September 4, 2023/CSL Research

BUA cement’s +17.2% y/y Revenue growth in H1 2023 was primarily driven by an upward price adjustment amidst stable sales volumes. Bua Cement reported increases in prices in H1 2023 with average cement price rising to N67,192/ton in H1 2023 from N56,454/ton in H1 2022 while sales volumes closed H1 2023 at 3.29 million MT from the 3.34MT recorded in H1 2022, indicating a 1.5% decrease. Net Income increased by 3.7% y/y to N63.62bn in H1 2023 from N61.36bn in H1 2022

We believe price adjustments would be necessary to support profit margins in H2, though we note that management has stated its intention to reduce prices. In our view, a reduction in prices will lead to a decline in Revenue amidst low sales volumes. We estimate a 9% y/y growth in price per tonne for 2023e while projecting a 5% y/y volume growth. Overall, we expect Revenue from the Nigerian operations to increase by 25% y/y to N451.89bn in FY 2023 from the N360.99bn recorded in FY 2022.

We are concerned about the company’s capacity to effectively manage its costs, particularly its selling and distribution costs and we believe this will hamper bottomline performance. We maintain our Sell recommendation on the stock and our price target of N80.50/s. Our price target implies a 16% downside potential from the last closing price of N96.15/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.

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Source: Company, CSL Research

Amidst stable volumes, price adjustments drive revenue growth.

In its recently released H1 2023 results, BUA Cement Plc reported a 17.2% y/y Revenue growth to N221.07bn in H1 2023 from N188.56bn in the prior period (H1 2022). Similarly, on a q/q basis, Revenue was up by 7.9% to N114.71bn in Q2 2023 from N106.35bn in Q1 2023. According to management, the (+17.2% y/y) increase in Revenue was primarily driven by upward price adjustments amidst stable production volumes. In terms of pricing, Bua Cement reported increases in prices in H1 2023 with the average cement price rising to N67,192/ton in H1 2023 from N56,454/ton in H1 2022, We believe that this was necessary to protect profit margins amidst a difficult business environment for the cement players.

Sales volumes closed H1 2023 at 3.29 million MT from 3.34MT in H1 2022, indicating a 1.5% decrease. We note that sales volumes have been low across the industry in H1 2023, mainly due to the impact of the 2023 general elections and the February Naira cash crunch. Also, we note that the constrained purchasing power of private players amidst the challenging macroeconomic environment has contributed significantly to the decline in the demand for the company’s products. We believe price adjustments would be necessary to support profit margins in H2, though we note that management has stated its intention to adjust prices downwards. This, we believe will result in a decline in Revenue given weak sales volumes. We estimate a 9% y/y growth in price per tonne for the year while projecting a 5% y/y volume growth. Overall, we expect Revenue from the Nigerian operations to increase by 25% y/y to N451.89bn in FY 2023 from the N360.99bn recorded in FY 2022.

We note that the company is embarking on an expansion drive with the construction of lines 3 and 5 at the Obu and Sokoto plants in a bid to increase volume capacity. The lines are planned to begin operations in H1 2024, adding another 6 MT to the company’s production capacity, raising the total production capacity to 17 MT from the present 11 MT. However, given the industry wide decline in demand levels, an increase in production capacity may not automatically lead to an increase in volumes sold. We further note that due to consumers’ preference for its competitors products, the company may not be well-positioned to benefit immediately from an increase in demand.

Cost pressures continue to mount.

Cost of Sales (adjusted for depreciation) was up 17.4% y/y to N105.36bn in H1 2023 from N89.73bn in H1 2022. We observed that most of the cost increases came from materials (+38.08% y/y) and energy cost (+9.5% y/y). Cost of sales was primarily driven by increases in raw material costs, depreciation charges, energy costs and repair/maintenance costs. However, given the increase in Revenue growth, Gross profit grew by 17.1% y/y to N115.7bn in H1 2023 while Gross margin contracted by 7bps y/y to 52.3% in H1 2023, impacted by elevated cost pressures.

Operating Expenses (adjusted for depreciation) increased by 46.2% y/y to N16.86bn in H1 2023 from N11.53bn in H1 2022. The increase was driven by both Administrative Expenses adjusted for depreciation (up 10.8% y/y to N5.58bn) and Selling & Distribution Expenses (up 73.9% y/y to N11.27bn). The management noted that the significant rise in distribution costs can be attributed to an increase in fleet size, depreciation charges, and other administrative expenses.

Other Income was also up significantly by 391.5% to N983m. Despite the cost pressures, EBITDA increased by 14.1% to N99.82bn in H1 2023. However, EBITDA margin decreased by 125bps to 45.2% in H1 2023 from 46.4% in H1 2022. Depreciation and Amortisation was up to N12.89bn, while Operating Profit grew by 11.8% y/y to N86.94bn from N77.74bn in H1 2022.

The management noted that the company’s profit was impacted significantly by inflationary pressures, FX unification, and increases in raw materials costs, energy costs, and distribution costs. The management stated that it has taken steps to control its costs, including the transition from Heavy Fuel Oil (HFO) to Liquefied Natural Gas (LNG) in its Sokoto operation, as well as the start of work on the 70MW gas power plant at Obu and Sokoto operations to combat rising energy prices. We are concerned about the company’s capacity to effectively manage its costs, particularly its selling and distribution costs. According to the management, the huge increase in distribution costs was due to rising diesel prices, worsened by the recent unification of FX which increased the cost of diesel importation. They also stated that most of their products are transported by trucks due to a lack of adequate train infrastructure. As a result, they are vulnerable to price changes. We observe that the firm urgently has to shift to either CNG or LNG trucks in order to combat growing energy prices and management noted they have begun to look into it.

BUA Cement recorded an increase in Net Finance Costs by 269.6% y/y to N10.52bn in H1 2023 from N2.84bn in the prior period (H1 2022). The significant increase reflects a 228.77% y/y rise in Interest Expense to N10.59bn in H1 2023, despite a 54.79% increase in Interest Income to N2.22bn in H1 2023. Pre-tax profit was up by 2.8% y/y to N76.42bn in H1 2023. The rise in interest income can be attributed to a 342.4% increase in the company’s long-term borrowings.

We did not see a significant impact of the recent revaluation on BUA’s books because the company reported a high amount of dollar deposits on its balance sheet, and these dollar deposits were revalued at the closing exchange rate which created significant exchange gain. The company’s Tax Expense declined marginally by 1.6% in H1 2023 to 12.81bn from 13.01bn in H1 2022. Consequently, Net Income declined by 3.7% y/y to N63.62bn in H1 2023 from N61.36bn in H1 2022. The company’s earnings per share was up by 3.7% y/y to N1.88/s in H1 2023 from N1.81/s in H1 2022.

We note that the company has received the first tranche of the IFC loan that was approved in October 2022. The total approved fund was US$500 million, with the second tranche of $200 million to come in soon. The loan has a tenure of 10 years, with the interest rate fixed at 5.5%. There is a 2.5-year grace period for the loan and the loan is mostly for the completion of the company’s Sokoto expansion.

Valuation

We maintain our sell recommendation on the stock and our price target of N80.50/s. Our price target implies a 16% downside potential from the last closing price of N96.15/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.

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Source: Company, CSL estimates

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