Omodele Adigun
The N162 billion reduction in the Lafarge Africa’s debt will deliver an improvement in its cash flow and net income , says its Chairman, Mr Mobolaji Balogun.
According to him, this will make the company consider additional investments in cement production in Nigeria.
At its recent Annual General Meeting last month in Lagos, he explained how the company was able to achieve this feat.
Excerpts:
The company
This year marks the 60th anniversary of the Company since its incorporation in 1959. Looking back, I must pay tribute and commend the vision of the leadership of the then old Western Region of Nigeria to set up the company in partnership with Associated Portland Cement, UK which later transformed to Blue Circle Industries Plc, UK. From a modest annual cement production capacity of 0.2mt commissioned in 1960 in Ewekoro, the company through organic growth and acquisitions, now have 10.5mt in total annual production capacity and has become a market leader in the domestic cement market having the widest geographical footprint in Nigeria with operations in the South West (Sagamu, Ewekoro), North East (Ashaka) and the South East (Mfamosing, Calabar). Given this footprint, the company continues to make substantial contributions to the economic growth of Nigeria by impacting the ecosystem positively and generating opportunities for trade and employment without losing focus on sustainability and the environment.
Debt restructuring
When the N131.6 billion Rights Issue was concluded in March 2018, the Board recognized that some further steps were necessary to address outstanding debts of the company so as to reduce financing cost and to provide additional working capital to limit the use of expensive overdrafts and other short term debts to finance operations. The first step was the restructuring of the foreign currency intercompany loans of $315.2million owed to Caricement B.V, a subsidiary of the LafargeHolcim Group (LH). Pursuant to the resolution passed by shareholders at an Extra Ordinary General Meeting (EGM)on Tuesday September 25, 2018, $22.2million of the outstanding loans were retained as short tenor while $293million was restructured into longer tenor of 7.5 years with a moratorium of 2 years on payment of interests and split into smaller tranches to enable the company repay as at when its cash flow permits. Thus the terms of the restructured loans provided flexibility in terms of Lafarge Africa’s financing arrangements, particularly regarding the two- year moratorium granted on the long term loans. Secondly, the Board proposed at the EGM of and shareholders approved the launch of a second Rights Issue of up to N90 billion. Following this approval, a Rights Issue of N89.2 billion was concluded in January 2019, on the basis six new ordinary shares at N12.00 per share for every seven ordinary shares held by existing shareholders. At closure, the offer was fully subscribed and the net proceeds of N87.9 billion was utilised as contained in the Rights Circular to repay $22.2million (N8 billion 9.1 per cent )short term intercompany debt owed to Caricement B.V. The entire N49.7 billion (56.5 per cent ) owed to local banks on short term loans were fully repaid and the balance of N30.2 billion (34.4 per cent) retained for working capital to limit further use of overdrafts. I would like to thank all of our shareholders who expressed their faith in the future of the company and participated in the offer, albeit, in a difficult period for the Nigerian equities market.
South Africa operations
Lafarge South Africa Holdings Pty Limited (LSAH) is a 100 per cent subsidiary of the company. The Company’s ownership represents an indirect average holding of 72.4 per cent in the underlying principal operating companies in South Africa, including Lafarge Industries South Africa, Lafarge Mining South Africa and Ash Resources. The remaining shareholding (27.60 per cnt) is held under the broad-based Black Economic Empowerment Act, 2003 (Act No.53 of 2003). LSAH’s operations have been subjected to a challenging market in South Africa, with shrinking demand in an aggressively competitive market. In the last four years, low growth indicators, growing budget deficits, declining infrastructure spend and reduced consumer discretionary income continue to constrain industry volumes; and characterise the downward trend in South Africa’s building materials sector. As part of its audit exercise with respect to the 2018 accounts, KPMG Professional Services, as auditors of the company, informed the management that, based upon its assessment of the 2018 performance of LSAH, the valuation of LSAH in the accounts of the Company would have to be impaired to a tune of N70billion.
The Board, sought further information and acting within its responsibilities, delayed the approval of the2018 accounts, while seeking the optimal resolution of this significant issue which had a potential major impact shareholders’ value in the Company. During deliberations by the Board on this matter, various options an immediate exit from South Africa. The Board then arrived at the conclusion that the disposal of LSAH was the best option for limiting any further downside, especially for minority investors. In addition and having considered all the options, the Board buy-back by LH was the most appropriate means of deriving the best value from the proposed sale in the interest of all stakeholders and most especially the minority shareholders. Understanding the implication of the potential impairment on the company, LH acted timely by agreeing to enter into negotiations with the company with respect to the potential sale.
