Like this:
Like Loading...
" />
Published On: Mon, Oct 2nd, 2017

Reasons Why Lafarge Should Outperform Market

Cement maker, Lafarge which trades with the name WAPCO seems set to outperform market in the near to middle term even though it had a not so inspiring half year run on a decent revenue base. Analysts point to the company’s planned rights issue, merger with sister companies United Cement Company (UniCem) and Atlas Cement Company; improving economic conditions as pointers for the second largest cement producer to outperform the market.
Lafarge is looking to up its equity base by sourcing for N131.65 billion via a rights issue where one share will go for N42.50. Under the issue, five shares will be issued for every Nine held by shareholders. Given that the current price of the stock as of Friday September 29 is N50.41, the new issues would be at a premium of N7.9. The move should generate activities around the stock in the near term.
Apart from the rights issue, Lafarge is seeking to compete on scale given that the biggest cement maker is already a behemoth and perhaps it can flex some muscles in that regard by swallowing the two subsidiary companies. This is to enable the enlarged company take advantage of benefits arising from various synergies as well as benefit from efficiencies arising from streamlining the operations of UniCem and Atlas, says a statement from Lafarge. It will also help in expanding the new company’s customer base.
But company share price has not jumped since the announcement to merge and to issue new shares, worse the company stock continues to outperform the market in the near term. While the stock delivered 18 percent return in the last six months, the All Share Index (ASI) out did it by returning 40 percent. Over the last twelve months, the stock basically returned a negative 3 percent while the ASI returned 28 percent. Underperforming the ASI at a time of recession shouldn’t be surprising as the stock is a cyclical one that should rebound on reversal of the fortunes of the wider economy, said to be out of the recession with a marginal 0.55 percent growth.
Analysts share the same sentiment about the stock, saying it would outperform the market with a median estimate of N72.00. The Financial Times poll says “that as of Sep 22, 2017, the consensus forecast amongst 10 polled investment analysts covering Lafarge Africa PLC advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on Nov 11, 2016. The previous consensus forecast advised investors to hold their position in Lafarge Africa PLC.
“The 11 analysts offering 12 month price targets for Lafarge Africa PLC have a median target of N72.00, with a high estimate of 90.82 and a low estimate of 50.55. The median estimate represents a 42.83% increase from the last price of N50.41”.
The current price of N72 is better than analysts March forecast of N60, confirming that improving economy is good for the stock. Even government has expressed desire to spend big on infrastructure going forward. This should improve the company’s half year run, which was huge on revenues but weak on bottom line.
The company’s half year results indicated that there was room for growth Revenues were up 44.2 percent to N154.8 billion from N107.4 billion in reflection of improvement in demand and growth in the construction business. Despite a rise in cost of goods sold (COGS), gross profit jumped a whopping 193.7 percent to N44.4 billion from N15.1 billion, doubling gross margin to 28.68 percent from 14.1 percent.

This article first appeared in Independent Newspaper

%d bloggers like this: