How Lafarge Africa Multiplied Profit At Half Year 2020
Lafarge Africa Plc has closed half year operations with operating results defiant of the Covid-19 pressure on corporate earnings. Management seems to have woven around the company a set of performance immunity that enabled more than two and half times multiplication of the bottom line within the three months of the second quarter.
The summary of the company’s operations in the second quarter is that a 5 percent drop in sales produced a 160 percent profit advance quarter-on-quarter to over N15 billion. That lifted the company’s first-quarter closing profit of N8 billion to close at over N23 billion for the half-year ended June 2020.
Management’s counter Covid-19 strategy centered around drastic cost reduction that cut across virtually all the main expense lines of the company. It countered the loss of sales revenue within the second quarter by jerking down input costs ahead of sales at 14 percent compared to 5 percent. That overturned the decline in turnover into a 10 percent improvement in gross profit quarter-on-quarter.
Much bigger cost savings came from administrative expenses, which dropped by 46 percent during the quarter, finance expenses – which fell by close to 69 percent and the absence of loss from discontinued operations that were as big as N3.6 billion in the second quarter of last year.
The huge cost savings lifted profit margin from less than 10 percent in the second quarter of last year and from 12.7 percent in the first quarter to 26.8 percent in the second quarter of this year. The robust second-quarter performance has jerked up the company’s half-year earnings position from the already impressive first-quarter record.
On a year-on-year basis, the company kept sales revenue improving though the decline in the second quarter lowered the growth rate from 10 percent in the first quarter to 2.2 percent at half-year. The slowdown in sales is more than compensated by increased cost savings that have powered profit capacity expansion for the year.
Lafarge Africa closed half year operations in 2020 with a turnover of N120.5 billion, an improvement of 2.2 percent year-on-year. This is still a positive pointer compared to a decline of 2 percent in sales revenue in 2019. Both the main revenue line – sale of cement and other products recorded drops during the second quarter.
The cost of sales changed direction from rising well ahead of sales revenue in the first quarter to dropping ahead of it in the second quarter. That left the half-year cost of sales figures flat at slightly below N79 billion at the end of June 2020.
The development enabled the company to convert the improvement in sales revenue into gross profit. Gross profit therefore improved by 5 percent to N41.7 billion at the end of June 2020 – an upturn from the first quarter position when the improvement in sales failed to lead to a gain in gross profit.
Selling and marketing expenses maintained a declining course year-on-year, increasing the pace from 8 percent in the first quarter to 10 percent to close at N1.5 billion at half-year. Administrative expenses gained even a greater speed downward from a slight decline in the first quarter to a drop of 30.6 percent to N7.8 billion at half-year.
On the flip side, a strong improvement in other income in the first quarter gave way to a drop of over 58 percent at half-year. Also, an impairment write-back on trade and receivables shifted to a net charge and other operating expenses of nearly N56 million appeared against a complete absence over the review period.
The outcome is an upturn of 18 percent in operating profit at N32.8 billion at the end of half year from the flat position at the end of the first quarter. Operating profit had dropped by 9 percent to about N35 billion at the end of 2019.
A big cost saving from finance expenses in the first quarter was maintained in the second. Finance expenses dropped by about 67 percent year-on-year to N4.4 billion at the end of half-year – which enabled management to lift pre-tax profit a clear 86 percent to N28.7 billion.
Finance cost is dropping for the second year – which is the gain accruing from an extensive deleveraging of the company’s balance sheet in 2019. Management cut interest-bearing debts by 76 percent to N64 billion in 2019. The debt reduction has continued this year to N60 billion at the end of the first quarter and further to N55 billion at half a year – the lowest debt figure in many years.
Building equity to reduce debts and save cost on finance expenses constitute the company’s anti-COVID-19 strategy that is lifting profit in a season of general casting down. Lafarge Africa strengthened its equity resources last year with a rights issue that injected N89 billion into the company and a windfall from discontinued operations that added nearly N100 billion net of operating losses to the bottom.
Strong growth in profit is still strengthening equity capital this year, which is sustaining debt reduction. Equity stock has grown further from N345 billion at the end of 2019 to N352 billion at half-year.
The company closed half year operations with an after-tax profit of more than N23 billion, an increase of 159 percent year-on-year. The second quarter produced N15 billion of the profit – which swelled the N8 billion the company posted at the end of the first quarter. A completed absence of loss from discontinuing operations so far this year compared to a loss of close to N7 billion at the half-year in 2019 made a big difference in the bottom line.
The profit advance was achieved from a 2 percent improvement in sales revenue, indicating big gains from cost-saving and major stretching of margins. Profit margin stretched out further from 12.7 percent in the first quarter to 19.3 percent at half-year against 7.3 percent at the end of 2019.
Earnings per share amounted to N1.45 at the end of the half-year operations, rising from 56 kobo per share in the same period in 2019. The company earned N7.15 at the end of 2019 and gave out N1 per share to shareholders in cash dividend