BUA Cement Stock Earns Don’t Buy, Don’t Sell Rating

BUA Cement Stock Earns Don’t Buy, Don’t Sell Rating

BUA Cement Plc. has earned hold rating from Meristem Securities Limited as equity analysts advised investors with long position not to sell the company’s stock now, and investors without position should maintain distance.

Equity analyst at Meristem Securities appetite for BUA Cement spiraled to neutral as the investment firm calculates the ticker target price at ₦71.57, which was below market price of ₦72.70 at reference date April 14, meaning the stock trades at premium already.

A s a result of closely knitted relationship in market and price target, analysts’ moods swung to neutral realising that the stock only offer downside potential of about 2%.

BUA Cement Plc recorded significant performance improvement in the financial year 2020. The third force among the cement oligarchs reported 13.31% growth in sales volume from 4,501 Kilotons in 2019 to 5,100 Kilotons.

Meristem Securities said in its noted that this was due to a resilient Q2:2020 performance, the relatively short rainy season, improved economic conditions in the second half of the year and an unrelenting drive to penetrate new markets.

Equity research analysts believe that these tailwinds culminated into a topline growth of 19.33% from ₦175.52 billion in 2019 to ₦209.44 billion.

“In assessing the performance, we cannot deny the impact of the export approval enjoyed by the company during the year.

“We also recognize the company’s commitment to expanding its Nigerian footprint through its capacity expansion initiatives cutting across geopolitical zones”, analysts stated.

While additional capacity is expected to suffer some under-utilization in the near term, Meristem Securities said prospects of the Nigerian cement market as seen in the adoption of cement for road construction, and development of other critical infrastructure gives reason for optimism.

For 2021, the investment firm expects revenue to grow by 17.63% from ₦209.47 billion in 2020 to ₦246.41 billion.

“We anchor our expectations on improvements in macroeconomic conditions and higher export volumes -due to reopened borders and the Africa Continental Free Trade Agreement (AfCFTA).

Looking into the future, analysts think better export volume will sustain the company’s revenue growth performance.

Margins Take Slight Hit

Meristem Securities spotted some dots in the company audited financial statement, noting that profitability metrics were only slightly affected by cost pressures arising from a combination of elevated energy costs(+18.63%) and raw material costs(+81.24%).

Based on figures in the company’s financial statement, energy costs expanded 18.63% in addition to 81.24% increase in material costs.

So, BUA cement gross margin for the year stood at 45.59%, falling below 46.97% in recorded in 2019 and operating margin slowed down to 39.16% from 40.70% in 2019.

These key indicators means that BUA Cement became less profitable before consideration for other overheads and tax obligations for the year.

Meristem Securities said to combat the perennial problem of high energy cost, the firm noted the company’s efforts towards fuel mix optimization, thus expect this to yield some gains subsequently.

Of a particular interest is the reconfiguration of Kalambaina plant to run on gas and coal as against low pour fuel oil that was used by the cement company previously.

Nonetheless, analysts noted that exchange rate stability remains a key factor if costs would be kept in check.

Regardless, the company reported a 19.36% increase in profit after tax to ₦72.34 billion from ₦60.61 billion in the comparable year in 2019.

The uptick was supported by 28.27% reduction in finance cost and tax benefits enjoyed under the pioneer status incentive, leaving effective tax rate at 8.48% from 8.49% in 2019.

“While we expect an uptick in finance costs for 2021 due to new debt issuance during the year, tax shields granted on Obu line 1 and Kalambaina line 2 should preserve margins”, Meristem said.

₦100bn Bond Issuance

As expected, the company’s consistent cash flow generation and decent leverage position with interest coverage ratio of 20.02x and debt to equity of 0.08x in 9M: 2020- earned it a fair credit rating.

Agusto credit rating for BUA Cement is A while the company earns AA- from DataPro.

Recalled that the company’s successful 7-year fixed rate senior unsecured ₦100 billion bond issuance was oversubscribed by 1.38x to the tune of ₦137.82 billion.

Read Also: Nigerian Cement Oligarchs Record N1.2 Trillion Domestic Sales

 This brings total debt to ₦269.33 billion from ₦21.47 billion in 2019 representing a net debt to earnings before interest tax depreciation and amortisation (EBITDA) of 1.50x compare with Dangote Cement at 0.77x and WAPCO 0.05x.

“The proceeds from the bond is intended to support working capital requirements and fund expansion initiatives”.

While the issuance raised the company’s debt-to-equity ratio from 0.08x to 0.47x as against 0.54x for Dangote Cement and 0.15x for WAPCO, the company’s liquidity position also improved.

Its current ratio printed at 1.15x from 0.64x in 2019 and working capital settled at N30.53 billion from deficit position of N34.30 billion in 2019.

Moreover, analysts at Meristem Securities interpreted that the company’s ability to meet its debt obligation is not in question with an interest coverage ratio of 21.38x.

Meristem Securities project BUA Cement EBITDA to print at ₦125.88 billion in 2021. Having adjusted for a net debt of ₦183.35 billion, analysts arrived at a target price of ₦71.57.

This translate to a downside potential of -1.55% when compared to its opening price of ₦72.70 on April 14, 2021, hence analysts advised investors to stay neutral on BUA Cement stock.

BUA Cement Stock Earns Don’t Buy, Don’t Sell Rating