Takeaways from BUA Cement's Q1 2020 and FY 2019 Conference Call; Summoning The Guerilla


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

  • Cement production rose from 2,901kt in FY 2018 to 4,501kt in FY 2029, a rise of +55.2%
  • Revenue rose from N119.01bn in 2018 to N175.52bn in 2019, representing a growth of +47.5%
  • The company's EDITA margin remained flat at 47% between both years 2018-2019
  • Earnings before interest and tax (EBIT) increased by +66.7% from NN42.84bn in FY2018 to N71.43bn in FY2019.
  • BUA's EBIT margin climbed from 36% in FY 2018 to 40.7% in FY 2019, a rise of +4.7%.
  • Profit before tax rose from N39.17bn in FY 2018 to N66.24bn in FY 2019, a growth of +69.1% Y-o-Y.
  • The company's net debt position spiralled +420% from N1.12bn in FY 2018 to N5.19bn in FY 2019.
  • BUA's free cash flow (FCF) jumped +159.3% from a negative N5.40bn in FY 2018 to a positive N3.20bn in FY 2019 


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Highlights Q1 2020

  • Cement production edged up by +20.0% from 1.11kt in Q1 2018 to 1.33kt in Q1 2020.
  • Revenue climbed +25.1% from N43.13bn in Q1 2018 to N53.97bn in Q1 2020.
  • EBITDA margins Y-o-Y fell -3.3% sliding from 48.9% in Q1 2019 to 45.6% in Q1 2020.
  • EBITDA margin slipped from 42.1% in Q1 2019 to 38.9% in Q1 2020, representing a decline of -3.2%.
  • BUA's profit before tax went up Y-o-Y by +15.7%, rising from N17.39bn in Q1 2019 to N20.13bn in Q1 2020.
  • Free cash flow (FCF) turned negative by N3.90bn in Q1 2020 as against the positive FCF of N13.52bn in Q1 2020 representing an N128.8bn shrink in FCF Y-o-Y which may largely reflect a major increase in the cement manufacturer's capital expenditure (CAPEX) in Q1 2020.
  • The rise in BUA's CAPEX appears to be confirmed by the +81.7% increase in its net debt which rose from N5.84bn in Q1 2019 to N10,60bn in Q1 2020
  • The equity to debt ratio of the company dropped marginally from 1.29x in Q1 2019 to 1.27x in 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)

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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

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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

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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


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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. 


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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

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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

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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

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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

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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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