused a 8.3% decline in demand level in the period. The investment firm said Lafarge made substantial strides relative to the previous quarter, with volume sales rising by 15.6% in the second quarter, aided by low base in the first quarter of 2023.

Like DANGCEM, WAPCO encountered various challenges in the first half that hindered demand. Analysts said the company is likely to buck historical trends and report better volumes in the second half as key challenges that it faced in the first half have fizzled out. 

However, analysts think volumes are likely to be 5.0% weaker year on year as management had indicated that around 3.3 million metric tonnes (MMT) of installed capacity still need to be unlocked by efficient operations, with only 300 thousand metric tonnes (KMT) already unlocked through the capacity debottlenecking exercise.

In the first half of 2023, CardinalStone cited that management took proactive measures to safeguard margins in response to significant cost inflation, partly stoked by direct and indirect FX exposures.

According to the report, Lafarge Africa acknowledged implementing cement price hikes of approximately 13.9% in the first quarter and around 15.0% in the second quarter of the year. 

Consequently, these cumulative adjustments culminated in the 15.5% year-on-year elevation in weighted cement price for the first half of 2023.   CardinalStone analysts expressed that sustained cost pressures will likely keep prices elevated for the rest of the year.

The investment firm’s analysts said the implied tactical price adjustments are poised to offset the projected volume contraction and stoke an about 11.0% upswing in the financial year 2023 revenue to N417.1 billion.

They also noted that Lafarge Africa’s prudent FX management would support margins in the year. The Naira devaluation caused a number of the company to record losses that drained bottom line in the first half of 2023.

In contrast, the cement company reported a notable net foreign exchange gain of N1.9 billion, against the trend of other industry players.  Analysts said the gain effectively masked finance costs via a material surge in finance income.

Management explained that a blended exchange rate of N751.00/$ was used to recognise FX-denominated assets and liabilities before the Naira devaluation, according to CardinalStone.  Analysts believe that the prudent approach protected the firm against substantial FX losses and resulted in a 17.9% year-on-year increase in profit before tax in the first half of 2023.

Analysts hint that the company has unveiled plans to leverage its robust cash flows to expedite the clearance of significant FX obligations from its balance sheets, a strategic manoeuvre intended to fortify the company against future vulnerabilities in the Naira. 

“Even though margins were stronger across the board, we note the worrisome 109.5% year-on-year surge in income tax expense in the first half of 2023. This increase was attributed to the reversion to a higher effective tax rate – a consequence of the expiration of pioneer incentives on the Mfamosing Line II plant”.

As a result, analysts report said net income margin came under pressure, causing earnings per share (EPS) to decline by 5.2% year on year to reach N2.20 in the first half of the year compared to N2.32 in the comparable period in 2022

In the near to medium term, we anticipate that the weight of elevated taxes will continue to impact the company’s bottom line. Nevertheless, plans to leverage tax credits available under the provisions of the Finance Act could offer some respite in the long term.

“We update our recommendation for WAPCO with a new target price of N34.44 per share and a BUY rating, implying a potential upside of 25.2% …Our recommendation is supported by the projected rise in cement prices and the proactive management of foreign currency liabilities”, CardinalStone analysts said in the update. #CardinalStone Sees WAPCO Good Deal with 25.2% Upside Nigerian Treasury Bills Yield Rises to 7%

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