BUA Cement: Analysts Express Concern over Borrowing Rate as Company Battles Free Float Issue
Analysts have expressed concern over BUA Cement Plc borrowing rate as the company battles free float issue.
As result, stocks pickers have been advised to maintain a neutral position on the company’s share despite earnings lift reported in 9-months 2020 financials.
Gross debt excluding related party loan portion of the cement company’s capital structure rose about 57% to ₦33.621 billion from ₦21.424 billion at the beginning of the year.
Investment experts at Chapel Hill Denham expressed concerned about 13% per annum borrowing rate in an environment of unprecedented low interest rates.
In what looks like apparent disappointing financial strategy, analysts stated that more than 90% of the company’s debt are due to First Bank of Nigeria alone.
This is coming just as analysts explained that BUA Cement, the third force in the cement oligarchy, is said to be battling with free float issue on the floor of the Nigerian Stock Exchange.
In its unaudited 9M-2020 results, BUA Cement Plc reported an uptick in revenue and there was lower effective tax rate, both of which combine to give the company’s earnings a strong lift.
Analysis of the 9-month result showed that BUA Cement reported 21% year on year growth in revenue, from ₦129.429 billion to ₦156.550 billion.
The company’s cost of sales printed at ₦84.82 billion from ₦66.306 billion in the comparable period in 2019.
This represents a 27.9% year on year growth, largely driven by increased activities level despite multiple pressures in the economy.
The fact that rate of growth in cost line outpaced revenue growth rate put pressure on margin.
BUA Cement gross margin was obviously pressured as result of this, recorded a downward movement from 48.8% to 45.8% year on year.
The cement company’s operating expenses jerked up ahead of inflation rate by 15.7% from ₦14.443 billion to ₦16.714 billion.
Down the line, earnings before interest and tax margin plunged to 39.8% from 41.6% in the comparable period in 2019.
Lower effective tax rate position however strengthened net margin, printed at 34.2% from 33.4% a year earlier.
The company’s annualised earnings per share (EPS) expanded by 23.8%, a fall out of 21.0% expansion in revenue and 3.9ppts deceleration in effective taxes.
In a note, Chapel Hill Denham highlighted that reported EPS is now 3.4% ahead of 2020 estimate of ₦2.04 on an annualised basis.
This came despite the tad slack witnessed in Q2-20 when EPS was down 8.2% year on year, which analysts said is understandable, given the negative impact of the outbreak of COVID-19 on cement demand.
On a positive note, analysts at Chapel Hill Denham explained that BUA’s reported strong revenue growth as analysts’ view that demand has recovered from Q2-20 downturn, induced by COVID.
Based on its financial statement, the group posted a 39.7% year on year revenue growth in Q3-2020, aided by stronger volume growth and a favourable pricing environment.
“Again, we believe the stronger cement consumption, especially in Nigeria, was private sector-led”, Chapel Hill Denham stated.
For the sake of evidence, analysts explained that Lafarge disclosed that its volume sold grew by 29.0% year on year over the same period, in Nigeria alone.
Read also: BUA Cement bolsters revenue amidst tough operating environment
This cascaded to revenue growth of 31.4% in Q3-20.
“While BUA cement is yet to provide a revenue breakdown, we believe the same pattern played favourably for the group”, analysts said.
Meanwhile, the company’s cash flow position improved in the period.
A deep dive into the balance sheet showed that BUA’s net operating cash flow was stronger in Q3-20, growing more than six-fold year to date to ₦178.97 billion.
The foregoing mostly stemmed from about ₦106.07 billion cash injected due to related parties.
Against that backdrop, the group’s cash balance expanded to ₦76.6 billion, from ₦15.6 billion previously, Chapel Hill Denham explained.
But Chapel Hill Denham expressed concerns over certain developments, explained that exogenous currency shocks weighed on energy costs.
“We note that cost of goods sold growth of 27.9% year on year outpaced revenue growth of 21.0% over 9M-20, leading to a massive 16.2 percentage points erosion in earnings before interest tax depreciation and amortisation (EBITDA) margin”, analysts remarked.
On cost of goods sold, analysts spotted that the pressure emanated from energy cost that grew 23.1% year on year and 47.2% increase in repair & maintenance cost.
“We understand that BUA cement still imports about 70% of its coal”, analysts stated.
Chapel Hill Denham seem not impressed with the scorecard may be yet as the firm retained HOLD rating on BUA with a 12-month target price of ₦34.61.
The Balance Sheet: A Déjà vu?
Explaining its position, Chapel Hill Denham said, “We are not surprised that the group’s gross debt rose by 56.9% year to date to ₦33.6 billion as at 9M-20, with about 90% of the loan still owed to First Bank of Nigeria at 13% per annum”.
“However, what captured our interest was the over five-fold jump in related party transaction liability to ₦107 billion”, analysts added.
Chapel Hill Denham said this is a number that was only ₦19 billion as of H1-2020.
Of the total related party liability, ₦105.7 billion is owed to BUA International Limited, while the balance is owed to Damnaz Cement Company Ltd.
“We believe this is related to the ongoing expansion at the Kalambaina plant. At this point, we are yet to ascertain if these facilities are interest-bearing”, analysts stated.
Chapel Hill Denham said: “If we capture the group’s sizeable related party obligations, BUA becomes the most leveraged among local peers, with debt-to-equity ratio of 0.34x, which compares unfavourably with Dangcem (0.31x) and Lafarge (0.15x)”.
Meanwhile, analysts said stripping out related party liability, the debt-to-equity ratios comes down to 0.08x.
Given the company’s operating and financing position, Chapel Hill Denham said capital raise is a question of when.
“We are concerned about the 13% per annum borrowing rate in an environment of unprecedented low interest rates, but management said plans are in the pipeline to refinance at least the ₦26 billion owed to First Bank of Nigeria”, the firm said.
Thus, analysts said it is likely that BUA approaches the debt capital market in the coming quarters.
Beyond that, Chapel Hill Denham understands that the group had previously planned to fund Kalambaina Line II with a 50% contribution from shareholder’s loan, a project that has an estimated cost of US$450 million.
Assuming an exchange rate of ₦380, this implies a shareholder outlay of ₦85.5 billion.
Overlaying the shareholder’s loan growth of ₦106 billion from 2019 to 9M-20, analysts noted that BUA International Limited has now supplied more than the 50% guidance.
Chapel Hill Denham said the firm is looking forward to also seeking clarity from management on this.
That said, it is unlikely that the shareholder’s loan will be converted to equity, particularly since BUA Cement is still battling with free float issues.
Read Also: BUA Cement Share Price Bursts Through Analysts Forecast for 2020
Thus, raising fresh debt to pay off BUA International Limited, upon completion of the project is not far-fetched, according to Chapel Hill Denham.
BUA Cement: Analysts Express Concern over Borrowing Rate as Company Battles Free Float Issue
