Lafarge’s Q3 2022 numbers were below our expectations, but in comparison with its peers, the Group did better. Lafarge’s revenue grew by 12% YoY to N83.27bn. We believe that higher pricing drove the topline growth. In comparison, Dangote Cement reported an 11% YoY growth while BUA Cement reported an 18% YoY revenue growth – however, BUA Cement added new production lines during the period.
Also, while other peers recorded a decline in gross margins, Lafarge’s grew. Higher energy-related costs led to a gross margin decline for the Group’s peers. For Lafarge, we attribute the increase in gross margins to effective inventory management in previous quarters. Therefore, gross profit grew by 30% YoY to N38.70bn in Q3 2022.
However, operating profit shrunk by 19% YoY to N8.01bn due to higher selling expenses, driven by higher diesel prices during the period under review.
We expect higher pricing to keep driving topline growth in Q4 2022, while improved volume sales will drive topline growth in the medium term.
On the other hand, cost pressures remain a downside risk. We do not see the pressure of high energy prices abating, nor inflationary pressures cooling off in the near term. As a result, we expect to see declining margins in the near term.
Generally, the broad fundamentals of the cement industry are still strong, in our view. Widening infrastructural deficit, favourable policies, and pricing power are some factors that enable players in the cement industry to deliver value. Specifically for Lafarge, a strong balance sheet, low debt levels and improving operational efficiency.
We maintain our BUY recommendation for Lafarge. However, our fair value is now lower (revised valuation: N27.17; previous valuation: N36.92). The valuation downgrade reflects our expectations of pressured margins and production disruption due to energy issues. We also lowered our FY 2022 dividend expectation to N2.20 per share (previous: N2.50; FY 2021: N2.00).
Based on the estimated N27.17 fair value, we project a 32% total return: consisting of a 22% price return and a 10% dividend yield.
Please follow the link “Lafarge Africa Plc Q3 2022 – Profitability Margins Deteriorate Amid High Energy Costs” to view the whole report.
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