BUA Cement FY2020 Unaudited Results: Significant Growth In Earnings and Debt Size Amidst A Pandemic


Saturday, February 20, 2021, / 06:00 AM / By Adaeze Nwanchukwu, Proshare Research   /  Header Image Credit: BUA Cement

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The full-year (FY) 2020 unaudited results of Nigeria's second-largest cement company reveals improvement across all profit metrices, although, cost of sales increased during the period, it did not blow a cloud over the company's broad outlook. Analysts attribute growth in earnings of BUA Cement Plc to effective cost management measures and the use of technologically advanced plants. The unaudited accounts of the cement maker saw a sizable growth in the company's debt, with its debt rising by +933.61% for the year, leaving the company highly leveraged.



Key Takeaways

  • Revenue rose by +19.35% year-on-year (Y-o-Y) from N175.52bn in 2019 to N209.47bn in 2020.
  • Profit before tax grew by +19.37% Y-o-Y from N66.24bn in 2019 to N79.07bn in 2020
  • Gross profit up Y-o-Y by +15.76%, from N82.44bn in 2019 to N95.43bn in 2020
  • Cement volume up by +13.33% in 2020 from 4.5m tons in 2019 to 5.10m
  • Cost of sales increased by +22.53% from N93.08bn in 2019 to N114.04bn in 2020
  • Finance cost declined significantly in 2020 by -33.77%, from N5.19bn in 2019 to N3.44bn in 2020
  • Selling and distribution grew by +7.27% Y-o-Y from N11.84bn in 2019 to N12.71bn in 2020.
  • Basic Earnings per share up by +16.2% Y-o-Y from 179kobo in 2019 to 208k in 2020


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Market Moves: Price and Volume Adjustments

As one of the most capitalized stocks on the Nigerian Stock Exchange (NSE), the share price of BUA Cement Plc has reflected the volatility that has been associated with several businesses in 2020. The company's share price grew by +109.05% in 2020, with the lowest price being recorded in April 2020 which was at the peak of the coronavirus pandemic. Prices were largely unsettled between May and September, however, in October 2020 the company's share price sprinted upwards, closing the year at its highest value in December 2020 when it capped off at N77.35 per share. Year-to-date (YTD), however, the company's share price has dipped by -6.92% as of February 17, 2021.


The trend in the company's volume of shares traded has been more volatile than the price of the stocks. In 2020, the volume of shares traded increased marginally by +4.70% with the lowest volume traded being in March 2020 while in August 2020 the stock saw its highest volume. The YTD performance of traded volume shows a decline of -73.56% as of February 17, 2021 (see chart 1 below).


Chart 1: BUA Cement Share Price Movement and Volume Traded as of 17 Feb. 2021

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Source: BUA Cement Financial Result, Proshare Research



Chart 2: BUA Cement Share Price Movement between February 01 and February 19, 2021


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Profitability-Pushing the Money Plate Forward

Despite harsh macroeconomic conditions induced by the COVID-19 pandemic, the FY2020 unaudited result of BUA Cement's saw revenue for the year increase Y-o-Y by +19.35% from N175.52bn in 2019 to N209.47 in 2020. Revenue was directly from the sale of cement as stated in its financial statement (see chart 2 below).



Chart 3: BUA Cement Revenue 2018 - 2020 (N'bn)

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Source: BUA Cement Financial Result, Proshare Research


However, translating to the US dollar, the clincker maker's revenue dropped by -3.85% from $571.81m in 2019 to $549.80m in 2020 using the official CBN rates at the different periods. This decline was the result of the noticeable devaluation of the domestic currency, the naira.


Chart 4: The Naira's Value Headache Dec. 2016-Nov. 2020

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Source: CBN, Proshare Research


Profit before tax (PBT) of the clinker manufacturer grew Y-o-Y by +19.37% from N66.24bn in 2019 to N79.07bn in 2020. However, growth in PBT for the period is lower than the +69.11% growth recorded in 2019 (see chart 4 below). 


Gross profit grew +15.76% in 2020 despite a +22.53% growth recorded in cost of sales during the period. Operating profit also recorded growth, grew by +14.98% Y-o-Y while finance cost declined by -33.77% for the period.


Translating to USD terms, PBT declined by -3.83% Y-o-Y from $215m in 2019 to $207.52m in 2020.


Chart 5: BUA Cement Profit Before Tax 2018 - 2020 (N'bn)

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Source: BUA Cement Financial Result, Proshare Research


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Liquidity - Pushing Current Assets and Freezing Liabilities

The working capital of the cement manufacturer shows significant improvement for the period. BUA Cement's working capital has been negative as current liabilities were higher than the company's current assets suggesting a tightening of the company's liquidity, usually characteristic of a company in a rapid growth phase. For 2020, working capital grew by +186.15% from a negative position of N34.31bn in 2019 to a positive working capital of N29.55bn in 2020, as the company began to work off its liabilities (see chart 5 below).



Chart 6: BUA Cement Working Capital 2018 - 2020 (N'bn)

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Source: BUA Cement Financial Result, Proshare Research


The current ratio of BUA Cement Plc improved in 2020 to 1.14 from 0.64 in 2019 reinforcing the notion that the company was resolving tight liquidity and building leg room for it to support operations and raise further capital for expansion. Although the ideal current ratio for a cement manufacturing company is roughly 2 which shows the company can conveniently meet its short-term liabilities the 1.14 figure was a notable improvement over the previous year (see chart 6 below).


