BUA Cement Plc H1 2020 Conference Call; Pushing For A Bigger Piece of The Pie


Tuesday, August 12, 2020, / 07:00 PM / By Adaeze Nwanchukwu, Proshare Research   /  Header Image Credit: @BUAgroup

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The cement business in Nigeria has become less genteel and friendly as BUA Cement Plc lays fresh siege on domestic market share. In 2018, the cement manufacturing business in Nigeria was shared roughly between Dangote Cement Plc with 60% of the domestic market, with Lafarge Africa Plc holding down a 30% market slice while, what later came to known as BUA Plc, obediently comforted itself with a 10% piece of the pie. Those days are over. Since Q1 2020 BUA Cement has become a more aggressive rival. The new market share configuration in 2020 shows Dangote Cement with 60% share, Lafarge Cement 21.9% and BUA 17.6% of the market, while other players take up the modest 0.5% balance.


Results presented by the company at a recent investor's conference call noted that the company was pushing for greater market share by being the largest producer of cement in the North-West, South-South and South-East markets with three modern plants cutting across two states. The strategy informed a change in its corporate payoff line from 'King of The North' to 'King of Strength'. The shift has since put the company in the crosshairs of its bigger competitors as the aspirational shift has begun to apply pressure to industry margins. BUA itself saw its EBITDA margin in H1 2020 slip from 49.8% in H1 2019 to 46.8% in H1 2020.


According to the company's managers, BUA has entered into two strategic partnerships for the supply of Liquefied Natural Gas at the Kalambaina plant and the management of the company's mining operations, this was done to drive efficiency and cut operational expenses.


Key Takeaways

  • Cement volume dispatched went up by +7.93% from 2.282Kt in H1 2019 to 2.463Kt in H1 2020.
  • EBITDA margins declined to 46.8% in H1 2020 from 49.8% recorded in H1 2019, while quarter-on-quarter (Q-o-Q) performance of EBITDA recorded an increase, from 45.6% recorded in Q1 2020 to 48.1% recorded in Q2 2020.
  • Cost of sales up by +19.64% to N54.52bn for H1 2020.
  • Earnings per share up by +14.44% to 103k
  • Gross profit up by +5.54% year-on-year (Y-o-Y), this was due to increased production volumes which were moderated by higher energy cost from price increase and the devaluation of the domestic currency.
  • Profit before tax up by + 9.83% Y-o-Y and -6.23% Q-o-Q.
  • Finance cost declined by -33.54% Y-o-Y to N1.64bn in H1 2020
  • Selling and distribution costs increased by +10.02% Y-o-Y to N6.39bn for H1 2020.
  • As disclosed by BUA, an approval for limited export to the Niger Republic from its Plant through the Illela border was received which was carried out successfully (This is 100kms from its plant).


Profitability- Pushing Past the Coronavirus

BUA Cement Plc posted a +12.69% Y-o-Y increase in revenue for H1 2020 as against N89.86bn recorded in the corresponding period of the previous year, this was achieved despite the challenging macroeconomic environment, although, the company's operational cost recorded an increase of +10.02% Y-o-Y respectively.


Q-o-Q revenue recorded a decline of -12.38% from N53.97bn recorded in Q 1 2020 to N47.29 recorded in Q2 2020, the company saw an increase in its cost of sales by +6.35% Q-o-Q, this was the result of an increase in production volume and higher energy costs (see chart 1 below ).


Chart 1: BUA Gross Revenue 2019 - 2020 (N'bn)

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Source: BUA Cement Financial Statement, Proshare Research


Lockdowns and restrictions of non-essential activities in Q2 2020 had an adverse effect on the Q-o-Q performance of the company's Profit before tax. Profit before tax increased by +9.83% Y-o-Y from N35.66bn recorded in the corresponding period of the previous year to N39.16bn recorded for H1 2020, although finance cost declined by -33.54%, while Q-o-Q performance of PBT declined by -6.23% from N20.13bn recorded in Q1 2020 to N18.88bn recorded in Q2 2020 (see chart 2 below).


Chart 2: BUA Cement's Profit before Tax 2019 - 2020 (N'bn)

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Source: BUA Cement Financial Statement, Proshare Research

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Activity Ratio- Dealing With The Sweat Work

The company's current ratio (a measure of liquidity) for H1 2020 stood at 0.70, which was higher than the 0.64 recorded for FY 2019, but relative to a preferred ratio of 2, BUA is locked in a liquidity squeeze. The problem reflects an increase in trade and receivables which went up by +93.87%


The increase in liquidity is largely due to the merger between CCNN and Obu Cement Company Limited (see chart 3 below).


