BUA Cement Plc. (Ticker: BUACEMENT) remains one of the few beautiful brides of an equities investors having bucked the bearish trend in the stock market this year.
The cement company that listed on the Nigerian Stock Exchange (NSE) on January 9, 2020 at ₦35 per share has appreciated by 12%.
The company delivered an impressive performance in the first half (H1) 2020, as topline jerked up 12.69%, from ₦89.86 billion in H1:2019 to ₦101.26 billion.
In spite the earnings lift, analysts at Meristem Securities Limited estimates revealed that the company’s stock upside potential is now less than 10%, thus rate the counter hold.
In its forecast, Meristem estimated ₦42.03 price target for BUACEMENT, which representing 8.05% upside to its Friday’s quoted price of ₦38.90.BUACEMENT Market Cap Rises 11.14% after 7-month on NSE
In January 2020, at ₦35, the cement company listed its entire shares or 33.86 billion share outstanding on the Nigerian Stock Exchange for ₦1.18 trillion.
In its financial scorecard, analysts said BUA Cement cost profile was impacted by devaluation of the local currency, naira, as the company strive to improve value creation.
In reaching their estimates, analysts said during the period, BUA Cement made significant strides in its market deepening efforts.
The company grew sales volumes by 7.93% to 2,463 Kilotons from 2,282 Kilotons the comparable period in 2019 despite an economy set on edge by the COVID-19 pandemic.
Meristem said unlike its peers (who recorded revenue declines in Q2:2020), the cement maker recorded a 1.21% turnover growth in Q2:2020.
This was attributed to the fact that the company’s major market (Northern Nigeria) was largely free of the lockdown measures which hindered construction activities elsewhere.
“In our last update on the company, we had expected largely weak construction activities, prolonged period of lockdown in the commercial hubs and a generally weak economic environment to have a deep impact on turnover.
“However, given the benign effect of the pandemic on performance, we have reassessed the impact of COVID-19 risks to topline growth”, Meristem stated.
Also, analysts stated that they see the further approval of exports quotas (the company received approval for limited exports via land borders in H1:2020) and an unrelenting drive into new markets as key tailwinds.
Thus, the investment firm projects a revenue growth of 20.59% which implied capacity utilization of about 64% to ₦211.65 billion – as against previous estimate of ₦148.57 billion – from ₦175.52 billion in 2019.
Energy Costs Rises on Account of FX Devaluation:
During the period, equity research analysts explained that higher costs were triggered by the Naira devaluation.
Notably, energy costs rose sharply by 17.97% as gas prices and costs of imported fuel options (LPFO and coal) increased in response to the devaluation.
In its equity note, Meristem stated that this impacted the company’s cost to sales ratio, which rose to 53.84% in H1:2020 from 50.71% in H1:2019 with total direct costs growing by 19.64%.
However, BUA Cement is making efforts at costs optimization, one of which is the reconfiguration of the Sokoto plant to run on gas as against Low Pour Fuel Oil (LPFO) it was using before.
Meristem held that to further pressure margins, BUA’s expansion into new markets drove operating expenses higher by +15.02%.
Analysts explained that this brought operating margin lower to 40.30% from 42.44% in H1:2019.
Nonetheless, profit after tax climbed higher by 13.74% to ₦34.82 billion in H1:2020 compare to ₦30.61 billion in H1:2019 on the back of 30.40% decline in finance expenses.
“Going forward, we maintain our expectation of an FX induced cost build-up, but a lower effective tax rate (a benefit of the pioneer status on its plants) should ease the impact on bottom-line”, Meristem said.
Related Party Liability: Shareholders’ Loan Triggers a Spike
Meristem Securities noted that as the company strives to deliver additional capacity by Q1:2021, it has relied mainly on funding from bank and shareholders’ loans.
Thus, related party liabilities surged by +1,974.05% to ₦19.06 billion, from ₦918.74 million in 2019.
“While the company has secured an extended tenor on its borrowings, it still maintains low gearing with a debt to equity ratio of 0.07x”, analysts at Meristem reckoned.
Despite a largely equity based capital structure, an annualized return on equity (ROE) of 16.26% was recorded in H1:2020.
“We however express concerns on cash earnings and liquidity going forward as trade receivables is seen to have risen sharply by 93.87% from ₦2.62 billion in 2019 to ₦5.08 billion in H1:2020”, Meristem stated.
Analysts at Meristem Securities said they have revised expectations for the company’s topline performance given reassessment of the operating environment.
So, given strong showings in the second quarter (Q2)2020, recovery in economic activities and further penetration into new markets, Meristem explained that the firm expects an impressive full year revenue growth.
Meristem upgraded projected earnings before interest, tax, depreciation and amortisation (EBITDA) by 34.09% to ₦81.85 billion from previous estimate of ₦61.04 billion and an enterprise value (EV) to EBITDA of 17.23x for 2020.
“Having adjusted for a negative net debt of ₦12.99 billion, we arrived at a revised 2020 target price of ₦42.03 which represents an upside potential of +8.05% compared to its current price of ₦38.90”, Meristem stated.
BUACEMENT Market Cap Rises 11.14% after 7-month on NSE