East and West Africa Cement Companies Report November 2011

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Lafarge WAPCO Reaping ‘first mover’ advantage benefits.... Lafarge WAPCO (WAPCO), commissioned its 2.5mtpa Ewekoro II integrated cement plant in mid-September 2011. The additional capacity brought the total to 4.5mtpa enabling the company to retain its second position behind DCP with a 15% share of installed capacity in Nigeria (including all the planned capacity additions by peers). Additionally, the plant is supported by a 90MW power plant which was commissioned in June 2011 and is expected to ensure production bottlenecks emanating from power outages are eliminated. WAPCO’s story going forward will be defined by how well it defends its turf in the face of stiffer competition as installed capacity races ahead of current consumption levels. We note the completion of its expansion program, especially ahead of the game changing DCP’s 12mtpa capacity addition. The company thus has a ‘first mover’ opportunity to help consolidate its market share. � WAPCO made significant investments into its distribution channel, opening 19 new depots and installing a hi-tech distribution system with the aim of improving efficiency in pushing its higher output volumes. � Additionally, transport logistics, which are a significant cost in Nigeria owing to poor road and rail networks, were boosted by a fleet of new trucks and a new business partnership with Nigeria Railway Corporation. � The company successfully raised NGN 11.8bn at a fixed interest rate of 11.5% under its NGN 50bn bond issuance programme. Management plans to apply the funds to retire its variable rate borrowings on the Ewekoro II expansion projects. We expect this to bring stability to earnings while providing cover to higher costs which are likely given inflationary pressures in Nigeria. � We value WAPCO at NGN 41.51 which largely indicates full valuation and accordingly downgrade our rating from buy to Hold. Millions Ashaka Cement: prive vs volume 200 180 160 140 120 100 80 60 40 20 0 Jan,08 Sep,08 May,09 Jan,10 Sep,10 May,11 Volume- RHS Price (NGN)-RHS 20 45 40 35 30 25 20 15 10 5 0 STRENGTHS WEAKNESSES EQUITY RESEARCH NIGERIA 28 November 2011 CEMENT BLOOMBERG: WAPCO:NL HOLD Current price (NGN) 39.00 Current price (USD ) 0.25 Target price (NGN) 41.51 Upside/Downside 6.4% 12 month High/Low (NGN) 49.29 ; 37.00 Liquidity M arket Cap (NGN m) 117,062.4 M arket Cap (USD m) 752.3 Shares (m) 3,001.6 Free Float (%) 10.0% Share Price Performance 6 months (%) 1.0% Relative change (%)* 21.8% 12 months -4.3% Relative change (%)* 15.7% * Relative to NSE index Financials (NGN m) 31 Dec 2010 2011F 2012F Revenue 43,841.0 EBITDA 10,078.0 Attributable profit 4,881.0 EPS (NGN) 1.6 DPS (NGN) 0.1 NAV/Share (NGN) 16.1 Ratios Membership in the Lafarge group brings Variable rate of interest on loan access to latest cement technologies Marginall improvement in operating Newer plant and stable power supply efficiency post commissioning of plant Capacity to monopolise its market compared to peers due to secluded location OPPORTUNITIES THREATS Possibility of diversifying to coal mining DCP's capacity additions likely to drive Fixed rate dond issue can lower volatility prices lower in earnings Competitors oppening up distribution Low per capita consumption in target deports in WAPCO's turf market pointing to growth opportunities 59,185.4 15,388.2 8,525.6 2.8 0.2 16.8 76,941.0 24,621.1 13,541.6 4.5 0.4 20.9 RoAE 10.6% 17.3% 23.9% RoAA 4.7% 7.1% 10.5% EBIDTA M argin (%) 23.0% 26.0% 32.0% Valuation Ratios PBV (x) 2.4 PER (x) 23.9 EV/EBITDA 11.1 EV/Tonne (USD) 1,441.1 2.3 13.7 7.3 160.9 1.9 8.6 4.7 163.9
Nature of business Lafarge WAPCO is a member of the Lafarge Group, the world’s leading cement, gypsum, aggregates and concrete manufacturer. The company manufactures Elephant Cement, a formidable brand in Nigeria and has two production sites, one in Ewekoro and the other in Sagamu in Ogun State. Its corporate head office is in Lagos. The company’s plant is the only one in Nigeria with a rail link and distribution via the railway countrywide has since commenced with volumes expected to reach 6,000 tonnes per week, which works out to 13% of annual production at full capacity 9 months to September 2011 financials review � Volume growth was impressive. Turnover grew 34.8% on the back of stable cement prices at cUSD 185/tonne pointing to volumes as the major driver of revenue. We note that Ewekoro II only came on line in late September and hence did not play a significant part in the growth in volumes. We therefore expect Q4 to have an even better outturn as the company adds more capacity, efficiency and higher plant availability to a system that already has upward momentum. � Y-o-y PBT fell by 5% to NGN 8.6bn compared to a decline of 27% as at the end of H1 2011, thus implying a huge improvement during the quarter under review. While a once off item of NGN 658m helped, power costs reduced significantly following the installation of the 90MW power plant � Rolling headline EPS works out to NGN 1.70 and translates to a rolling PER of 23.6x which looks demanding. Our FY 2011F EPS of NGN 2.70 works out to a PER (+1) of 14.5x that is at a premium to the peer average of 10.6x. Valuation and recommendation A combination of DCF and relative valuation methods led us to a target price of NGN 41.51 for WAPCO which is 6.4% higher than the current price. The company currently trades almost at par with its price 12 months ago and the price has consolidated round about NGN 40, having traded largely sideways for a year now, with NGN 40 being a key support area. Additionally, we note the completion of the expansion program and enhancements of the distribution channel that add weight to our opinion that there is unlikely to be a significant downside on WAPCO’s share price. On the other hand, EV/tonne of USD 161 is at a discount to the peer average of USD 185, while the EV/EBITDA of 7.3x is largely in line with the peer average of 7.0x. We therefore revise our rating downwards from buy owing to full valuation. Further, we advise holding WAPCO shares because we do not foresee price weakness that would have provided better buying opportunities, while, on the other hand, the completed expansion is expected to underpin growth momentum going forward. Hold 21 Shareholders analysis Foreign shaholders 60.0% Odua Group of Companies 30.0% Nigerian Public 10.0% Total 100.0% 9 Months to Septemebr 2011 financials (NGN bn) 16.0 12.0 8.0 times PER 2011F 4.0 - CCNN Twiga DCP PER 2011F Average 9M 10 9M 11 % ch Turnover 33.1 44.6 34.8% PBT 9.0 8.6 -5.1% PAT 5.7 5.2 -9.1% Shareholders' fund 48.3 53.3 10.4% Total Assets 118.5 147.5 24.5% TTM EPS 1.7 NAV/Share 16.1 17.8 Ratios PBT margins 27.3% 19.2% -29.6% PAT margins 17.2% 11.6% -32.6% RoE 15.7% 12.9% -17.7% RoA 6.4% 4.7% -27.0% TTM PER 23.6 PBV 2.20 WAPCO Source: Company reports, IAS
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East and West Africa Cement Companies Report November 2011

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