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BUACEMENT 9M'20: Waxing Stronger Against All Odds
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BUACEMENT 9M'20: Waxing Stronger Against All Odds

By Meristem

Further Revenue Growth in Q3 Boosts Overall 9M Topline Performance
In Q3:2020, BUA Cement Plc. (BUACEMENT) improved on the revenue gains made in H1:2020 to deliver another impressive topline performance in 9M:2020. The company grew sales volumes by 15.95%, from 3,291 kilotons in Q3:2019 to 3,816 kilotons in Q3:2020. This puts standalone revenue for the quarter at NGN55.29bn – a 39.72% improvement compared to NGN39.57bn in Q3:2019. Since the merger, the company has focused on leveraging on its wider geographical footprint to access new markets and claim a stronger market share. While its efforts have resulted in enhanced brand awareness and a wider distribution chain, performance in Q3:2020 was largely supported by the pickup in economic activities following the easing of lockdowns in Q2:2020 and the relatively short rainy season which aided cement distribution. Overall, the 9M:2020 financial scorecard showed a revenue
growth of 20.95%. For 2020FY, we maintain our expectation of a total turnover of NGN211.65bn by 2020FY- a growth rate of 20.59% when compared to NGN175.52bn in 2019FY.

Lower Net Finance Costs Delivers Stronger Bottomline
In spite of the improvement in topline, energy costs remain a persisting problem pressuring margins. In our last update, we highlighted how the Naira devaluation triggered higher energy costs for the company and this narrative remains unchanged in the period under review. A devaluation induced spike in energy costs (+23.07%) in 9M:2020 pushed the cost to sales ratio to 54.18% (vs 51.23% in 9M:2019). In subsequent periods, while fuel mix optimization efforts are expected to yield some gains, a lot still depends on exchange rate stability. Similarly, higher operating expenses (+15.72%) due to higher marketing and distribution costs further pressured the company’s operating margin. Hence, EBIT margin declined from 41.65% in 9M:2019 to 39.83% in 9M:2020. However, sizable amounts in interest income (NGN233.80mn vs NGN96.63mn in 9M:2019) and a lower interest expense (-19.77% YoY) lifted bottom-line. Hence, Profit after tax for the period (NGN53.57bn) was higher by 23.85% when compared to NGN43.25bn in 9M:2019.

Planned Debt Issuance to Support Working Capital Requirement
In line with our expectation, the company has expressed its intentions to access the bond market. This is given the need to shore up working capital and fund its expansion activities. The company also looks to take advantage of the low interest environment and as well refinance its related party source of funds (which resulted in a spike in related party liabilities by +1,974.05% in H1:2020) with cheaper debt. We note that the company maintains a decent leverage position with a negative net debt of - NGN42.97bn and an interest coverage ratio of 20.02x. Hence, given its consistent cashflow generation and decent leverage, we expect a fair credit rating of the company and consequently, a modest cost of debt. Currently, the debt to equity ratio stands at 0.08x and thus we anticipate the company to aim for a more balanced capital structure going forward.

Recommendation
We maintain our EBITDA projection of NGN81.85bn and an EV/EBITDA of 17.23x for 2020FY.Hence, we retain our 2020FY target price of NGN42.03 which represents an downside of -7.63% (compared to its current price of NGN45.50). We thereby rate the counter as HOLD



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A Love Beyond the Stars – Against all Odds
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