Lafarge a Marris Type Player in 2016
Construction, Lafarge

When Dangote cement entered the construction value chain, we knew that incumbents were now faced with a formidable near rival who was (and still is) a Baumol player. A Baumol player is a company that possesses a management team that is keen on maximizing market share and revenue growth. It was clear when we conducted the 2015 review on our paternal website that there was zero-sum in the revenue distribution of players selling cement.Incumbent Lafarge was left with no choice back then to either adapt or die.With the price war that ensued, a Marris type player that is Larfarge made the management decision to product diversify in order to protect revenues. The signals were clear, as we had earlier indicated with their introduction of new types of cement indicated that they would purse research and development (R&D)and bring to market products that meet the diverse needs of its customers. We decode they have an expansionist strategy in the construction value chain.

A player such as Lafarge has capacity. To put things into perspective, take for example Amigo crisps. Their parent company introduces new products every few months (different flavors and different package sizes). What this signals is that the PPE (property, plant and equipment) was implemented with economies of scope in mind. This makes it easy for an astute management team to make the decisions on product diversification very easy. Rivals must beware of players such as these as they are not interested in prices wars. They are conscious of the investment they have made in PPE and protection of the shareholder value.

In their 2016 AR, their newly appointed CEO Vincent Bouckaert signaled lowering production costs, introduction of innovative products, securing key construction projects and developing a new retail network which is indicative of Marris type player tendencies that are not keen value destruction strategies such as entering price wars. This is the hallmark of a cost leadership strategy. We applaud them and so should their shareholders.  However, the CEO indicates frustration at failure to achieve a 100% safety record in 2016. Work in progress nonetheless.

Although their Non-Executive Chairman, Muna Hantuba, echoed macro forces ranging from economic factors such as fluctuating exchange rate and high inflation, we sense the price war with their near rival has reached Nash equilibrium (watch Russell Crowe’s A Beautiful Mind). The Nash equilibrium is the point at which companies signal to each other that “enough is enough, we will not move our price to suit you”. The price war is over. Conversely, Muna indicated that prolonged low liquidity on the money market coupled with high interest rates stifled expenditure ergo the manufacturing industry was hard hit contributing to the erosion of revenue growth. In addition, uncertainty in the Congo (Lafarge’s biggest export destination) was also hard hit.

On performance, local sales eroded by over 50% with exports doubling fueled by increased sales to Lafarge Zimbabwe which accounted for 11%of total sales for 2016. Although the marketing and administration cost (SGA) were lower in the year, selling and distribution expenses were higher indicative of inflationary pressure. In addition, there was lower income from investments. Conversely, the exchange rate gains of 2015 were not enjoyed in 2016 as the movement of the dollar led to a loss despite a stable Kwacha for most part of the year. Their capital structure saw finance costs reduced to a third indicative of astute financial management. The company continues to carry no debt save for the provision for environmental liabilities which is indicative of a management team concerned with safety.

Going forward, shareholders will be keen on keeping an eye on point number 2 and 3 of their strategy (2.Serve the building needs of individuals and retail customers and 3. Be the preferred partner for building and infrastructure). With the technological scale the company has, it will not be a surprise if new products are introduced in 2017. Furthermore, Kumanga outlets possess the hallmarks of Zambeef’s successful micro outlets. This is a clear message to the competition that they will protect their position as market leader.

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