Lafarge Africa Plc took a stance to shed its dead weight and it has paid off well. Just a year ago, it cut off its South African subsidiary, Lafarge South Africa Holdings (LSAH), which had been making billions of naira worth of losses for years. Lafarge then restated its accounts by adjusting figures from the discontinued operations and set off on a positive growth trajectory. It also experienced a series of changes in leadership over the same period.
The company’s recent performance indicators
Following these moves, the cement maker’s Q1 2020 financial result showed significant improvement. In Q1, total debt reduced, short term loans and long term loans also dropped by 79% and 75% respectively in comparison with the first quarter of last year.
Also in Q1 2020, the company had noted that the COVID-19 pandemic “will adversely affect the company’s results in Q2, 2020” owing to the loss in demand for cement from restrained construction activities. True to its word, the company reported a revenue of N56.8 billion for Q2 2020, representing a 5.1% drop in revenue year-on-year. Profit after tax for the quarter, however, was N15.3 billion, up 160.27% from N5.9 billion in Q2 2019. This revealed the effect of the loss from discontinued operations and may not be a good representation of Lafarge Africa’s level of growth. Yet, the company’s many cost-cutting measures played a huge role in this.
The strategy that is cost-cutting and its limitations
Having successfully witnessed the effect of cutting down its ailing subsidiary, the company seems to have embraced new cost-cutting methods as its turnaround strategy.
Cost of sales dropped by 13.79% from N38 billion in Q2 2019 to 32.8 billion in Q2 2020
Selling and marketing expenses declined by 11.62% from N804 million to N711 million
Administrative expenses declined by 46.40% from N6,040,244 to N3,237,568
Finance costs also declined by a whopping 68.61% from N6,208,802 to N1,949,238
Note that these reductions in cost are part of what prompted the more than proportionate increase in profit for the quarter despite a drop in revenue. There were also reductions in CAPEX.
Lafarge Africa’s commendable efforts
In a press release explaining its latest earnings reports, Lafarge Africa noted that its core strategy is a “Health, Cost and Cash cutback initiative,” which involves cutting back on CAPEX, fixed costs, and focusing on the health and safety of staff and its customers. Consequently, its cash position was bolstered. The company had N39.7 billion in cash at the end of the quarter compared to N20.8 billion at the end of March. It also has little debt with just 0.16 debt-to-equity ratio, meaning it has less pressure on profits. The impact of its strategies has been immense as its operating profit margins for the quarter was much better than that of market-leader,
Dangote Cement. For a company that had been declaring losses just a few years ago, its efforts are commendable. Given the challenges in demand for cement owing to the pandemic, this couldn’t have come at a better time.
There are some concerns…
However, there are two key things to consider. The first is that it is one thing to cut costs, and it is another thing to cut costs efficiently. Efficient cost-cutting takes place where not-so-relevant costs are taken off in order to focus on the areas that yield greater value. Cutting costs across board on the other hand, will ultimately do more harm than good.
The second thing to consider is that as far as the company’s bottom-line is concerned, cutting cost is only sustainable in the short to medium term. For a company like Lafarge which still has tough competitors like Dangote Cement and Bua Cement working tirelessly to expand their shares of the market, growth strategies simply must be deployed to stay in the game. Currently, Lafarge does not control market prices in the North, Middle belt, or South West and these are three major markets already being proliferated by its competitors.
The company has a low return on average equity (ROAE). Lafarge’s ROAE, was just 6.5% last year and it is a major challenge impacting on its valuation. At its current pace, it is highly unlikely that it will achieve higher double digit from profitability growth and even it does, sustaining it will be a challenge. For context, it will need to deliver profits of over N70 billion to achieve a return on equity of just 20%. Its current share price stands at N12.20, barely midpoint of its 52-week average which is between N8.95 and N17.60. Its earnings per share which is low at 1.43 and its price-to-book of 0.5535 reveal that the company has more than enough room for growth. What it needs right now is to deploy the right combination of strategies to get to its Eldorado, and its investors will certainly be happier for it.