Lafarge Africa: Big Harvest For Shareholders
Lafarge Africa Plc is expected to unveil one of the biggest profit advances, as the corporate earnings reporting season for the 2019 operations draws near. The cement producing company broke free from two preceding years of losses to register a comfortable profit mark at the end of the third quarter. The improvement came out of fundamental changes in the cost-income structure of the company that gave profit margin a big leap.
In addition to the upturn in the company’s operational force, a windfall from discontinued operations added nearly N100 billion net of operating losses to the bottom line at the end of September 2019. That changed the company’s earnings story from a comprehensive loss of almost N11 billion in the same period in the preceding year to a comprehensive income of over N120 billion at the end of the third quarter. That is more than many years of the company’s profits put together.
The group discontinued the operations of its South African-based subsidiary – Lafarge South Africa Holdings in July 2019 and made a gain of N106.5 billion. This is a big harvest for investors coming after two years of losses. The company’s management is certain to present one of the most exciting earnings stories from the 2019 trading.
Apart from the windfall, a major strengthening of the company’s cost-income structure has happened. The company has rebuilt the strength to deliver profit from the naira of sales revenue. While it posted losses from growing turnover in the two preceding years to 2018, management was able to build profit from a drop of more than 30 percent in sales revenue as at the end of the third quarter of 2019.
There was a streamlining of expenses from input cost down to finance expenses. This was reinforced by strong improvements in other income lines. The result is a major stretching out of profit margin in the year, exclusive of profit from investment disposal to as high as about 13 percent at the end of September 2019. This is a major improvement from a profit margin of 7.7 percent in the company’s last recorded profit in 2016.
The biggest slashing of costs happened in two areas – administrative and finance expenses. The company made cost savings in the region of N40 billion from the two expenditure lines over the review period. A moderated growth in input cost also boosted gross profit, as cost of sales dropped well ahead of turnover.
The difference is that management lifted operating profit a clear 85 percent from a 30 percent drop in sales revenue. This development is the anchor of Lafarge Africa’s turnaround in the core business in 2019.
An extensive deleveraging of the balance sheet has happened for the company, which is reflected in the cut down in finance expenses. Interest-bearing debts have dropped by 78 percent to about N65 billion at the end of the third quarter in 2019.
Lafarge Africa closed the third quarter operations in 2019 with a turnover of N163 billion, losing 30.4 percent of the sales revenue it posted in the same period in 2018. The drop occurred in the three product lines of the company but was more pronounced in the aggregate and concrete product line – which fell by over 89 percent. Its main revenue line is sale of cement, which accounted for 97 percent of the turnover figure at the end of September 2019. Revenue from the South African operations has ceased as a result of the disposal.
Cost of sales dropped well ahead of sales revenue over the period at 37.3 percent to under N112 billion. That reduced the margin of decline in gross profit well below the drop in turnover at 8.6 percent. With that, management raised gross profit per naira of sales from 24 kobo to over 31 kobo over the review period.
The boost in gross profit was reinforced by major cost slashing in administrative expenses as well as marketing cost. Administrative expenses fell by 60 percent to N13 billion and marketing cost dropped by 28 percent year-on-year to N3.2 billion at the end of September 2019. A big improvement in other income and impairment write back on trade and receivables added flavours to the impressive earnings story of the company.
The outcome is an 86 percent advance in operating profit to N35.5 billion at the end of the review period. That is already well above the operating profit of about N25 billion the company reported at the end of 2018.
Another big cost saving came from finance expenses, which dropped by 52.5 percent to N16.6 billion at the end of the third quarter. Finance expenses were as high as N46 billion at the end of 2018. Management has reduced the company’s borrowings from N301.5 billion at the end of 2018 to N65 billion at the end of the third quarter of 2019.
The operating results show a major restructuring of the cost-income relationship that has created room for profit delivery. This enabled a turnaround from a net loss of N10.4 billion in the same period in 2018 to an after tax profit of N20.6 billion at the end of September 2019. A tax credit crowned the favourable cost behaviours that powered the rebuilding of profit in 2019.
Profit from discontinued South African operation net of operating loss amounted to N99.6 billion. This swelled total comprehensive income of the company to N120.2 billion at the end of September 2019. The full-year profit figure is estimated to be in the region of N125 billion for Lafarge Africa for 2019. It ended 2018 operations with a net loss of N8.8 billion.
Earnings per share amounted to N7.46 at the end of the third quarter, rising from a loss per share of N1.20 in the same period in 2018. The full-year earnings per share expectation is N7.79 for Lafarge Africa for 2019.
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