Chart 7: BUA Cement Current Ratio 2018 - 2020

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Source: BUA Cement Financial Result, Proshare Research



BUA's current asset growth outstripped growth in its current liabilities, hence providing a brighter operating outlook as the need to raise large short term bank loans may have become muted. The cement makers current assets grew Y-o-Y by +279.34% while current liabilities grew by +113.8% between 2019 and 2020. Growth in current assets was driven mainly by cash inflow of N66.72bn being proceeds of an earlier bond Offer.


BUA Cement's quick ratio for the period increased to 1.01 from 0.36 in 2019 indicating a decline in its inventory of finished and intermediate goods. A quick ratio less than 1 indicates that the company doesn't have enough ready assets excluding inventories to cover current liabilities (see chart 7 below).



Chart 8: BUA Cement Quick Ratio 2018 - 2020

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Source: BUA Cement Financial Result, Proshare Research

Overall the liquidity position of BUA Cement Plc improved in 2020, from 3.31% in 2019 to 15.76% in 2020. Total assets grew significantly Y-o-Y by +68.7% from N470.57bn in 2019 to N793.85bn in 2020. Growth in total assets was majorly driven by an over +700% rise in cash and short-term deposit between 2019 and 2020 (see chart 8 below).  


Chart 9: BUA Cement Liquidity Ratio 2018 - 2020

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Source: BUA Cement Financial Result, Proshare Research


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Debt-to-Equity Ratio-The Sweet Danger of Leverage

A higher debt-to-equity ratio (leverage ratio) indicates that a company is using debts to finance its assets and operations. This reflects on the significant spike in the leverage ratio of the cement company. The leverage ratio increased to 59.19% in 2020 from 5.89% in 2019. Total debts grew Y-o-Y by +933.61%, from N21.42bn in 2019 to N221.43bn in 2020 while total equity grew marginally by +2.87% (see chart 9 below).


Chart 10: BUA Cement Leverage Ratio 2018 - 2020

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Source: BUA Cement Financial Result, Proshare Research


The Company has been aggressive in financing its growth with debt and this can pose a great risk to its investors. BUA Cement plc entered into the debt market in December 2020, its first issuance was a N100bn Series 1 corporate bond. The bond was issued at a fixed rate of 7.5% and was over-subscribed by +37.82%, this brought the company's total debt size to N221.43bn including long and short-term borrowings at the end of 2020.


BUA Cement's sustainable growth rate (SGR) soared to +44.12% in 2019 from 15.38% in 2018, the over +40% growth in 2019 was after the merger with CCNN. However, between 2019 and 2020, the limestone crusher saw SGR climb to +47.38%  this sustained the previous years growth rate but represented a decline in the pace of SGR growth. The company's SGR is impressive but unsustainable as it would require a level of equity return and retained earnings that would naturally decline as the company pays back its debt (see table 1 below).


Table 1: BUA: A Leap of Faith

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Managers of the company, have said that BUA cement was set to commission its 3 million Metric Tonnes (MT) Sokoto cement plant in 2021 and an additional 3 lines of 9million Metric Tonnes (MT) total capacity in Adamawa, Edo, and Sokoto states by 2023.


Analysts note that this should bring the company's total cement production capacity to 20m metric tonnes per annum upon completion, putting the Company behind Dangote Cement Plc which has 48.6m MTPA as of 2020, but ahead of Lafarge Africa Plc at 14.1m MTPA. Currently, BUA Cement Plc has a total capacity of 8m MTPA.


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Noise That Hurts

BUA's unaudited 2020 result is some respects impressive and in others worrying. The company's escalating debt may indicate a problem of overtrading and expansion beyond what is prudent and sustainable, however, the cement makers growth in sales and earnings and fall in inventory of finished goods suggest that the company has solid headroom for further business, especially with the local economy out of 2020's recession as indicated by the 0.11% growth in gross domestic product (GDP) in Q4 2020. The economy's full year growth shrunk by -1.92% which was well above analysts forecast for the year after the Q2 drop of -6.10% and Q3 fall of -3.62%.


The opinion has been expressed in some quarters that BUA had breeched stock market rules by handling information about its full year report was an audited report. They insist that since the result was unaudited it should have been treated as an interim report and should have emphasised the company's unaudited Q4 performance.


There is some merit in the observation but the rules of the NSE introduced in 2019 permits companies to report their unaudited interim reports including for its year end as long as it is clearly stated that the figures were unaudited and indicative.


The fact that the company's managing director made a statement around the interim result as if it were the audited financial statement of the company was an oddity. Managing Directors and Chairmen of companies traditionally wait for the full account to be published before issuing reviews that are published as part of the company's statement of financial affairs. BUA's MD, Engr. Yusuf Binji's, operational review accompanying the full year 2020 interim result amounted to jumping the gun and leap frogging the remit of an unaudited financial statement.


While there is nothing wrong with companies publishing their unaudited full year financial result it would, however, be a misrepresentation of facts for such results to be treated as audited statements of the company's financial performance for the year in review.


Enthusiasm has its value but it cannot be allowed to manifest outside the confines of best market practices and proper investor communication. The NSE may need to take a second look at how companies represent their interim financial statements and ensure that such statements comply with globally adopted norms. On the stock market self-promotion should have its limits too.



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