November 5, 2020/InvestmentOne Report

·          Turnover: up 16.91% q/q, 39.72% y/y.

·          Gross margin performance: down 186bps q/q, 240bps y/y.

·          OPEX/Sales ratio: down 157bps q/q, 169bps y/y.

·          PBT Margin: down 316bps q/q, up 4bps y/y.

BUA Cement published its Q3 2020 results displaying a strong performance in its topline. Although the cement producer’s gross margin declined by 240bps y/y, a fall in OPEX/Sales ratio and net finance cost by 169bps y/y  and 14.55% y/y respectively shielded bottom line performance as PBT margin improved marginally by 4bps y/y to 36.75%.

Still Pressing Forward

BUA cements’ Q3 numbers came in decent as top line rose by 39.72% to N55.29billion. We opine that the improvement in top line was hinged more on volume growth than price increase following slow volume sales in the Q3 2019.

However, gross margin come in lower by 240bps to 45.19% during the quarter on the back of a 23.06% and 7.58% y/y rise in energy cost (owing to the devaluation of the NGN against the USD during the quarter) and repairs & maintenance cost respectively.

Despite the rise in administrative (+7.29% y/y) and Selling & Distribution (+29.94% y/y), the cement producer recorded a decline in its OPEX/Sales ratio, down by 169bps y/y to 10.07%. The resulted from the faster growth in top line.

Lower Net Finance cost and OPEX/Sales Supports Bottom line

Despite the shrink in gross margin, PBT margin came in at 36.75%, rising slightly by 4bps y/y – thanks to a decline in net finance cost and OPEX/sales ratio. While finance income rose by 11.44% y/y to N240million, finance cost was largely flat at N1.36billion. We posit that the increase in the cement manufacturer’s finance income may not be unconnected with the c.391% ytd increase in cash and short-term deposits.

Nine-months Performance

The cement producers’ 9M performance is commendable despite the COVID-19 pandemic. So far this year, top line has increased by 20.95% y/y; this resulted from a slightly higher average cement price and stronger volume performance as the cement producer continues to explore new markets following the merger of its Sokoto and Edo cement plants.

Nonetheless, BUA cement recorded a GPM of 45.82%, down 295bps y/y. This is owing to the devaluation in the country’s currency, which has negatively affected its energy cost. Nonetheless, we observed a slight drop in its OPEX/sales ratio to 10.68% (down 48bps y/y). In the same vein, net finance cost was lower by 22.73% compared to the same period in the previous year; however, PBT margin inched downwards by 78bps y/y to 38.00%.

Outlook

Going into the last quarter of the year, we expect the company’s topline performance to remain stable, as cement demand is likely to be sustained barring any significant weather changes. However, volume demand from the public sector may be weak as government revenue generation for the rest of the year comes under pressure.

We spotlight that, of the three major players in the cement industry, BUA cement has a relatively higher energy cost. Hence, we are concerned about a possible rise in its energy cost on the back of FX uncertainties in the country. 

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. 

Source: Company Financials, Investment One Research

*Estimated from our model

Source: Company Financials, Investment One Research