May 22, 2020/InvestmentOne Report

• Turnover: up 47.48% y/y to N175.52billion.
• Gross margin performance: down to 46.97% from 50.37% in FY 2018.
• OPEX/Sales ratio : down to 12.74% from 15.63% in FY 2018.
• PBT Margin: rose to 37.74% from 32.91% in FY 2018.
  

The recently released result of BUA Cement Plc. reflected the increased production capacity of the cement producer through the merger of OBU Cement Company with Cement Company of Northern Nigeria as well as the commencement of operations at Obu Cement Plant (Line 2); these bolstered the company’s topline performance. Furthermore, lower OPEX/sales ratio offset the rise in net finance cost as PBT margin improved by 483bps.

Becoming a Worthy Competitor

Following its merger with CCNN and commissioning of new production line in Edo State, BUA Cement (formerly OBU Cement Plc) now boasts a total production capacity of 8mmta. This brings it in close reach with Lafarge Africa (10.5mmta) in terms of production capacity however, Dangcem, with a capacity of 29.30mmta in Nigeria, remains the largest producer in the country. BUA cement’s management have affirmed the completion of Kalambaina Line 3 (3mmta capacity) by H1 2021 as one of its strategic priorities.  

Looking at the FY 2019 numbers, we observed a 47.48% y/y rise in revenue to N175.52billion on the back of 53.06% volume growth (2.94mmt in FY 2018 vs N4.50mmt in FY 2019). However, there was a 3.67% decline in its cement prices, which combined with increased cost of sales (up 57.59% y/y) to limit gross profit margin performance (down 340bps to 46.97%). The rise in cost of sales may be as a result of increased capacity which was driven by a 75.6% jump in energy cost to N36.29billion (energy cost per ton rose by c.15% to N8,065.22). 

Low OPEX/Sales ratio Supports Bottom-line

Moving on to bottom-line performance, the cement producer recorded a 289bps drop in OPEX/Sales ratio to 12.74% mainly as a result of jump in volume performance. However, operating expenses rose by 20.20% y/y to N22.36billion on the back of selling and distribution expenses which were up 94.78%. This could be as a result of expansion in sales volume and entry to new markets. The decline in OPEX/sales ratio was enough to offset the 41.27% rise in net finance cost to N5.19billion as PBT margin improved by 483bps to 37.74% at the end of the year.

Can Three Play the Game?

We are pleased with the developments in the Nigeria cement industry and we maintain that long-term potentials remain on the back of huge infrastructural and housing deficit as well as low cement consumption per capita compared to the global average. However, our short-term outlook remains weak on the back of COVID-19 pandemic, which may slow construction activities in the near term. Nonetheless, we expect a gradual pick in cement demand as the spread of the virus wanes. 

Going forward, we expect prices to be stable with the possibility of a downward tilt on the back of increased competition among the top players. We highlight that with a gross profit margin of 46.97%, BUA cement is only second to Dangote cement in terms of margin performance. The company also posed a commendable OPEX/sales margin 12.74%, outperforming Dangcem (24.09%) and closely behind Lafarge Africa (10.64%). We opine that the relative newness of its factories at Kalambaina, Sokoto and Obu Cement, Edo state may contribute positively to the firms cost efficiencies and perhaps, capacity utilisation. We are optimistic about the firm’s ability to drive down further cost and improve revenue synergies as the companies merged have been with the same leadership of the parent company. Lastly, given the locations of its cements plants, we believe the firm is well positioned to tap into virgin markets especially in the Northern part of the country.

Source: Company financials, Investment One Financial Services Research

Source: Company financials, Investment One Financial Services Research