Chart 3: BUA Current Ratio 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research


The company's H1 2020 acid test ratio (a stiffer liquidity measure) stood at 0.41 representing an increase from 0.36 recorded in FY 2019 but this was a long way from a preferred ratio of 1.5, although borrowing increased by +21.69%, there was also an increase in property, plant and equipment figures by +9.09% (see chart 4 below).



Chart 4: BUA Cement's Acid Test Ratio 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research


Liquidity Ratio- A Long Way From Home

H1 2020 liquidity ratio of the company stood at 8.50%, higher than the 3.87% recorded in FY 2019. Analysts believe that company financial positions are safer when their liquidity ratio is between 20% and 30%, meaning that they have cash and short-aged receivables that can quickly cover near-term shocks to the business's emergency cash needs (see chart 5 below). BUA's recent 8.5% ratio is an improvement from its year-end 2019 figure but for analysts to feel more comfortable with its operating cash and near-cash position it has a few more yards to go.


Chart 5: BUA Cement's Liquidity 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research


Leverage - Low-base Debt, High-minded Growth

H1 2020 saw BUA with a leverage ratio of 8.50% as against 3.87% recorded in FY 2019, suggesting that the company has low debt leverage allowing for higher debt leverage opportunity if the company needs financing to grow business revenues post-COVID 19 (see chart 6 below).



Chart 6: BUA Cement's Leverage Ratio 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research

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Share Price Movement-From Bear To Crounching Bull

BUA was listed on the Nigerian Stock Exchange (NSE) in January 2020 with 33.9bn units of ordinary shares at N35 per share. The year-to-date (YTD) performance of its share price has portrayed investor sentiment. During the coronavirus lockdown, the price of the company's shares dropped to as low as N30.8 per share or by 22% of its listing price(see chart 7 below).


The limestone crusher is the 3rd most capitalized stock on the NSE, the recent price movements of BUA's shares suggests that the company has weathered the more severe aspects of investor pessimism, whether this trend will continue will depend on various factors like the overall state of the domestic economy and the outcome of the court case between the company and Dangote Cement Plc over the claims on the Obu-Okpella mines in Edo state.


The company's shares traded within a bearish channel between January and May 2020 before witnessing a breakout by mid-May 2020 running into the second week of June when the bullish orientation started to become choppy as another, this time bearish, a reversal took place at the beginning of July 2020. The bearish direction of BUA's share price has been less severe in the first week of August and may indicate a bullish reversal as the economy picks up from the COVID-19-induced downturn.


Chart 7: BUA Cement's YTD Share Price Movement (as at 3rd August 2020)

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Source: NSE, Proshare Research


Expansion Strategy: Aggressive Market Play, Knocking The Big Boys

The cement manufacturer is haunted by its aspiration of growing market share and increasing market presence across the country. The company has been reluctant to yield its rising sales profile to competitors despite the growing cost of production and declining industry-wide sales growth. Indeed BUA's strategy is to expand across the country raising its profile in the southeast and south-south markets (see illustration1 below).

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Three years ago, 2018, Dangote cement controlled 60% of the domestic cement business, with Lafarge Africa taking up 30% of domestic market share and BUA (before the merger with CCNN) coming in as the third leg of a tripod with a 10% share of the domestic cement market. Today things have evolved a bit. Dangote still controls roughly 60% of domestic market share but Lafarge Africa has seen its piece of the pie shrink to 21.8% while BUA has gobbled up a nice piece of the business with an additional 7.6% of the domestic market to advertise a recent market share of 17.6% (see illustration 2 below).


Illustration 2 Nigeria's Cement Market Matrix-The New Hardball Games

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The cement market is becoming a slowly burning battle and BUA is smack in the middle of the emerging confrontation for a bigger piece of the limestone processing business.  How things play out would be a brilliant contemporary case study in corporate strategy.  In their book Competing for The Future, Gary Hamel and CK Prahalad noted that "creating the future is more challenging than playing catchup, in that you have to create your own roadmap. The goal is not simply to benchmark a competitor's products and services and imitate its methods, but to develop an independent view about tomorrow's opportunities and how to exploit them", a lesson BUA may well heed.

BUA has growth opportunities in neighbouring African states with its limited approval to export cement to the Niger Republic. This should serve as a toe poke into a potentially sustainable continental export market.


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