November 10, 2023/CSL Research

BUA Cement’s +27.92% y/y Revenue growth in 9M 2023 was primarily driven by an increase in price and sales volumes. BUA Cement reported increases in prices in 9M 2023 with average cement price rising by 21.4% to N68,540/ton from N56,468/ton in 9M 2022 while sales volumes closed 9M 2023 at 4.90 million MT from 4.65 MT in 9M 2022, indicating a 6.52% increase. Net Income increased by 2.8% y/y to N76.07bn in 9M 2023 from N74.02bn in 9M 2022.

The constrained purchasing power of private players and low CAPEX expenditure by the government amidst the challenging macroeconomic environment has continued to affect volume growth in the industry. To aid volume growth, BUA Cement reduced ex-factory price in Q3. We estimate a 20% y/y (19% ytd) growth in price per tonne for the year while projecting a 10% 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 believe costs associated with its production capacity expansion drive will impact profitability negatively in the short to medium term. We also believe the market has priced in the expected growth from the capacity expansion drive. We maintain our Sell recommendation on the stock and our price target of N80.50/s which implies a 24.77% downside potential from the last closing price of N107/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.​​

Source: Company, CSL Research

Volume and price increases drive revenue growth.

In its recently released 9M 2023 results, BUA Cement reported a 27.9% y/y Revenue growth to N335.86bn in 9M 2023 from N262.60bn in the prior period (9M 2022). Similarly, on a q/q basis, Revenue was up by 0.1% to N114.8bn in Q3 2023 from N114.71bn in Q2 2023. According to management, the (+27.9% y/y) increase in Revenue was primarily driven by an upward adjustment in price and growth in sales volumes. In terms of pricing, BUA Cement reported increases in prices in 9M 2023 with the average cement price rising by 21.4% to N68,540/ton from N56,468/ton, in 9M 2022, We believe that this was important to safeguard profit margins for the company in a challenging business environment.

We note that in Q3 the company reported a reduction in its ex-factory prices to N3,500/ per bag from roughly N4,200 sold previously. The Management noted that the decline in prices was necessary to spur development in Nigeria’s building materials and infrastructure sectors. They also noted that Nigerians can start benefitting from the price fall before its plants are completed. 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 to 17 million metric tonnes from the existing 11 million metric tonnes. We believe that the reduction in ex-factory price was done in a bid to boost the company’s demand and improve its market share.

Sales volumes closed 9M 2023 at 4.90 million MT from 4.65 MT in 9M 2022, indicating a 6.52% increase. We note that sales volumes have been low across the industry in 9M 2023, mainly due to the impact of the 2023 general elections and the Naira cash crunch in Q1 2023. Also, the constrained purchasing power of private players and low CAPEX expenditure by the government amidst the challenging macroeconomic environment has continued to affect volume growth in the industry. We believe that the decline in ex-factory price in Q3 contributed to an increase in demand of the company’s product, which led to the marginal growth we saw in sales volumes. We believe volume growth from the commencement of the company’s new plants in Q1 2024 might offset any potential loss that may have been associated with the Q3 reduction in price. We estimate a 20% y/y (19% ytd) growth in price per tonne for the year while projecting a 10% 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 N360.99bn recorded in FY 2022.

Cost pressures continue to mount.

Cost of Sales (adjusted for depreciation) was up 31.8% y/y to N172.05bn in 9M 2023 from N130.5bn in H1 2023. We observed that most of the cost increases came from materials (47.35% y/y) and energy cost (+26.67% y/y). We believe that inflationary pressures continue to pressure cost amidst increasing production volumes. Given the increase in Revenue growth, Gross profit grew 24% y/y to N163.82bn in 9M 2023 while Gross margin contracted by 152bps y/y to 48.8% in 9M 2023, impacted by elevated costs.

Operating Expenses (adjusted for depreciation) increased by 50% y/y to N26.08bn in 9M 2023 from N17.38bn in 9M 2022. The increase was driven by both Administrative Expenses adjusted for depreciation (up 21.4% y/y to N9.11bn) and Selling & Distribution Expenses (up 71.7% y/y to N16.97bn). The management attributed the increase in distribution costs to higher fueling costs, increased fleet size (trucks), repair and maintenance costs, depreciation charges, staff costs and advertisement & promotion expenses. Other Income which comprises of insurance claims, government grants, and sundry income was also grew significantly, up 312.1%y/y to N1.1bn. Despite the cost pressures, EBITDA increased by 20.8% to N138.86bn in 9M 2023. Consequently, EBITDA margin decreased by 243bps to 41.3% in 9M 2023 from 43.8% in 9M 2022. Depreciation and Amortisation was up to N19.17bn, while Operating Profit grew by 20.6% y/y to N119.68bn from N99.25bn in 9M 2022.

The management noted that the company’s profit was negatively impacted by inflationary pressures, FX unification, and increases in raw material costs, energy costs, and distribution costs. The company’s energy cost per ton increased by 20.2% to N16,803/ton from N13,978/ton in 9M 2022. In a bid to curb the company’s rising energy cost, the management noted that its transition from Heavy Fuel Oil (HFO) to Liquefied Natural Gas (LNG) in Sokoto was already in place. The management also noted that work has commenced on the 70MW gas power plant at both the Obu and Sokoto plants. Overall, we estimate EBITDA of N190bn in 2023, which translates to an EBITDA Margin of 42% in 2023.

BUA Cement recorded a 249% increase in Net Finance Costs to N33.94bn in 9M 2023 from N9.72bn in the prior period (9M 2022). The significant increase reflects a 56.9% y/y rise in Interest Expense to N6.99bn in 9M 2023 and a 411.77% rise in Net Exchange Loss to N26.93bn from N5.26bn due to the impact of the naira devaluation. The rise in Net Finance Cost dragged pre-tax profit down by 3.4% y/y to N85.75bn in 9M 2023. Tax expense declined by 34.6% in 9M 2023 to 9.68bn from 14.8bn in 9M 2022. Consequently, Net Income increased by 2.8% y/y to N76.07bn in 9M 2023 from N74.02bn in 9M 2022. Earnings per share was up by 2.6% y/y to N2.25/s for 9M 2023 from N2.19/s in 9M 2022.

Valuation

We maintain our sell recommendation on the stock and our price target of N80.50/s. Our price target implies a 24.77% downside potential from the last closing price of N107/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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