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Lafarge Africa Plc – Capital Restructuring on Track, Rights Price at ₦42.50

Lafarge to raise ₦131.65 billion via Rights issue
EPS dilution imminent in near-term amidst
Post-rights target price estimated at ₦62.06
Rights details out; price set at ₦42.50

Following the conclusion of the Extra-Ordinary General Meeting, the Board of Lafarge Africa PLC announced the details of its planned Rights issue. Lafarge Africa plans to raise ₦131.65 billion by issuing 5 new shares for every 9 shares held by investors at a Rights price of ₦42.50, a 25% discount to current price of ₦56.89.

Assuming a completely successful issue, the company’s shares outstanding would increase by 3.1 billion to 8.6 billion units of ordinary shares. As previously approved at the AGM, shareholders are allowed to use any outstanding obligations due to them from Lafarge Africa to offset payment for the Rights taken up.

EPS dilution remains a risk, but transaction provides some benefits

Whilst EPS dilution is imminent in the near term amidst the capital raise, we reiterate a couple of upsides from this move, particularly stemming from the expected liquidation of the outstanding $286.7 million quasi-equity instrument (previously shareholder loan) on Lafarge Africa’s balance sheet. Firstly, the payment of the dollar denominated quasi-equity instrument will make Lafarge Africa less susceptible to the impact of currency volatility.

Also, with earnings just recovering from 2016 lows, the 6% annual dividend payable to holders of the quasi-equity instrument (FY’17E: ₦6 billion) would no longer be required – freeing up cash for possible reinvestment. Meanwhile, we should highlight that excluding quasi-equity instrument, the company still has dollar-denominated obligations of $308.4 million. We understand that the cement giant hedged $88.4 million at NGN275/USD with one-year non-deliverable forwards.

According to management, the balance of $220 million was also hedged at the NAFEX window at an undisclosed rate. Assuming full subscription to the Rights, we expect a net cash of c.₦24 billion which could be used to pay down part of these dollar liabilities.

Post-rights, the quasi equity instrument would no longer be treated as part of minority interest. The consequent increase in our equity valuation would taper the impact of the expected 56% increase in number of outstanding shares (assuming full subscription to the issue) on our valuation per share (target price). Upon completion of the issue, we expect FY’17 EPS to fall from our current estimate of ₦6.50 to ₦4.20. Modelling a full subscription, our target price would potentially fall to ₦62.06 from our current ₦79.26. Pending the conclusion of the Rights, we maintain our current target price.

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