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Lafarge Wapco's profit at its peak since 2008

By The Citizen
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Lafarge Wapco's earnings performance for 2012 puts the company up for the second year after two years of stagnant sales revenue and profit collapse. The company succeeded in rebuilding profit fully last year and for the first time matching and surpassing the peak net profit record of N11.2 billion achieved in 2008.

Net profit of the company saw a strong growth for the second year at 70.4% to N14.7 billion, having grown by 77% in the preceding year. The company's net profit had fallen from the 2008 peak to N5.06 billion in 2009 and further to N4.88 billion in 2010.

The fall in profit was a reflection of inability to grow sales revenue in those years. Sales revenue only inched up by 5.3% to N45.6 billion in 2009 and declined by 3.9% to N43.8 billion in 2010. Also, the improvement in profit performance in the following two years is a factor of strong growth in sales revenue.

The company raised turnover by 40.7% to N87.96 billion in 2012 against an improvement of 42.7% in the preceding year. Revenue growth slowed down in the final quarter and the full year figure is below analysts' estimates based on the third quarter growth rate. It however stepped up profit margin from 15.5% in the third quarter to 16.7% at full year. This enabled it to keep profit growth on target.

In the light of fluctuating earnings records, whether the company will stay up in earnings for the third year this year or repeat the pattern of rise and fall will need to be watched. Inability to maintain stable earnings records is considered to some extent to be a fact of the cement industry. In specific company consideration, Lafarge Wapco is further affected by huge balance sheet debts and comparatively low level of income from non-core business.

Despite that profit has risen to a new peak in 2012, the company's previous profit capacity is far from being rebuilt. The ability to convert revenues into profit remains constrained and unable to match the 2008 record. At the end of 2012, the company converted 16.7% of sales revenue into net profit, which is well below the net profit margin of 25.9% achieved in 2008.

If the company had been able to match the 25.9% net profit margin in 2012, it would have posted a net profit figure of N22.78 billion. This means that, using the 2008 profit performance as a benchmark, Lafarge Wapco was short in profit performance by more than N8.0 billion in 2012.

The 2012 performance however shows a step further in rebuilding profit margin. Net profit margin improved further from 13.8% in 2011 to 16.7% in 2012. It had first improved from 11.1% in 2010. Two critical developments to watch on the company's operations in the current year are the ability to sustain the recovery in profit margin and how strong will be sales revenue growth.

The company's high level of indebtedness is no doubt a stumbling block on the way to improving profit margin. Lafarge Wapco carries long-term debts of N32.92 billion in the balance sheet, which is a drop from N48.38 billion in the preceding year. It has an additional N4.38 billion in short-term borrowing.

The effect of the debts on the income statement is quite significant in view of the prevailing high interest rates in the economy. In 2012, the company paid N5.39 billion in interest expenses, a leap of 77.9% from the N3.03 billion finance costs it paid in 2011. That claimed an increased proportion of sales revenue at 6.1% in 2012 compared to 4.8% recorded in 2011.

The company showed reasonable cost management efficiency in respect of other main cost elements in 2012. Cost of sales moderated by growing below the rate of sales revenue growth at 28.7% compared to the 40.7% rise in turnover. This means that the cost of each naira of sales revenue in 2012 declined from 69 kobo in 2011 to 63 kobo in 2012. This enabled the company to raise gross profit margin well ahead of sales revenue at 67.7% in the year.

Selling and marketing expenses declined slightly from N6.30 billion in 2011 to N6.24 billion in 2012 against the increase of 40.7% in sales revenue. This means that the selling and marketing cost over unit of sales of the company declined from 10 kobo to 7 kobo over the review period.

Major developments in the company's balance sheet in 2012 are an increase in inventory, a drop in trade and other receivables and a decline in cash/bank balances. There was also an increase in trade payables but other payables declined during the year.

The effect on cash flow of an increase of 25.4% in inventory to N12.93 billion seems to have been compensated to some extent by a drop of 33.6% in trade and other receivables to N1.98 billion. Cash flow was further improved by a rise of 26.8% in trade payables to N17.33 billion during the year. Other payables however fell by 44.3% to still impact negatively on the cash flow.

The company earned N4.90 per share in 2012, up from N2.88 in 2011. It is paying a cash dividend of N1.20 per share, improving from 75 kobo paid in the preceding year. The dividend yield is low at 1.6%. The company's dividend pay-out ratio is usually low and has further declined from 26% in 2011 to 24.5% in 2012.

Net assets value per share improved from N18.68 in 2011 to N22.77 billion in 2012. The company's stock closed at N76 in the stock market last week and has risen by 29.8% from its January 2013 opening mark.