BUA Cement Plc Q1-24: Cost Pressures Compel TP Revision

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May 9, 2024/Cordros Report

We update our views on BUACEMENT in this report, accounting for the performance witnessed in the first quarter of the year. BUACEMENT’s revenue grew by 51.5% y/y in Q1-24, which we believe was driven by volume growth and likely price increases. However, we note that heightened cost pressures from raw materials, energy, operation, and maintenance expenses significantly weighed on earnings in the quarter – Q1-24 EPS: NGN0.53 (Q1-23: NGN0.79) – despite the low base from Q1-23. Following our expectation of further strain on profitability for 2024E, we reduced our target price by 6.4% to NGN56.99/s, while retaining our “SELL” recommendation on the stock. Sequentially, we lowered our forecast for 2024E EPS to NGN2.60 (prev.: NGN3.10) given the expected pressure from accelerating costs and FX losses. We now envisage 2024E DPS of NGN2.53, translating to a dividend yield of 1.8%. Based on our estimates, BUACEMENT is trading on a 2024E P/E of 55.1x and EV/EBITDA of 34.5x.

Stellar revenue growth but cost pressures remain a challenge: Just as we envisaged, BUACEMENT’s Q1-24 sales outturn revealed a notable uptick in demand for the company’s product and we expect that the positive momentum will be maintained for the rest of the year as local demand and exports remain solid. We now anticipate that volume growth alongside price increases will be drivers for topline in 2024E and increase our revenue projection to 35.4% y/y (prev.: +28.9% y/y). For context, management highlighted in its last earnings call that they were only able to sustain the price slash done in October 2023 for few months and had to review prices upward, due to the persistent challenges from FX and energy prices and the negative effects on business performance. Nonetheless, given that a substantial amount (c. 65.0%) of the company’s energy and maintenance expenses are paid for in FCY, we believe currency pressures and rising inflation will continue to drive production costs upwards, coupled with expected net FX losses of NGN44.90 billion in 2024E (2023FY: NGN69.96 billion), slowing margins and earnings expansion. As a result, we now forecast EBITDA margin to settle at 23.2% (+142bps y/y | prev.: 26.9%) as EPS prints NGN2.60 (+26.7% y/y | prev.: NGN3.10).

FCF margin primed for improvement in 2024E: On profitability, we highlight that the company’s FCF margin has remained healthy over the last 5 years (average: 8.9%), save for 2021FY (-30.4%) due to the intense capex for its 5mmtpa plant expansion. However, FCF margin rebounded in the following year to an all-time high of 54.5%, before settling at 6.7% in 2023FY due to the high capex spend for the 6mmtpa plant expansion to a capacity of 17mmtpa. Notably, management guidance is a lesser capex spend in 2024E as all ongoing plant construction projects have been paid for and there are no plans for additional lines. Thus, there is no significant funding requirement in the year. As a result, we expect FCF margin to recover to 20.2% with a 5-year forecast average of 19.5%.

Valuation: Our target price is NGN56.99/s, derived from a 70/30 blend of DCF and sector relative valuation (P/E & EV/EBITDA) estimates. Our DCF FV is derived from an equal blend of FCFF (NGN62.47/s) and FCFE (NGN71.94/s) estimates, assuming a 20.4% WACC and a 4.0% terminal growth rate. On P/E, we utilised the Bloomberg Middle East & African (MEA) peer average 2024E multiple of 14.0x. Applying this to our 2024E EPS estimate of NGN2.60/s gives a FV of NGN36.31/s. Similarly, for EV/EBITDA, we also utilised the 2024E Bloomberg MEA peer average (8.0x) and derived a fair value estimate of NGN29.95/s.


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