BUA Cement Overstretched Valuation Eclipses Growth Potential

FMDQ BUA Cement Plc N100Bn Bond Issuance Now Open

Recently, BUA Cement Plc filed its audited FY-2020 results. Despite substantial cost pressures, the cement maker saw a 19.1% and 19.4% y/y increase in PBT and PAT, respectively, to N78.9bn and N72.3bn.

This was primarily driven by volume growth (+13.3% y/ y), which supported topline (+19.3% y/y), and lower Net financing expenses (-28.3% y/y) over the period. We review the FY earnings and adjust our expectations for FY-2021 below.

Revenue: Resilient Output Amid Harsh Operating Environment

In the period under review, BUACEMENT’s revenue surged (+19.3% y/ y) to N209.4bn in FY-2020, on the back of a 13.3% y/y growth in sales volumes to 5.1Mt. and a 5.3% increase in Revenue per tonne to N41,116/tonne. Sales within Nigeria made up 99.3% of Revenue (vs 97.1% in FY-2019) as exports fell by 71.8% amid the pandemic’s effect on regional trade.

The strong performance was aided by strategies to increase market presence and distribution capacities. Furthermore, a rebound in construction activity following the lifting of pandemic-related lockdowns in late Q2-2020 and a comparatively quiet rainy season in Q3-2020, bolstered volume growth, as observed with industry peers.

Notably, the cement maker maintained the highest level of capacity utilization (compared to peers) at 63.8% . However, we highlight that two (2) major customers accounted for 23.9% of Revenue from cement sales (vs 26.5% in 2019), with each contributing more than 10% of total revenue.

Profitability: Margins Give-In To Inflationary And FX Pressures

BUACEMENT saw faster growth in Cost of Sales (+22.4% y/y to N114.0bn), owing to higher energy costs (+18.6% y/y to N43.1bn), which remains a persistent concern, and Raw materials cost (+81.2% y/y to N21.3bn) amid inflationary pressures and increased production

The rise in energy costs was mostly reflective of the impact of Naira devaluation on gas supply contracts, an industry-wide issue . This pressured Gross Margin 138bps lower y/y to 45.6%. Similarly, Operating expenses grew 21.2% y/y to N13.5bn as EBIT margin shrank by 153bps

However, Net finance cost declined by 42.7% y/y to N3.0bn due to an increase in Finance income (+447.5% y/y to N859.6mn), and a decrease in Finance cost (-28.3% y/y to N3.8bn) despite a significant increase in debt. Recall that the group registered a N200.0bn Bond program in 2020. Notably, the bulk of the first tranche (N115.0bn) of the bond issuance was used to refinance existing debt at a much lower funding cost, leveraging the low yield environment in 2020.

Summarily, PBT and PAT increased by 19.1% and 19.4% y/y, respectively, to N78.9bn and N72.3bn. Thus, BUACEMENT’s Net profit margin for the year settled at 34.5%, (vs DANGCEM’s 36.1% and WAPCO’s 15.7%), Return on equity at 19.2% (vs DANGCEM’s 31.0% and WAPCO’s 14.9%) and Return on assets at 9.4% (vs DANGCEM’s 13.7% and WAPCO’s 6.1%).

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Net Debt Climbs To N269.3bn, 71.6% Of Equity

As noted above, BUACEMENT took to the debt markets in the year under review, taking advantage of the lower interest rate climate in a bid to finance its working capital needs, expansion plans, and refinance related-party debt. The Company issued a N115.0bn local bond in Dec-2020, with a 7-year tenor and a coupon rate of 7.5%. Net financial debt for the full year totaled N269.3bn, representing 71.6% of equity (vs 5.9% in FY-2019). Consequently, the Leverage Ratio climbed to 2.0x.

Our Dupont Analysis of BUACEMENT’s Return on Equity (ROE) indicates that the increased leverage made for a higher ROE (19.2% vs 16.7% in FY-2019) amid a marginal 1bps expansion in Net Margin (34.5%) and lower Asset Turnover (0.27x vs 0.37x in FY-2019). Relatedly, proceeds from the bond issuance reflected in BUACEMENT’s cash position (+694.4% to N123.8bn).

Outlook And Valuation

Overstretched valuation undermines growth potential For 2021E, we expect BUACEMENT to pick up from its strong FY-2020 debut, with volumes driving revenue, supported later in the year by its 3Mt plant in Sokoto, which is expected to be operational this year.

On costs, we struggle to see improvement in cost efficiency for the full year, given persistent inflation and BUACEMENT’s long-term gas contracts, which are highly susceptible to FX risk. The cement maker is also likely to maintain its marketing efforts to drive volumes, pressuring OPEX. Furthermore, we anticipate additional debt financing, beginning with the second tranche of its N200.0bn bond program, for the funding of its additional 9Mt capacity tabled for completion in 2023, and higher tax charges, due to pioneer status expiry on its OBU lines.

Accordingly, we expect higher financing costs and tax charges. Consequently, we expect a 15.5% increase in Revenue to N241.9bn, driven by a 10.1% volume growth to 5.6Mt. and a slight moderation in EBITDA margin to 46.0%. In all, we forecast a 8.9% y/y and 6.9% y/y growth in PBT and PAT, respectively to N85.9bn and N77.3bn. Additionally, we expect a BUA to maintain its dividend payout strategy and forecast a N2.2/s dividend for the fiscal year.

We acknowledge the cement maker’s growth potential by virtue of its expansion strategy, volume growth, headroom for price increases and healthy margins. However, we consider the ticker highly overvalued at current price. BUACEMENT trades at an EV/ EBITDA ratio of 26.1x (vs DANGCEM 8.5x and WAPCO’s 4.4x) and PE ratio of 34.9x, a massive premium over the domestic peer average (12.1x ex. BUACEMENT). Following our forecast updates and adjustments for the higher rate environment, we set a target price of N42.2/s and reiterate a SELL recommendation due to the 41.9% downside on the stock