BUA Cement Plc. Earnings Note Q1:2023 - Macroeconomic Realities and Rising Finance Cost Take a Toll
Moderate Revenue Growth Amid Domestic Headwinds
BUA Cement Plc. had a lackluster start to Q1:2023. While Revenue showed a modest YoY growth of 9.65% (NGN106.35bn), both EBITDA (-2.58% to 44.81bn) and Profit After Tax (-19.13% YoY to NGN28.80bn) experienced a slowdown during the quarter. This could be attributed to the impact of rising costs, electioneering activities, and compounding finance costs. Furthermore, economic activities across the country were hampered by the cash crunch experienced in the first quarter.
Marked by Repairs and Maintenance Cost
Cost of Sales (adjusted for depreciation) rose sharply by 12.37% (YoY) to NGN52.28bn from NGN45.64bn in Q1:2022. This was driven by a surge in Repairs and Maintenance Costs (+41.10% to NGN2.92bn) and Materials Costs (+35.03% YoY to NGN18.63bn) during the period. It is possible that the repairs and maintenance activities in the company's plants may have caused a decline in the stock available for sale, which is evidenced by the drop in stock movement from NGN1.38bn in Q1:2022 to -NGN1.28bn in Q1:2023.
Elevated Finance Charges Continues to Impact Net Income
We had previously predicted a substantial increase in finance cost due to BUA Cement's expansionary plans. Despite a Net Gain on FX Exchange of NGN1.71bn, the decline in Interest income (-80.77% to NGN60.69mn) and significant upsurge in Interest Expenses (+1,177.32% YoY to NGN4.42bn) resulted in an 8,364.29% YoY surge in Net Finance Cost to NGN2.65bn.
In view of these developments, we are revising our target price upward to NGN110.81 with a "NEUTRAL" rating. We expect BUA Cement Plc. to maintain its revenue growth momentum, given the management's focus on expanding production capacity and increasing market share. Additionally, we anticipate an overall improvement in demand in 2023FY, particularly in H2:2023 following the recovery of economic activities from the impacts of election uncertainties and the scarcity of Naira. Also, we expect the resumption of works on private and public projects that have been halted due to the general election.
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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