Lafarge Africa Plc: Not an excellent year

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Introduction

Our analysis of Lafarge Africa’s recent financial reports shows that Nigeria’s economic recession continues to have a regressive effect on the company. For the 2017 review year, the company could barely hold its own against economic elements and turned out a loss rather than a profit; despite the fact that it earned more revenue through sales during the course of the year.

The loss recorded was quite crippling, but the company chose to dip into its reserves to pay investors a collective dividend of N13 billion. This singular action may very well be the action that continues to ensure investor confidence in the management of the company.

 

Core operations

The company earned more revenue in 2017 than it did in 2016. Revenue for the year was N299.2 billion, 36.2 per cent more than the N219.7 billion recorded in 2016. This is as compared to a decline rate of 17.8 per cent in the prior year. It is important to note that the company had expended significantly more on cost of sales and operations to achieve the level of sales that it did. Finance costs also increased over that of the prior year.

These increased finance costs and cost of sales ate significantly into the company’s pre and after tax profits, driving them losses in 2017. Profit before loss was N34.3 billion, 48.5 per cent worse than the pre tax loss of N23.1 billion recorded in 2016. It also recorded an 304.1 per cent decline in after tax profit during the course of the year, with the after tax profit declining to a loss of N34.6 billion from a profit position of N16.9 billion in the prior year.

Thus, there was no earnings per share (EPS); rather a loss per share of 637 kobo was achieved, as compared to the earnings per share of 315 kobo recorded before. Despite this dip in EPS, the company’s BOD decided to up the level of dividend paid to its shareholders, dipping into reserves to pay them 150 kobo per share, as compared to 105 kobo dividend in the prior year.

 

Profitability ratios

The company did not perform as well in 2017 than it did in 2016 in terms of return on assets (ROA) and return on equity (ROE), recording losses rather than returns. Loss on assets for the period under review was 5.9 per cent while loss on equity was 22.1 per cent, both worse than the loss ratio of 4.6 per cent and return of 6.8 per cent respectively in the preceding year. Analysis shows that the company made a pretax loss of N5.90 on all N100 assets deployed an after tax loss of N22.10 on every N100 worth of equity employed. These do not indicate a superior management of key assets.

The company’s ability to squeeze as much profit as is possible from revenue earned also declined during the course of the year. Profit margin declined to negative 11.5 per cent in 2017 from negative 10.5 per cent in the erstwhile year.

The company’s total number of employees decreased to 3,335 from 3,601 in the preceding year. Earnings per employee then improved to N89.7 million on the average, up from N61.1 million in 2016, but is not particularly indicative of employee productivity and company efficiency.

 

 

 

Other ratios

For the 2017 financial year, Lafarge’s equity could only finance a lower proportion of its total capital than it could in the preceding year, and this means that the company’s capital adequacy is not as robust as that of the prior year. The result for the year was 66.2 per cent, lower and worse than the 76.6 per cent recorded in the erstwhile year. The result recorded was also not on par with what was obtainable in the industry for the period under review.

Lafarge also did not perform as well in 2017 as it did in 2016 in terms of liquidity ratios. First, it was not as able to convert assets into needed funds more quickly than it did in 2016. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was a lower 0.4 times, lower than the preceding year’s 0.5 times result, and also lower than what was generally obtainable in the industry.

Having a debt to equity ratio of 2.68 indicates that the company is using N2.68 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using a total capital of N3.68 for every N1.00 of equity capital.

 

 

 

Sustainable growth

For the review year, the company had no distributable profit to speak of. It however dedicated a much higher N13 billion of its reserves to dividend. It therefore had a retention ratio of negative 1.4 because it in essence did not retain any dividend, but rather expended from reserves.

With a profit margin of negative 11.5 per cent, an asset turnover of 0.5 times, and an assets/equity ratio of 3.7 times, the company had a sustainable growth rate of 30.6 per cent for the period under review. This means that the company had a 30.6 per cent inherent capacity for growth during the course of the year.

For the year under review, actual growth was 36.2 per cent, higher than the sustainable growth, an indication that the company overshot its inherent potential for growth during the course of the year.

 

 

Unique strategies

Lafarge Africa is a constantly evolving company, and its ability to adapt appropriately to changes has made it as stand out company so far. In 2014, Lafarge Cement WAPCO Nigeria completed the acquisition of 100 per cent of Lafarge South Africa Holdings, 58.61 per cent of AshakaCem Plc, 35 per cent of United Cement Company of Nigeria Limited (‘Unicem’) and 100 per cent of Atlas Cement Company Limited, to create a strong and diversified Nigerian and

African building materials company.

It has now built a significant platform to drive value creation for all its stakeholders.

 

Conclusion

Lafarge Africa while a solid company, is having a little difficulty adjusting to the economic realities of the Nigerian nation. With time however, we believe it will be able to return to maximum profitability.

 

*Source: LAFARGE’s 2017 financial report

*The Nigerian Stock Exchange

Nbillion 2017 Percentage change 2016 Percentage change 2015
Turnover 299.2 36.2 219.7 -17.8 267.2
Profit pre tax -34.3 -48.5 -23.1 -178.8 29.3
After tax profit -34.6 -304.7 16.9 -37.4 27.0
Total assets 577.7 15.2 501.4 10.7 453.0
Equity 156.9 -37.0 248.9 41.3 176.2
Liabilities 420.7 66.7 252.4 -8.8 276.8
Kobo
Earnings per share -637 -302.2 315 -49.9 629
Dividend per share 150 42.9 105 -65.0 300
Core operations 2017 2016 2015
Turnover growth rate 36.2 -17.8 2.5
Profit growth rate -48.5 -178.8 -27.5
Profitability ratios
Profit margin (%) -11.5 -10.5 11.0
Return on assets (%) -5.9 -4.6 6.5
Return on equity (%) -22.1 6.8 15.3
Earnings per employee (Nm) N89.7m N61.1m N70.5m
Other important ratios
Capital adequacy 66.2 76.6 48.4
Current ratio 0.4 0.5 0.8
Debt to equity ratio 2.68 1.02 1.06
Actual Vs sustainable growth
Profit margin (%) -11.5 -10.5 11.0
Retention ratio -1.4 0.66 0.49
Asset turnover (times) 0.5 0.4 0.6
Assets/Equity (times) 3.7 2.0 2.6
Sustainable growth 30.6 -6.1 8.1
Actual growth 36.2 -17.8

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