NIGERIA|CEMENT| BUA CEMENT

FX Losses drag PAT

BUA Cement's +27.4% y/y Revenue growth in 2023 was primarily driven by upward increases in both price and sales volumes. BUA Cement reported price increases in 2023 with average cement price rising by 18.7% to N68,293/ton from N57,511/ton, in 2022, while sales volumes closed 2023 at 6.60 million MT from 6.30 MT in 2022, indicating a 4.8% increase. Due to a significant rise in FX losses of N69.96bn, profitability declined in 2023, with Pre-tax Profit down by 44.1% to N67.64bn from N121.11bn in 2022.

With the launch of the new production lines 3 and 5 at the Obu and Sokoto plants, the company's volume capacity has increased from 11 to 17 million metric tonnes. This expansion is anticipated to drive further growth in sales volumes. However, we foresee a modest increase in 2024 due to the expected initial low-capacity utilization of the new lines. We forecast a 15.9% rise in volumes in 2024 to 7.7 million MT from the 6.6 million MT recorded in 2023.

We expect prices to increase in 2024 to reflect macroeconomic realities. We have forecasted a 13.0% increase in price to N77,171/ton in 2024, from N68,293 in 2023. Overall, we expect Revenue to increase by 28.3% y/y to N590.36bn in FY 2024 from the N460bn recorded in FY 2023. We, however, remain concerned about the company's ability to manage its increasing costs. Without a stronger focus on cost-cutting measures, we anticipate potential pressure on the company's bottom line in the medium to long term.

We maintain our SELL recommendation on the stock, and we have revised our target price downwards to N77.52/s from N80.50/s previously. Our price target implies a 46% downside potential from the last closing price of N143.2/s. We believe the stock is overvalued at current levels. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. The stock currently trades at an EV/EBITDA of 29.64x compared to the industry average of 15.85x.

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Source: Company, CSL Research

Volume and price increases drive revenue growth.

In its recently released FY 2023 results, BUA Cement reported a 27.4% y/y Revenue growth to N459.99bn in FY 2023 from N360.99bn in the prior period (FY 2022). Similarly, on a q/q basis, Revenue was up by 8.1% to N124.14bn in Q4 2023 from N114.77bn in Q3 2023. According to management, the (+27.4% y/y) increase in Revenue was primarily driven by increases in price and sales volumes. In terms of pricing, BUA Cement reported increases in prices in 2023 with the average cement price rising by 18.7% to N68,293/ton from N57,511/ton, in 2022. We believe that this was important to safeguard profit margins for the company in a challenging business environment.

In Q3, the company announced a reduction in its ex-factory prices to N3,500 per bag, down from the previous N4,200. BUA had anticipated that this price cut would be offset by an expected increase in volume following the completion of its plants in Q1 2024. However, we had previously cautioned that this price reduction might not be sustainable, given the challenging macroeconomic conditions in 2023 and consumer preferences for competitor products. As anticipated, management, citing rising production costs, reversed the decision to cut prices and adjusted them upward in late 2023.

Sales volumes closed 2023 at 6.60 million MT from 6.30 MT in 2022, indicating a 4.8% increase. We note that sales volumes remained low across the industry in 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.

With the launch of the new production lines 3 and 5 at the Obu and Sokoto plants, the company's volume capacity has increased from 11 to 17 million metric tonnes. This expansion is anticipated to drive further growth in sales volumes. However, we foresee a modest increase in 2024 due to the expected initial low-capacity utilization of the new lines. We forecast a 15.9% rise in volumes in 2024 to 7.7 millon MT from the 6.6 million MT recorded in 2023. We expect prices to increase in 2024 to reflect macroeconomic realities. We forecast a 13% increase in price to N77,171/ton in 2024, from N68,293 in 2023. Overall, we expect Revenue to increase by 28.3% y/y to N590.36bn in FY 2024 from the N460.00bn recorded in FY 2023.

Cost pressures continue to mount.

