On 29th August 2018, Lafarge Zambia Plc. Published its half year performance with an impressive 18% increase in sales revenue compared to the previous years’ half year results. Their SENS announcement attributed the record K498 million revenue to strong market growth in 2018.
Their statement identifies the operating environment for Lafarge Zambia as being fairly stable given the challenging market environment that has faced tight liquidity. However, they do admit that they have been a “beneficiary” of Government being one of their major off takers. With programs such as Link 8000 and other various infrastructure projects that have been pursued in the interest of national development, Lafarge appears to be one of the cement suppliers of choice.
While the Company has continued to develop products and services to supply all major infrastructure projects in Zambia, it has also been accelerating the roll out of the Binastore Franchise network which aims to provide the homebuilders with a one stop building materials store. By bringing their products closer to consumers, their strategy of economies of scope (the variety of cement options) makes the company a formidable construction partner. Their current Binastore footprint currently stands at 41 stores nationwide.
However, their industry is not without challenges. Increase in production costs particularly energy costs (diesel and coal) negatively impacted their profit. So far, fuel has seen a double increase in 2018 alone, with the second increment coming in Q3 2018 signalling continued stress of cost of doing business when the company reports full year results for 2018.
On competitive forces, the statement does not make mention of the oligopoly that Lafarge has found itself in. This is indicative of the management team believing there are on the ascent as regards to market dominance. With Cement prices experiencing price inflation following their jump from the mid K50s to currently hovering above K70, cost reflectivity’s return to the industry has made it all the more attractive. So attractive is their industry that Sinoma Mpande entered their market (with the construction of a USD 500 million plant in chongwe) with a strategy of economies of scope and scale that is analogous to Lafarge’s. They too offer a plethora of cement options. Financial Insight believes that the Lafarge management team are way ahead because of their supply chain dominance through Binastore. Conversely, astute management will want to keep an eye on the retail strategy that Sinoma will bring to the fight as this could introduce another threat to their competitive advantage in as many years (they are only just recovering from Dangote’s entrance into the market).
Their financial performance has seen the company’s sales volume increase by 12% with profit before tax at K25 million compared to a loss of K17 million at the same time in the previous financial year. Cash generation came in stronger at K14 million compared to K6 million in 2017. Their Chief Financial Officer continues to pursue a stable capital structure at present has no long term debt.
A closer look at their condensed unaudited financials reveal positive net exchange gains of K5.8 million compare to a prior loss position. Effects of the currency rout in Q2 no doubt. In addition, the CFO’s invested cash also boasts a 29.8% increase over the same period. This is basically the difference between the net interest received from storing cash and interest paid.
In terms of outlook for the near future, the Lafarge management team are placing a bet on good relationships with Government as the continued pursuit of infrastructure development will see the continued growth of their industry. Furthermore, they signal the use of alternative energy that is more environmentally friendly and carbon neutral. However, the worded statement does not provide details of where they see themselves deploy green energy hence this should be a question at the end of year AGM as this move will require capital investment. For the sake of dividends, answering this question could mean the different between the company pay a dividend or not.