| Stock & Analyst Updates |    1857 VIEWS  |
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Tuesday, June 16, 2020
/7:00PM / Teslim Shitta-Bey, Managing Editor /Header Image Credit: Ecographics
BUA has edged into a
position of challenging for recognition as the second-largest cement
manufacturing operation in Nigeria as it clips at the heels of its closest
rival Lafarge-Africa. Recently released results by the company at its recent
Investors Conference Call for 2020 noted that the clinker manufacturer was
pushing to increase market share as it adopts a four-pronged approach to
corporate growth and sustainability.
Outsiders see this as a
Guerilla move as the cement producer slowly chips away at the market share of
its two larger competitors, Dangote Cement and Lafarge. In 2018 the market
share of the three major cement producers in Nigeria was carved nicely with
Dangote leading with roughly 60% of market share while Lafarge came in second
at 30% of market share and CCNN (later to become BUA) trailing with an
approximate market share of 10%. But since 2019 when CCNN merged with Obu
Cement to form BUA, the playfield seems to have changed. The gentlemanly market
slices are shifting noticeably as BUA continues to nibble at the market share
of competitors.
The completion of its
Kalabaina plant was a game-changer as it enabled the company to increase output
and reduce production cost per unit. The consequence has been that BUA has
marginally sliced down the retail price of cement as chiselled down the market
share of competitors. The consequence has been a slow slide in the retail market
price of cement, especially in the North. The result of BUA's market ascendancy
has seen a shift in market share with BUA reportedly cornering 17.6% of the
local market, Dangote holding its ground at 60.6% and Lafarge dropping to 21.8%
as at 2019. The clinker maker's recent financials colour-in the operational
shifts designed to create increased market presence.
Highlights FY 2019
Highlights Q1 2020
Sounding The
Profit Bugle Quietly
BUA's Q1 2020 profit
performance was respectable with profit before tax (PBT) rising by +15.7% from
N17.39bn in Q1 2019 to N20.13bn in Q1 2020. Admittedly, this was a far distance
from the +69.1% growth in PBT between FY
2018 and FY 2019, but with an economy growing at +1.87%
in Q1 2020 as against +2.1% in Q1
2019, the slower growth in PBT was expected. Besides, with COVID-19 gradually
taking its toll on economic activities by March 2020, not much forward momentum
could have been generated as the cement industry is pro-cyclical, typically
moving with the upturns and downturns of the broad economy (see chart 1
below).
Chart 1 BUA Profit Numbers FY2018-FY2019, Q1 2019-Q1 2020 (N'bn)
Source: BUA Audited Financial Statement FYE 2019,
Financial Statement Q1 2020
An opening up of the
economy in Q3 2020 may see better profit performance but the outlook for Q2
2020 is at best weak. If a second wave of the COVID-19 pandemic does not lead
to another economic lockdown, BUA may see an uptick in its earnings from Q3
2020, but if the second round of lockdowns occurs within the year, the company may
suffer negative free cash flow (FCF) and a not-so-subtle slide in net sales and
profit.
Activity,
The New Challenge
Keeping its plants running
the company has had to evolve a business plan premised on efficiency and
aggressive market penetration. BUA has had to jettison its niche strategy
(reflected in the change in its corporate pay-off line from 'King of the North' to 'King of Strength'). The company has retained its generic cost containment
plan but has had problems with differentiation. Nevertheless between 2018 and
2019 the clinker producer saw impressive operational numbers with production
tonnage rising by +55.2% and revenues
gliding up by +47.5% Y-o-Y. Unfortunately,
Q1 2020 has not been as cheery. The Y-o-Y growth in tonnage between Q1 2019 and
Q1 2020 was +20% and the rise in revenue was
+25.1%. For Q1 2020 this could be seen as a good
result as the first quarter in each year are usually slow sales periods for
most businesses including construction and building materials (see chart 2
below).
Chart 2 BUA's Revenues FY 2018-FY 2019, Q1 2019-Q1 2020
Source: BUA Audited Financial Statement FYE 2019, Financial
Statement Q1 2020
The company's current assets relative to its current liabilities have grown steadily suggesting improved operational stability and liquidity. BUA's current ratio rose from 0.5 in 2018 to 0.64 in 2019 and 0.86 in Q1 2020. Although the ratio has been rising it is still far from what analysts considered a preferred ratio of 2 (see chart 3 below). Indeed, the manufacturers acid test ratio (a ratio that adjusts for the stock of unsold goods and raw materials in a company's warehouses relative to current assets and liabilities) was even less flattering.
Chart 3 BUA's Current Ratio FY 2018-FY 2019, Q1 2020
Source: BUA Audited Financial Statement FYE 2019,
Financial Statement Q1 2020
From 0.38 in FY 2018 the
acid test ratio fell to 0.36 in FY 2019 and reversed to 0.56 in Q1 2020, an
acid ratio less than 1.5 is usually frowned upon by analysts as it reflects the
high influence of inventories or stocks on a company's liquidity (see chart 4
below).
