Earnings: BUA Cement Records Good Start in Challenging Environment
BUA Cement Plc starts the financial year 2021 with an improved balance sheet, strong core earnings amidst a challenging economic environment as energy costs match inflationary pressure.
Despite the impacts of pandemic-induced economic stress on operation, the company records an impressive outing in the first quarter of the financial year 2021.
The strong earnings score was supported by increased government infrastructure spending as the third force in the cement oligarch family reported a 13% year-on-year earnings per share increase.
The company’s earnings boost stemmed from price-led revenue growth, according to equity analysts amidst a general average increase in the price level in Nigeria.
In its report, Chapel Hill Denham said BUA Cement’s earnings per share EPS is now ahead of its financial year 2021 estimate by about 36%.
However, the firm expressed the view that the company’s stock’s relatively rich valuation still portends a sizeable negative risk-reward potential which prompted analysts to retain a low rating on the stock while awaiting the first substantial correction.
According to the cement company’s financials, BUA Cement delivered strong revenue growth of 13.4% year on year over Q1-2021, a performance that analysts said was mostly supported by higher prices based on attribution analysis.
For the sake of clarity, Chapel Hill Denham said the management’s higher pricing tactics continued into the new financial year, with the average realised price rising by 9.6% year on year when compared to the corresponding period of last year.
It said the price increase reported is not surprising, since management has committed, during the last engagement that its favours profitability ahead of volume, especially to neuter the exogenous impact of currency shocks on gas prices.
Elsewhere, analysts spotted the group achieved a capacity utilisation rate of 68.7% in Q1-2021 from 66.4% previously, thereby “midwifing” a sales volume growth of 3.5% year on year.
“Annualised, we noted that BUA sales volume is tracking below our financial year 2021 forecast by as much as 10.1%”, analysts added.
Unlike WAPCO, analysts said they like that BUA Cement achieved another margin accretion in Q1-2021 by 3.2 percentage points, the second consecutive quarterly margin accretion.
It was however noted that BUA Cement cost of goods sold expanded by 6.9% year on year, well below revenue growth of 13.4%.
“While we acknowledge that the combination of the pressured domestic inflationary environment, together with currency depreciation, took a toll on the company’s energy cost, management adopted a higher pricing strategy to mask the impact on gross margin”, Chapel Hill Denham explained.
For clarity, analysts said reported energy cost per tonne growth of 8.2% year-on-year is ahead of volume growth, a development that should have dented margin.
Earnings: BUA Cement Records Good Start in Challenging Environment
However, the average realised price grew faster, setting the stage for a 3.2 percentage point increase in gross margin.
“It is imperative to note that energy cost constitutes about 38% of BUA cost structure”, Chapel Hill Denham revealed.
Despite the preceding, analysts said Dangote Cement (DAGCEM) remains the industry cost leader, with BUA’s energy cost (N8,666) still well ahead of DANGCEM’s (N4,888) on a per tonne basis.
Citing BUA Cement’s management, analysts said the short-term strategy for BUA is to reduce the proportion of expensive imported coal to about 30%, operate its own coal mines, as with AshakaCem, and Transport the coal using the company-owned transport system.
It was noted that these could help drive production cost per tonne lower by about 30%.
Elsewhere, equity analysts added that the company sustained its strong working capital management as net cash from operations jumped 22.1% year on year.
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Furthermore, BUA Cement’s net capital expenditure to sales ratio sloped down to 19.8%, from the unprecedented 236% in Q1-2020, a development that cascaded to a 0.7% adjusted free cash flow yield, from -4.2% previously.
Analysts concerns
In its equity report, Chapel Hill Denham said as with Q4-2020, effective taxes expanded by about 8.0 percentage points, albeit not enough to dent the impressive performance.
In the period, BUA Cement reported a tax charge of N2.41 billion from N0.34 billion in the prior year.
Nonetheless, EPS increased 13.0% year on year as related margin shrunk by only a basis point in the period.
Still, analysts said they highlight that the reported EPS is now ahead of Chapel Hill Denham’s 2021 estimate by 36.2% on annualised basis.
Valuation
Analysts set a 12-month target price on the ticker at N34.61 after noting that BUA completes the largest corporate bond in Nigeria, which effectively raised the working capital position.
Chapel Hill Denham had predicted BUA would likely approach the debt capital market, adding that its view then was hinged on the concern around the ambiguously related party loan, which makes the company’s capital structure difficult to audit and the 13% borrowing rate in an environment of unprecedented low-interest rates.
“True to our prognosis, the company’s management hit the debt market and successfully completed its N115 billion or US$291 billion Series I corporate bond issue, being a part of its NGN200 billion bond scheme”.
Analysts stated this is the largest ever corporate bond issuance in the Nigerian Debt Capital Markets. The issue is a seven-year issuance priced at 7.5%, with the subscription level reaching NGN138 billion.
“As we had called, the company used the proceeds to partly refinance its historically vague related party loan. For evidence, the related party loan is now down to N30.4 billion, from N106 billion as of 9M-2020”, Chapel Hill Denham added.
The firm stated further that excluding the related party loan, BUA cement’s borrowing totaled N192 billion, split across short (N25 billion) and long (N115 billion) terms.
BUA to overtake Lafarge as the second-largest cement producer in Nigeria, and now aiming for Dangote Cement, according to analysts report.
Kalambiana II plant – 3MT – is now expected to be launched in the second half of 2021, a move that will effectively raise the company’s installed capacity to 11.0MT/annum, just a tad ahead of Lafarge Africa’s 10.8MT/annum.
Beyond that, BUA cement Plc announced that it has signed a contract for the building of additional three production lines of 3MMT/annum each to be located in Adamawa, Edo, and Sokoto states.
The investment firm detailed that the contract is said to have been signed between BUA Cement Plc. and Sinoma CBMI of China. Upon completion, BUA Cement’s installed capacity will come to 20MT, well behind the market leader but closer than previously.
“For us, in an already oversupplied market, we find such investment unjustified”, Chapel Hill Denham said.
Earnings: BUA Cement Records Good Start in Challenging Environment
