August 13, 2020/InvestmentOne Report

·         Turnover: down 12.37% q/q, up 1.21% y/y.

·         Gross margin performance: up 167bps q/q, down 256bps y/y.

·         OPEX/Sales ratio: up 89bps q/q, 47bps y/y.

·         PBT Margin: up 261bps q/q, 82bps y/y. 

BUA Cement published its Q2 2020 results displaying a flattish performance in its topline. Although the cement producer’s gross margin declined by 256bps y/y and its OPEX/sales ratio inched up slightly by 47bps, a 53.00% y/y decline in net finance cost was enough to shield bottom line performance as PBT margin improved by 82bps y/y to 39.91%. 

Weathering the Storm 

BUA cements’ Q2 numbers came in quite stably as top line performance remained somewhat flat, inching up by 1.21% y/y. A 6.35% y/y rise in the firm’s COGS saw gross margin come in lower by 256bps to 47.05%. The rise in COGS during the quarter was on the back of a 13.25% and 10.20% y/y rise in energy cost (owing to the devaluation of the NGN against the USD during the quarter) and repairs & maintenance cost respectively. 

Moving on, OPEX/Sales was largely flat, inching up marginally by 47bps y/y to 11.64% in Q2 2020. While selling and distribution cost only inched up marginally by 0.39% to N3.02billion, administrative expense was up 12.32% y/y to N2.48billion.  

Lower Net Finance cost Boosts Bottom line  

Despite the shrink in gross margin and uptick in OPEX/Sales, PBT margin came in at 39.91%, rising by 82bps – thanks to a decline in net finance cost. While finance income rose by 162.01% y/y to N82billion, finance cost declined by 49.89% y/y to N872million owing to lower borrowing cost as affirmed by the management. We posit that the increase in the cement manufacturer’s finance income may not be unconnected with the c.151% ytd increase in cash and short term deposits  

Decent Half-year Performance

The cement producers’ half-year numbers came in solid at top line despite COVID-19 pandemic. So far this year, top line has inched up by 12.69%; this resulted from a combination of relatively higher average cement price (up c.4% y/y) and stronger volume performance (H1 2020: 2.46mmt vs H1 2019: 2.28mmt) as the cement producer continues to explore new markets following the merger of its Sokoto and Edo cement plants.  

Nonetheless, BUA cement recorded a 19.64% y/y increase in COGS to N54.52billion, which depressed GPM by 313bps to reach 46.16%. We observed a slight uptick in its OPEX/sales ratio to 11.01% (up 22bps y/y). Furthermore, PBT margin inched downwards by 101bps y/y to 36.68%, despite the 33.54% y/y decline in net finance cost.  

Outlook

Going into the third quarter of the year, we expect the company’s topline performance to remain somewhat stable. While there continues to be easing in economy lockdown across Africa, which should support cement demand and construction activities, we pinpoint that Q3 is usually a slow quarter for cement manufacturers owing to heavy rainfall. 

In addition, the prospects of volume demand from the public sector may be weak as government revenue generation for the rest of the year comes under pressure. We believe the downward review of government revenue may have a negative impact on its capital budget implementation.  

We spotlight that, of the three major players in the cement industry, BUA cement has a relatively higher energy cost. Nonetheless, management have announced that in a bid to reduce this cost, an agreement has been reached for the supply of gas to its Kalambaina factory. We posit that this should bode well for the cement producer given that gas is one of the cheapest energy source, relative to LPFO, which has been in use in its Sokoto factory.