Chart 4 BUA's
Acid Test Ratio FY 2018-FY 2019, Q1 2020
Source: BUA Audited Financial Statement FYE 2019,
Financial Statement Q1 2020
BUA has two operating issues it may need to address urgently, the first is what appears to be a tight liquidity situation which would require lower inventory levels and lower debt or higher equity. The second issues is that the company may need to find a quick and permanent resolution to its ongoing legal battle with Dangote cement over the mining rights to its Obu-Okpella quarries. The ongoing conflict between the two companies could put severe pressure on BUA's corporate outlook as trading partners see the overhanging legal dispute as part of their corporate trade risk assessment, the same would be valid for bank lenders to the company who would insist on a premium for loans advanced. The consequence of the higher cost of finance would be a squeeze on PBT and a cut in free cash flow.
The
Liquidity Minefield
BUA is obviously equity
rich but most of the equity close to N400bn is invested in property, plant and
equipment leaving operating activities to be covered by short term-borrowing
which explains the +420% leap in net debt
between FY 2018 and FY 2019. The high debt financing model appears to be an
industry characteristic as other companies in the business also posted low
current and acid test ratios between FY 2018 and FY 2019 as well as Q1 2020 (see chart 5
below).
Chart 5 BUA's liquidity ratio FY 2018-FY 2019, Q1 2020
Source: BUA Audited Financial Statement FYE 2019,
Financial Statement Q1 2020
However, going forward BUA
may need to scale back investment in assets so that the company can push up its
return on asset and return on equity. With higher net sales to asset size the
company should be able to improve its return on equity (RoE) in FY 2020. Of
course, this will be contingent on the next course of federal and state
government action concerning the COVID-19 pandemic in Q3 and Q4 2020.
The company during its
Conference call noted that part of the reasons for the heavy investment in inventory
is that the company decided to adopt a deliberate input hedging strategy to fend-off
supply chain disruptions that could occur in an environment of public policy
uncertainty and an escalation in the communal spread of the disease. The
company also noted that to handle liquidity some capital expenditure
considerations may be postponed (see illustration 1 below)
Illustration 1 BUA's Risk Identification and Mitigants
The Missing Debt
Trap
BUA's massive surge in net
debt would need moderation over the next two consecutive quarters if the
company is to maintain fiscal balance. The problem with a growth sprint is that
corporations tend to overtrade in the heat of an expansionary dash and this
leaves them with heavy cost of carry as inventories pile up and cash becomes increasingly
scarce. BUA may, therefore, need to keep a keener eye on its balance sheet
composition with a view to gradually easing pressure on the borrowing gas
pedal. The company's Y-o-Y net debt
increase from N1.12bn in FY 2018 to N5.19bn in FY 2019 could become an
albatross if allowed to escalate further.
Admittedly, as a
proportion of equity BUA's debt ratio is quite modest and does not raise any
red flags, but the problem emerges from the fact that most of the company's
equity is invested in assets that are not easily convertible to cash, thereby
putting short- term pressure on liquidity (see chart 6 below).
Chart 6 BUA's Debt to Equity Ratio FY 2018-FY2019, Q1 2020s
Guerilla
warfare
Besides its battle to hold onto its mining licenses in Okpella, Edo state, BUA has not taken on any of its competitors in a head-on battle for market supremacy. The company has definitely leveraged the efficiency of its newer equipment to reduce unit cost of production but it has not gone into an overt 'beggar-thy-neighbour' onslaught on its competitors market share. The quiet and unspoken gentleman's concord amongst local cement manufacturers has kept prices up and operating margins healthy for all. But unfolding events indicate that BUA intends to fight for a larger piece of the local cement pie, perhaps underlying the recent wrangle between it and Dangote over the Okpella, Edo state, quarries (see illustration 2 below)
Illustration 2 BUA's Strategic Market Positioning Plan
Such a bold move has
understandably raised the interest of its competitors who are keen on not
tipping the previously well-established applecart here BUA played a comfortable
but distant third to Dangote and while clipping at the heels of Lafarge. Recent
events suggest that things are likely to change as BUA is dogged in growing its
market share and reluctant to yield its rising production and sales profile to
its rivals.
From a quiet nibbling at
the edges of the local cement market BUA is insisting on a larger seat at the
table and from guerrilla warfare the company may morph it a army of corporate
occupation, how the events pan out for clinker producers over the next two
quarters will be a matter of brains, street smarts and strategy, if a bit of
politics is thrown into the mix, so be it. The BUA guerilla appears ready to
push for more territory, no matter whose ox is gored.
The consequence of such
bravado could prove to be a brilliant strategy in modern corporate competition
or may end up being one of the most disastrous efforts at head-on collision
with market colossus's in modern competitive strategy, whatever the outcome the
chess moves are a delightful treat to watch.
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