To ensure that the negotiation was at arm’s length, the Board adopted Nigerian Stock Exchange (NSE) rule that guides transactions between Related Party and Interested Persons. Following discussions and various negotiations on the proposed sale, LH agreed to purchase LSAH for the consideration being a sell-off of all outstanding amounts due by the company to Caricement under the Inter-Group Loan Agreements at the Closing Date which is July 31, 2019 $316,289,061) being the sum total of the principal sum of US$293,000,000.00 plus $23,289,061 as at July 31, 2019.
The proposed sale is expected to enhance the shareholder value in Lafarge Africa, which is of utmost importance to the Board. shareholder loan of US$293,000,000.00 as at July 31, 2019 represents the only existing foreign currency loan in the books of the company will be completely paid off. This full repayment of the shareholder loan will protect and preserve Lafarge Africa’s net Income and cash flows considering the resulting decrease in debt service and the company’s debt will be reduced by N115 billion and an additional c.N47 billion through the deconsolidation of LSAH. The N162 billion reduction in the company’s debt will deliver an improvement in cash flow and net income, and will enable Lafarge Africa to consider additional investments in cement production capacity and to improve its market share in Nigeria. The sale is also expected to boost the company’s profitability, through positive cash flow generation.
The Board believes that, under the circumstances and given the likelihood that LSAH’s continued operational and financial performance would have required Lafarge Africa to take a very significant impairment on its the consideration of US$316,289,061 investment, represents a desirable outcome, creating certainty for Lafarge Africa and simplifying the business. The impairment of the investment in LSAH that is recognised in the 2018 audited Financial statements is N3.2 billion which represents the difference between the carrying value of the investment (N118.1 billion) and the net salep roceeds translated from US$ to Naira based on the prevailing exchange rate as at 31 December 2018
Nigerian operations
Despite the challenging economic and regulatory operating environment, the company has continued to make significant progress on a number of fronts, thereby ensuring solid operating performance. EBITDA margins in the Nigerian operations stood at 27 per cent at the close of the year resulting from a stable pricing environment, stabilising industrial operations, the use of alternative energy and the execution of our commercial and logistics performance improvement plan.Overall domestic demand estimated at c.21mt for 2018 represents 11.5 per cent on the 18,5mt estimated for 2017. Following the collapse in global commodities market in 2016 which led to a significant fall in crude oil price, the construction sector suffered a contraction that led to 18.5% drop in demand for cement by the end of 2017. The growth in demand seen in 2018 was therefore from a low base for 2017. Since Nigeria’s Gross Domestic Product (GDP) pulled out of negative territory in 2017 there has been a gradual increase in demand for cement.The trend seen so far for 2019 suggests growth close to that of 2018
Results
The stabilization of cement selling price plus 9 per cent growth in cement dispatched in Nigeria helped to improve turnover in 2018 by approximately three per cent to N308.4 billion. The improvements in cost and execution of the new route to market had a positive impact on operating profit which increased by over 200 per cent from N7.9 billion in 2017 to N24.8 billion in 2018. However, this was turned into a loss before tax of N19.5 billion as a result of N45 9 billion financing cost incurred for the year Deferred tax asset estimated for the year was N12 1 billion on account of deductible timing differences, pioneered activities in Mfamosing and unutilised tax losses reduced the loss after tax for the year to N8.8 billion (2017 N34 6 billion).
It is expected that the reduction in the debt of the Company following the conclusion of the N89.2 billion Rights Issue and the approval of the proposed sale of LSAH will result into a substantial reduction in financing. cost as from 2019.
Dividend
On the basis of the results for the year, the Board is unable to propose a dividend. If the sale of LSAH as proposed by the Board to shareholders is approved, the only debt that.will remain on the books of the Company will be the second tranche of the N60 billion corporate bond, that is N33 6 billion due for redemption in June 2021 and N11.3billion in respect of CBN Power Intervention Funds through Bank of Industry, compared with total debt of N206 bilion at the close of 2018, this significant reduction ndebt hoids prospects for dividend distribution in future.
