As expected return on BUA Cement Plc. stock clicks negative, United Capital Plc have downgraded the third force cement company to sell over what analysts called overstretched valuation.
Analysts revised downward the cement company price target to N42.2 per share from N59.10 kobo, the ticker currently trading above N70 on Nigerian Exchange.
BUA Cement recently filed its audited results for 2020 with increase in revenue and bottom line.
United Capital said despite substantial cost pressures, the cement maker saw a 19.1% and 19.4% year on year increase in pre and post-tax profit respectively, to N78.9 billion and N72.3 billion.
This was primarily driven by volume growth (+13.3%), which supported topline (+19.3% y/y), and lower net financing expenses (-28.3%) over the period.
Revenue: Resilient output amid harsh operating environment
In the period under review, BUACEMENT’s revenue surged 19.3% year on year to N209.4 billion in 2020, on the back of a 13.3% growth in sales volumes to 5.1Mt. and a 5.3% increase in revenue per tonne to N41,116/tonne.
Analysts said sales within Nigeria made up 99.3% of revenue compare with 97.1% in the comparable period in 2019 as exports fell by 71.8% amid the pandemic’s effect on regional trade.
“The strong performance was aided by strategies to increase market presence and distribution capacities”, equity research analysts United Capital noted.
It was also noted that a rebound in construction activity following the lifting of pandemic-related lockdowns in late Q2-2020 and a comparatively quiet rainy season in Q3-2020, bolstered volume growth, as observed with industry peers.
Notably, analysts recognised that the cement maker maintained the highest level of capacity utilization (compared to peers) at 63.8%.
However, United Capital highlights that two major customers accounted for 23.9% of revenue from cement sales compare with 26.5% in 2019, with each contributing more than 10% of total revenue.
Profitability: Margins give-in to inflationary and FX pressures
According to United Capital, BUA CEMENT saw faster growth in cost of sales which jerked up 22.4% year on year to N114.0 billion, owing to higher energy costs, which remains a persistent concern.
While energy cost increased by 18.6% year on year to N43.1 billion, the company raw materials cost also swelled up 81.2% to N21.3 billion amid inflationary pressures and increased production.
United Capital believes that the rise in energy costs was mostly reflective of the impact of Naira devaluation on gas supply contracts, an industry-wide issue.
It was noted that these issues pressured BUA Cement gross margin which came 138 basis points lower year on year to 45.6%. Similarly, the company’s operating expenses grew 21.2% to N13.5 billion as earnings before interest and tax (EBIT) margin shrank by 153bps to 39.2%.
Unpalatable as that was to the company, there was a succour as net finance cost declined by 42.7% year on year to N3 billion in the pandemic year.
This was due to an increase in finance income that recorded an uptick of 447.5% year on year to N859.6 million, and a decrease in finance cost, falling 28.3% to N3.8 billion despite a significant increase in debt.
Analysts recall that the group registered a N200 billion Bond program in 2020. Notably, the bulk of the first tranche (N115.0 billion) of the bond issuance was used to refinance existing debt at a much lower funding cost, leveraging the low yield environment in 2020.
Summarily, the company’s pre-tax and post increased by 19.1% and 19.4% year on year, respectively, to N78.9 billion and N72.3 billion.
Thus, BUACEMENT’s net profit margin for the year settled at 34.5% dropped behind DANGCEM’s 36.1% and but ahead of WAPCO’s 15.7% while its return on equity printed at 19.2% compare with DANGCEM’s 31.0% and WAPCO’s 14.9%.
Likewise, return on assets came at 9.4% falling behind DANGCEM’s 13.7% but ahead of WAPCO’s 6.1% as BUACEMENT’s net debt climbs to N269.3 billion, translating to 71.6% of the company’s equity
BUACEMENT took to the debt markets in the year under review, taking advantage of the lower interest rate climate in a bid to finance its working capital needs, expansion plans, and refinance related party debt.
The Company issued a N115.0bn local bond in Dec-2020, with a 7-year tenor and a coupon rate of 7.5%. Net financial debt for the full year totaled N269.3bn, representing 71.6% of equity (vs 5.9% in FY-2019).
Consequently, leverage ratio climbed to 2.0x.
United Capital said its analysis of BUACEMENT’s return on equity (ROE) indicates that the increased leverage made for a higher ROE at 19.2% from 16.7% in 2019 amid a marginal 1bps expansion in net margin (34.5%) and lower Asset Turnover (0.27x from 0.37x in 2019.
Relatedly, analysts explained that the proceeds from the bond issuance reflected in BUACEMENT’s 694.4% increase in cash position to N123.8 billion.
Outlook and Valuation:
Analysts said BUACEMENT overstretched valuation undermines growth potential For 2021 estimate, United Capital expressed view that BUACEMENT will pick up from its strong 2020 debut, with volumes driving revenue, supported later in the year by its 3Mt plant in Sokoto, which is expected to be operational this year.
On costs, analysts at United Capital said they struggle to see improvement in cost efficiency for the full year, given persistent inflation and BUACEMENT’s long-term gas contracts, which are highly susceptible to foreign currency risk.
The cement maker is also likely to maintain its marketing efforts to drive volumes, pressuring operating expenses.
Furthermore, analysts said they anticipate additional debt financing, beginning with the second tranche of its N200.0 billion bond program, for the funding of its additional 9Mt capacity tabled for completion in 2023, and higher tax charges, due to pioneer status expiry on its OBU lines.
“Accordingly, we expect higher financing costs and tax charges. Consequently, we expect a 15.5% increase in revenue to N241.9 billion, driven by a 10.1% volume growth to 5.6Mt. and a slight moderation in EBITDA margin to 46.0%.
In all, analysts at United Capital forecasted 8.9% and 6.9% year on year growth in pre- and post-tax profit, respectively to N85.9 billion and N77.3 billion.
Additionally, they revealed expectation that BUA will maintain its dividend payout strategy and forecast a N2.2 dividend per share for the fiscal year.
“We acknowledge the cement maker’s growth potential by virtue of its expansion strategy, volume growth, headroom for price increases and healthy margins. However, we consider the ticker highly overvalued at current price”, United Capital said.
Analysts explained that BUACEMENT trades at an enterprise value (EV) to EBITDA ratio of 26.1x compare with DANGCEM 8.5x and WAPCO’s 4.4x and price earnings ratio of 34.9x, indicating a massive premium over the domestic peer average which 12.1x when BUACEMENT is excluded.
“Following our forecast updates and adjustments for the higher rate environment, we set a target price of N42.2 per share and reiterate a SELL recommendation due to the 41.9% downside on the stock”, United Capital explained.