Cost of Sales (adjusted for depreciation) was up 41.9 y/y to N257.12bn in FY 2023 from N181.16bn in FY 2022. We observed that most of the cost increases came from operations and maintenance service charges (88.23% y/y) and energy cost (+35.19% y/y). We believe that elevated inflationary pressures and the steep devaluation of the currency have continued to raise the cost of the company. Given the increase in Revenue growth, Gross Profit grew by 12.8% y/y to N202.88bn in FY 2023 while Gross margin which was impacted by elevated cost pressures contracted by 5.7ppts y/y to 44.10% in FY 2023.

Operating Expenses (adjusted for depreciation) increased by 39.85% y/y to N35.22bn in FY 2023 from N25.18bn in FY 2022. The increase was driven by both Administrative Expenses adjusted for depreciation (up 17.9% y/y to N11.64bn) and Selling & Distribution Expenses (up 54% y/y to N23.58bn). Other Income which comprises of insurance claims, government grants, and sundry income declined by 26% to N2.06bn. Despite the cost pressures, EBITDA increased by 7.8% to N169.72bn in FY 2023. However, EBITDA margin decreased by 6.7ppts to 36.90% in FY 2023 from 43.61% in FY 2022. Depreciation and Amortisation was up by 12.9% to N25.06bn. We saw a significant rise in FX losses in 2023 because of the steep fall of the currency, with FX losses rising by 1171.7% to N69.96bn in FY 2023 from N5.50bn in FY 2022. Given the rise in FX losses, Operating Profit declined by 42.2% y/y to N74.70bn from N129.72bn in FY 2022.

The management noted that the company's profit was impacted significantly by increases in energy costs, mostly denominated in USD; operations & maintenance service charge; other repair & maintenance expenses; staff cost and depreciation of PPE. The company's energy cost per ton increased by 26% to N18,301/ton from N14,527/ton in 2022. The company noted that the increase in energy cost was due to the impact of energy price increases and the depreciation of the Naira.

In efforts to address the company's escalating energy expenses, management highlighted the shift from Heavy Fuel Oil (HFO) to Liquefied Natural Gas (LNG) at the Sokoto plant. Additionally, they mentioned that construction progress on the 70MW gas power plant at the Obu facility was advanced, with the Sokoto plant's 70MW gas power plant already operational. Despite these initiatives, we maintain concerns about the company's ability to manage its increasing costs. Without a more aggressive approach to cost-cutting measures, there could be pressure on the company's bottom line in the medium to long term.

We note that most of the company's FX losses came from the company's loans and borrowings associated with its volume capacity expansion. In 2024, we expect FX losses to be minimal as we do not expect as steep a devaluation as we saw last year. Additionally, we do not expect a significant increase in foreign borrowings in 2024, given the completion of the company's expansion program. Overall, we estimate EBITDA of N174.79 in 2024, which translates to an EBITDA Margin of 30% in 2024.

BUA Cement recorded an 18.1% decline in Net Finance Costs to N7.06bn in FY 2023 from N8.61bn in the prior period (FY 2022). The decline reflects a significant 563.53% y/y rise in Finance Income, despite an 88.91% rise in Finance Cost. Pre-Tax profit was down by 44.1% y/y to N69.46bn in FY 2023 from N121.11bn in FY 2022.

The company recorded a Tax Credit of N1.82bn in FY 2023, compared with a Tax Expense of N19.14bn recorded in FY 2022. Consequently, Net Income declined by 31.2% to N69.46bn in FY 2023 from N101.01bn in FY 2022. EPS was down by 31.2% y/y to N2.05/s for FY 2023 from N2.98/s in FY 2022. In 2024, we expect the company's profits to grow and we forecast a PBT of N101.93bn in 2024 from N69.46bn in FY 2023.

Valuation

We maintain our SELL recommendation on the stock, and we have revised our target price down to N77.52/s from N80.50/s previously. Our price target implies a 46% downside potential from the last closing price of N143.2/s. We believe the stock is overvalued at current levels. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. The stock currently trades at an EV/EBITDA of 29.64x compared to the industry average of 15.85x.

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"‹BUA-Cement-FY-2023-Earnings-Review.pdf"‹"‹"‹

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Mustapha Umaru

Email: CSLResearch@fcmb.com"‹

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Website: www.cslstockbrokers.com