Nigeria’s post-COVID-19 economy was fast to bounce out of recession but slow in re-establishing sustainable supply chain networks at pre-pandemic prices. War between Russia and Ukraine, disruption to commodity supply chains and rising energy prices translated to higher domestic production costs, a fall in real effective consumer demand, and consumer inflation anxiety. Global growth forecasts for 2022 tumbled from 2.9% to 1.7%. Somehow Nigeria’s cement industry dodged the downturn bullet and companies like Lafarge Africa saw revenues spiral upwards, but only as finance charges sprung to the roof. 

Why has Lafarge done well at a time of global economic slowdown? A few factors appear at play. The first is that cement demand is relatively inelastic, meaning that a change in price results in a smaller percentage change in demand. For example, a ten per cent increase in price could result in a one per cent fall in cement demand. In Nigeria cement is the material of choice used in residential and non-residential construction. A rise in cement price up to a point would improve corporate cement revenues and this has been the case with the country’s three major cement suppliers, Dangote, Lafarge and BUA.  

However, cement companies were buffeted by foreign exchange (FX) challenges in 2022 leading to a slower bottom-line earnings growth of +5% to N53.65bn while top-line earnings grew by 27% to N372.24bn supported by the strong demand. Corporate liquidity remained strong in FY 2022 mostly because of the improvement in net cash generated from operations which grew by +38.69% to N100.71bn despite the decline in trade and other receivables which typically constrains the cash flow of a company. 

The increase in Lafarge’s working capital also improved its liquidity, implying that the company had enough pre-tax income to settle short-term debt and even finance capital expansion (CAPEX). 

Key Highlights

• Revenue increased Year-on-Year (Y-o-Y) by +27.30% from N293.03bn in FY2021 to N373.24bn in FY2022.
• PBT increased by +10.47% from N61.84bn in FY2021 to N68.31bn in FY2022.
• Cost of Sales rose by +17.62% to N177.02bn in FY2022 from N150.51 in FY2021.
• Gross profit surged by +37.62% to N196.22bn in FY2022 from N142.58 in FY2021.
• Net finance cost worsened by -308.62% Y-o-Y as finance cost surged to N15.98bn in FY2022 from N5.28bn in FY2021.
• Total Assets grew by +14.02% Y-o-Y to N600.71bn in FY2022 from N526.84bn recorded in FY2021.
• Total Equity increased by +9.92% in N416.10bn in FY2022 from N378.56bn in FY2021.
• Total Debt grew by +57.14% Y-o-Y to N36.59bn in FY2022 from N23.29bn in FY2021.
• Working capital Turnover declined by -74.80% from N53.09bn in FY2021 to N13.38bn in FY2022.
• Earnings per share increased marginally Y-o-Y by +5.05% to N3.33k in FY2022. 
• Lafarge Cement Dividend yield improved to N0.008 in FY 2022 from N0.04 in FY 2021

Share Price Movement 

Lafarge’s stock price started the year on a strong note before stumbling in March. The share price regained its bullish momentum in May to hit a 52-week high of N31.75 and subsequently maintained a mixed descent till November as price clocked N20.1. Thereafter, the bullish trend re-emerged in December to close the year at N24.00k. Year-to-date, the cement share price only had a marginal gain of 0.2%. Meanwhile, share price movement for 2023 increased YTD by +4.58% to N25.10k on March 17, 2023 (See Chart 1 below). 

Chart 1:

Profitability Ratios

Revenue

Strong demand for Lafarge’s product line helped sustain FY2021’s impressive growth rates as total revenue increased by +27.30% in FY2022 to N373.24bn. Cement revenue contributed 97% of the company’s total earnings and it grew +26.95% to N361.96bn in FY2022. Also, Lafarge’s other product line reported sustained growth as readymix and other products surged by +41.71% to N11.28bn in FY2022 (See Chart 2 below).

Chart 2:

Profit Before Tax (PBT)

PBT rose marginally by +10.47% to N68.31bn in FY2022 despite the +44.14% rise in operating expenses to N112.59bn. The rise was because of the +202.92% hike in finance costs to N15.98bn in FY2022 from N5.28bn in FY2021. The bounce in finance costs was traced to a net foreign exchange loss worth N13.13bn. Similarly, finance income also fell to N1.53bn in FY2022 (See Chart 3 below). 

Chart 3:

Profit Margin

Lafarge’s profit margin fell to 14% in FY2022 implying that there was a dip in profit efficiency as rising prices ate deep into gross revenue. Higher sales costs, operating expenses, and net finance costs took a toll on earnings in FY2022. Operating costs grew by +44.14% in FY2022 due largely to a significant rise in selling and distribution expenses and an increase in impairment loss on trade receivables (See Chart 4 below). 

Chart 4:

Liquidity Ratios

Current ratio

Lafarge’s current ratio grew from 1.04 in FY2021 to 1.17 in FY2022 on account of the +43.72% increase in current assets as short-term liabilities rose by +28.48% in FY2022. Growth in its short-term assets to N196.28bn during the session was primarily on account of a +136.53% increase in cash and cash equivalents to N118.40bn. Thus, improved working capital from N5.52bn in FY2021 to N27.90bn in FY2022. This suggests that the cement producer has enough financial resources to meet its short-term obligations.

Also, total debt grew y-o-y by +57.14% to N36.59bn in FY2022 due to the +68.53% rise in short-term debt. This usually supplies a firm with a source of cash that it can utilize to finance expansion plans or other strategic goals. (See Chart 5 below). 

Chart 5:

Acid test ratio

The company’s quick ratio (a tougher measure of liquidity health) rose in FY 2022 to 0.85 from 0.70 in FY 2021. In FY2022, short-term assets (excluding inventories) and current liabilities both grew by +56% and +28%, respectively. The implication is that available assets might be insufficient to cover short-term obligations although there is an improvement compared to previous years (See Chart 6 below). 

Chart 6:

On Asset Quality: Asset Turnover Ratio

Lafarge’s asset turnover ratio sustained a 5-year rise growing to 0.62 in FY2022 on account of smarter asset use. Although, the growth rate increased at a decreasing rate compared to the +22% reported in FY2021. Nonetheless, strong growth (+27%) in earnings across product lines against a modest increase (+14%) in total assets spurred the rise to 0.62 (See Chart 7 below). 

Chart 7:

Leverage ratio

The company ended a downward tilt in FY2022 as the debt-to-equity ratio rose to 0.09 showing the heavy reliance on equity financing. Aggregate debt jumped by +57.14% and total equity increased slightly by +9.92%, respectively in FY2022. Despite the rise in total debt to N36.59bn in FY2022, the group remains low leveraged which slightly favours profitability as interest expense continues to decelerate, dropping by -79.63% to N766.86m in FY2022 (See Chart 8 below). 

Chart 8:

Dividend Pay-out Ratio

The computed pay-out ratio in FY2022 stood at 28.10%, up +6.26% from the 26.44% recorded in FY2021. This inadvertently implies a decrease in the rate of retention for growth expansion. Nonetheless, Lafarge was able to generate higher profit which is why it could still retain more earnings than in the previous session. Retained earnings grew by +19.81% to N227.003bn in FY2022. (See Chart 9 below). 

Chart 9:

Cement Industry: Competing Above the Inflation Cliff

Sailing a boat in a storm was the tale of businesses in 2022 with heavy winds rocking profitability and liquidity near a wreck. The big trio of the domestic cement industry saw operating expenses spike, with BUA cement recording the highest increase at +86.84%, followed by Dangote Cement at +46.24% while Lafarge cement had the least at +44.16%, which put pressure on profit. Dangote cement experienced a slight injury in profit before tax, dropping by -2.67% while BUA cement and Lafarge Cement still had a double-digit growth of +16.80% and +10.47% respectively. In actual figures, Dangote cement remained the Giant of the trio with profit after tax valued at N524bn, BUA cement followed at N120.15bn and N53.65bn for Lafarge. 

The offset of rising costs to customers favoured revenue, with Bua cement leading at 40.28% growth, WAPCO cement at 27.35% and Dangote cement growing only by 16.96%. Total assets for the trio rose to N4.09trn, Dangote cement contributed 64%, Bua cement 21% and Lafarge cement had 15% and generated an asset turnover of 15%, 12%, and 9% respectively. 

Lafarge cement is the most liquid among the major players with a working capital of N27.89bn relative to N1.78bn of Dangote cement. Bua cement had a negative working capital of N59.79bn, driven by its large short-term borrowing of N80.69bn and trade payables of N78.12bn compared to lesser trade receivables of N17.57m (see illustration below).

Illustration 1                                      

End Note

Lafarge cement could see net revenue peep above the clouds of a challenging economic environment, improving its financial position and generating double-digit profits.  However, the cement producer has not had a significant capital appreciation and it has the lowest dividend payment among the big cement bears at N2 per share. Despite the bullish momentum in the Nigerian stock market in 2022, a +19.98% gain in all share indexes, Lafarge cement saw only a 0.2% gain in share price movement.

Analysts, however, expect the group performance to slightly improve in 2023, given that the removal of subsidy should lessen energy supply disruption, but this would generate higher input costs as PMS price rises. The group is expected to tighten its cost-minimization strategy to grow profit.