LAFARGE AFRICA (WAPCO): Did You Know?

Dear Africa Interested Individuals:

This article is not scheduled.  My current output is approximately one every quarter as this is a hobby done pro bono.  This was achieved for Q1 2020 with my article sent out on Monday.  I was reviewing WAPCO formally and the more I uncovered, the more I felt it was necessary to put together a quick note.  When I am done, you may never have a quizzical look on your face again as to why a good number of Nigerian companies have price - to - earnings ratios below five (5) and investors barely flinch.    

1.  WAPCO has approximately tripled its outstanding shares in less than two (2) years: 5 .5 billion to 16.1 billion outstanding shares.  

2. WAPCO sought and was approved for 2 rights issues in less than two years.  Both rights issues were concluded within fourteen (14) months of each other raising a total of N220 Billion ($610m).  

3.  One board member remains on the board (the only one left) after more than fourteen (14) years as a member of WAPCO's board of directors.  Every other board member on WAPCO's board as of fourteen years ago, has left voluntarily or involuntarily.  This person is none other than the current Chairman of WAPCO's board: Mobolaji Balogun.  Corporate governance is failing where it is needed most in Nigeria.  

4.  Chapel Hill Denham where Mobolaji Balogun is the Managing Director and co-owner continues to profit from these rights issues as the Lead Issuing House on both rights issues.  

5.  The rights issue that commenced in November 2017 was issued at a price of N42.50 per share; the rights issue that commenced a year later was issued at a price of N12.00 per share.  

6.  Shareholders were cajoled into participating in the Q4 2017 rights issue based on a half-year 2017 pre-tax income profit figure of 18.16B (stated in the rights circular).  How were shareholders rewarded?  The actual fiscal year 2017 pre-tax income figure six months later became a loss before tax of N34 Billion!  Let me take you down memory lane to a report I wrote 8.5 years ago:  

"We seriously frown at companies that try to mislead the public about the actual state

of their financial affairs. It highlights the tendency to make a bad situation look good

for public relations purposes.  Lafarge WAPCO’s unaudited H1 FY 2009 net profit as

released to the Nigerian Stock Exchange on July 31, 2009 was N5.23B; when the H1

FY 2010 net profit was released on July 30th, 2010, H1 FY 2009 net profit was

restated as N3.42B. Additionally, the company is notorious for overstating its

unaudited nine months net income relative to the audited full year result. This was

clearly evident in FY 2009 and FY 2010."

7.  Disgruntled shareholders (rightfully so) were temporarily appeased with a N1.50 dividend per share from pioneer profit amounting to N13 Billion.  This figure is just 10% of the rights issue proceeds raised five months earlier.  

8.  Continuing from 7 above, WAPCO was not done with its shareholders yet; the stock price tanked more than 70% in 2018 and at the end of 2018, another rights issue commenced to raise N89 Billion.  This new amount is approximately seven times (7X) the amount paid in dividend seven months earlier.  

9.  After turning a H1 2017 profit into a FY 2017 loss, raising N220 Billion and tripling outstanding shares in under fourteen months, stock price declined in excess of 70%, shareholders were rewarded with a loss before tax of N19.5 Billion for fiscal year 2018 and no dividend payment.  Is it not interesting how after raising money from shareholders twice in a year span, no dividend payment was issued for FY 2018?  After the loss for FY 2017, a dividend was still issued from reserves in my opinion to groom shareholders to be generous again seven months later.      

10.  How are the mighty fallen?  WAPCO embarked on a rights issue in the first half of 2005 at N8.00 per share.  About fourteen years later, WAPCO embarked on another rights issue at N12.00 per share.  The stock market (over fourteen years we can say rationality should have come to the fore) is clearly telling investors that WAPCO has not moved forward and management is culpable.  

11.  Total debt outstanding for WAPCO as at December 31, 2016 was N104.5B as stated by management in its 2017 rights circular; total debt outstanding as at December 31, 2018, was N266.2B.   The company had received the first rights issue proceeds of N131B at this time; still, total debt outstanding rose  by N162B (155% increase) in two years.  Total debt outstanding as at September 30, 2019 is N64.6B after selling the South Africa subsidiary and receiving N89B in proceeds from the second rights issue.  

12.  Revenue for FY 2019 is set to be approximately 8X that of FY 2005; despite this, pre-tax income margin for fiscal year 2005 and 2019 is set to approximately equate at 12%.  A much bigger manufacturing capacity , has not made WAPCO more efficient.  For FY 2006, pre-tax income margin was 31% and 19% for FY 2010.  Revenue for FY 2010 (N43.8B) is less than the revenue generated for the three months ended September 2019 (N45.2B).   Economies of scale is clearly a misnomer here. 

13.  The CFO of WAPCO was removed during the second half of 2019; management had to come out to publicly deny any probe had been instituted against it by the Securities and Exchange Commission.

14.  IN FY 2010, fixed assets were N100.7B and revenue was N43.7B; capital expenditure was N28.9B.  Eight years later for FY 2018, fixed assets were N394.5B and revenue was N308.4B; capital expenditure was N21.8B.  Despite the significant ramp up in size, capital expenditure has remained high and is expected to increase by another 25% (extrapolation) for FY 2019 which will take it to within 10% of the capital expenditure figure for FY 2010 when fixed assets were 75% less approximately.  

15.  Administrative expenses (actual, not collective) have declined by approximately 60% from September 2018 to September 2019 without any explanation.  This is the loosest expense item on the income statement in my opinion and I have encountered multiple companies using this to boost net income artificially over the years.  One of recent memory is Forte Oil that was sold a year ago.  Operating income for FY 2018 was 8% and was 19% in FY 2010 which was a bad year for WAPCO relative to years prior.  

WAPCO has mismanaged the debt it has borrowed over the years.  It is unfortunate that the "NEW DAWN" embarked upon after the financial debacle of FY 2004 has now become the "OLD DUSK."  Debt at certain thresholds is an asset; debt beyond certain thresholds is an albatross especially when it is mismanaged.       

I will leave you with this quote from a WAPCO report I wrote for a client 8.5 years ago:  

Overall, Lafarge WAPCO is returning to the debt-burdened years prior to 2006.

The company does not have enough funds and we do not expect it to generate

enough funds to pay off its existing debt and maintain its day-to-day operations

without issuance of additional debt. The company has taken on a project that is

clearly beyond it given the company’s state of affairs. The effect of this

burdensome but welcome (necessary in the opinion of management) project on

the company’s financials has been masked through a variety of omissions and

commissions over the years.

On that day, the price of WAPCO was N43.20 and today it is N9.50.  Growing up, there was a popular commercial by a Nigerian bank that ends with" Big, Strong, Reliable.  Lafarge Africa (WAPCO) is big, not strong and history says is an unreliable investment with unreliable earnings releases.  

A rapper titled a song "more money, more problems" about twenty-three years ago.  The more money WAPCO has been given over the years (debt & equity), the more problems that have continually propped up.   

                 TELL OTHERS TO TELL OTHERS; the FINANCIAL TRUTH is here