“N138.965bn non-controlling Interest: N131.50bn Lafarge’s right issue proceeds to offset larger debts proportion”


By Dr Omokehinde Joshua

Lafarge Africa plc (“Lafarge” or “the Company”) released its Q3-2017 result for the period ended 30th September stimulate the market with 45.10 jump in revenue to N233.67billion from N161.04billion recorded in Q3-2016. The company was able to minimize its costs; both the cost of sales and other operating expenses except finance cost.

The moderation of cost of sales impact positively on the company’s gross earnings with 275.0% increase. Part of the cost management strategies are the significant drop in selling and marketing expenses by 23.43%, and 77.05% decline in other expenses as major drivers accounted for the exit of the company from its financial doldrum in Q3-2017.

The increased administrative expenses by 80.51% is explained by the rise in revenue and other earnings. Meanwhile, the company posted a loss of N37.40billion in Q3-2016 and has been reversed to a profit of N938.0million in Q3-2017.

However, the company’s exit from loss position is still fragile because of the imbalances in the capital structure as this skewed toward debt than equity.

The aggregate debt status of the company for the period ended 30th September, 2017 stood at N290.20billion which accounted for the 134.06% growth in its net finance costs to N17.309billion.

In addition, Lafarge also borrowed N60.00billion from the FMDQ exchange through Commercial paper, thereby, increasing the company’s debts to N350.20billion. Part of the debts was utilized to acquire Ashaka Cement Plc, United Cement and Atlas Cement company Limited.

The company has also proposed a Rights Issue of N131.65billion. This intends to be utilized to reduce the debts to a manageable level.

Unless the growth or new phase of developments through merger and acquisition is well managed and sustained, Lafarge may be strangulated by the burden of the debt subsequently. One important notice is the reduction in owner’s equity by 89.04% from N350.195billion in Q3-2016 to N38.375billion in Q3-2017; while the N138.965billion represents Non-Controlling Interest.

The implication of the new equity structure is to protect the interest of the non-controlling equity holders whose contributions attracts a cost. It is a way of hedging against any probable poor performance in the future earnings of the company.

The cost is charged to the comprehensive income statement as finance costs. It is interesting to also note that the larger proportion of the debts is owed to the non-controlling interest of the company.

Recently, at the Extra-Ordinary General Meeting of the company, it was resolved that the creditors are allowed to convert their loans to equity of the company which by implications, not all the N131.20billion proceeds from the proposed rights issue will come in cash. The larger proportion will be utilized to offset the debts.

The proposed rights will have effect on the per capita of the company coupled with the shares of the acquired companies. At AshakaCem Extra-Ordinary General Meeting held this week, it was resolved that minority shareholders will receive 202 units of Ashakacem for 57 Lafarge shares.

Before the merger, AshakaCem share outstanding stood at 2,239,453,125 units. This will be reduced to 631, 924,891 units of Lafarge post-merger. The post-merger, post-rights will increase the share outstanding of Lafarge to 9,173,480,000 without the consideration of shares from United Cement company, and Atlas Company which may possibly push the total share outstanding to 10.0billion units.

In view of the above scorecard of Lafarge, Tiddo has forecast N10.0billion as the 2017 year ending profit after tax of the company which translates into N1.82 EPS and N36.42 intrinsic value or undervalued by 29.96%. On the basis of the above analysis, Tiddo Securities Research has placed a SELL recommendation on Lafarge share until the completion of the acquisition and rights issue processes.


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