GCR Ratings has affirmed Lafarge Africa Plc. national scale long-term and short-term Issuer ratings of AA- and A1+ respectively, with the outlook accorded as stable. The ratings reflect Lafarge Africa Plc.’s strong credit risk profile, improving earnings trajectory and relatively strong cash flows since the operational rationalization in 2019.
According to GCR, Lafarge Africa is the second-largest cement producer in Nigeria, with a combined production capacity of 10.5 million metric tonnes per annum from four plants spread across the country.
Its competitive position is further supported by demonstrated technical support from its parent company, Holcim, a global leader in cement production with 2,500 plants across 90 countries.
GCR noted that while the company is geographically concentrated in Nigeria, the corporate restructuring and deleveraging between 2017 and 2019 has allowed it to focus on the more profitable Nigeria business, infrastructural enhancements at the existing plants and expansion opportunities.
Nevertheless, the assessment of its competitive position is constrained by the market dominance of the largest cement producer (with a 61.3% market share), as well as the lagging earnings margin reported by Lafarge due to its relatively old production infrastructure.
Higher selling prices and rising demand, spurred by robust construction activity, have driven strong earnings growth since 2019, with the EBITDA margin rising from 28% in 2018 to 36% at 1H FY21 (FY20: 31%).
However, the rating agency recognised that the company’s margin enhancement has been further supported by a cheaper fuel mix and lower power costs.
COVID-19 has not had a meaningful impact on earnings, although inflationary pressure and foreign currency shortages are expected to continue to weigh adversely on production costs and operating expenses.
Nevertheless, Lafarge’s strong financial profile will serve to moderate the impact of external shocks and GCR expects strong revenue and earnings progression to continue, on the back of a wider national footprint and solid margin.
Following the capital injection and operational rationalization during 2019, Lafarge’s credit risk profile significantly strengthened, GCR stated. It noted that the new capital was utilized to reduce external debt to N64 billion in the financial year 2019, from a review period high of N301.5 billion in 2018.
Gross debt further reduced to N19.8 billion in the first half of (H1) financial year 2021, as the Series 2 Bonds were redeemed, and other loans partly settled. Moreover, with N57.8 billion in cash, Lafarge Africa registered a net ungeared position in the first half of 2021.
GCR expects the net ungeared position to be maintained in the short to medium term as capital expenditure is expected to be funded from operational cash flows, while the key focus will be on optimizing existing production capacity. Interest coverage registered at 8.4x in 2020 and GCR expects the level to trend comfortably above 10x – compare to 15x delivered in the first half of 2021- as long as the net cash position is maintained.
Similarly, operating cash flow coverage of debt spiked to over 500% in the first half from 114% in 2020, supported by the low debt level and is expected to remain strong over the rating horizon.
Lafarge Africa’s uses against sources liquidity coverage are calculated to remain above 1.6x over the next 18-month period. The liquidity assessment is underpinned by the current high cash holdings and an expectation that cash flows will remain strong.
Against this debt maturities are low, and little capital expenditure spend is projected. While most remaining debt is short-term, GCR also positively notes the unutilized committed funding lines from six domestic financial institutions and facility headroom.
The company’s stable outlook reflects GCR’s expectation that LAP will continue to report strong earnings and strong cash flows, whilst maintaining a conservative funding profile. This will mitigate the increased risks within the Nigerian economy.