Lafarge Africa Gets More Proficient at Generating Returns as ROCE Improves

Lafarge Africa Plc, a producer of the building materials in Africa’s most populous nation is a company with a great business model and plenty of profitable reinvestment opportunities as return on capital employed has improved.

Lafarge Africa’s return on capital employed (ROCE) increased to 15 percent in the first nine months of 2023, from 12.49 percent as at September 2o22, according to Moneycentral calculations.

The term return on capital employed (ROCE) refers to a financial ratio that can be used to assess a company’s profitability and capital efficiency. In other words, this ratio can help to understand how well a company is generating profits from its capital as it is put to use.

Further analysis shows Lafarge Africa appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up.

It is important to note that the cement maker has a current liabilities to total assets of 29.14 percent, which is quite low, and indicates the company is not dependent on suppliers and other forms of short-term creditors.

In all, the balance sheet remains healthy and liquid with a current ratio of 1.3x, the strongest in the sector and well above industry average of 1.1x. On cash flows, net operating cash flow improved by 88.5 percent year on year (yoy) to N93.4 billion in nine months (9M-23) while capital expenditure increased by 96.6 percent yoy to N22.78 billion in 9M-23.

“While Dangote Cement and BUA Cement have been actively increasing their installed capacity and capitalising on the tax advantages granted by the Pioneer Status Incentive, Lafarge has prioritised operational efficiency,” said analysts at Chapel Hill Denham Limited.

Analysts at Chapel Hill Denham have a BUY rating on Lafarge with a 12-month target price (TP) of N39.54.

“Lafarge is currently trading at an EBITDA multiple of 2.8x, which is at a significant discount to our coverage average of 10.4x.” said the analysts.

It is worth noting that Lafarge is the most attractive cement stock that offers a high dividend yield (DY) at a low price to earnings multiples compared to peer rivals who are overvalued.

For instance, Lafarge Africa has a forward price to earnings (P/E) ratio of 9.89 times, and that compares to Dangote Cement (12.64), and BUA Cement (34.17).

The company has a dividend yield of 10.14 percent, and that compares with Dangote Cement (6.17 percent), and BUA Cement, (2.80 percent).