Cement News

Why BUA Cement is not a buy….for now

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Bua Cement’s share price has remained bullish, despite missing its earnings forecast and analysts’ estimates.

The share price has continued to sustain last year’s bullish trend with YTD gain of 1.74% having started the year with a share price of 97.75% and closed on Wednesday, December 11, 2023, at N99.45 per share.

Last year, the company’s share price, posted a year-to-date gain of 35.86%; outperforming the All Share Index performance of 19.98% and tracked significantly above its four-year EPS CAGR of 9.39% per year.

Earnings guidance/estimates trend: Back in June 2022, Bua Cement Plc had informed the stock market of a likely profit after tax of N35.629 billion in Q3 2022, premised probably on its impressive performance in prior quarters of the year. In Q1, revenue grew by 58.50% to N96.988 billion, while in Q2; revenue grew by 45.16 to N91.573 billion compared to a year ago.

  • But by October, when it released its Q3 results, profit after tax declined by 44.91% quarter-on-quarter to N12.651 billion in Q3; 65% below the June forecast. In fact, it reported the lowest revenue, earnings, and earnings per share in Q3 compared to Q1 and Q2. Earnings per share in Q1 and Q2 were 83% of the company’s 9M 2022 EPS of N2.19.
  • Prior, in 2021 FY and Q1, 2022, while revenue was in line with analysts’ estimates, earnings missed estimates by 2.7%.

Probable reasons: Bua Cement Plc just like its peers and other companies experienced a significant rise in operating costs on the back of macroeconomic headwinds, but these costs were unwavering all through the quarters.

The decline/miss in earnings, especially in Q3 was on the back of slower growth in revenue relative to operating/overhead costs due to low volume growth.  According to the company, it achieved only 4.65 million tons in the nine months of 2022.

However, the outlook remained favourable for the company.

  • Earnings per share maintained a resilient growth, up 12.31% to N2.19 per share in 9M 2022.
  • The share price was up 9.71% m/m to N76.8 per share after the release of the Q3 2022 results.
  • Its trailing twelve months’ earnings per share at N2.94 was N0.28 per share higher than the earnings per share reported in the full year of 2021

Valuation: At N99.45, the cement company is trading at a trailing twelve months price-to-earnings ratio of 33.83x, which is above its peer average P/E ratio of 11.9x and Global Basic Materials industry average P/E ratio of 14.5x.

  • Also at a price/earnings-to-growth (PEG) ratio of 2.75x above 1x and a price-to-book value of 8.17, the cement company stock is considered overvalued.
  • The company’s share price delivers a dividend yield of 2.61% and indicated a gross yield of 2.77% based on its most recent dividend of N2.60 per share.
  • This is low compared to both; the bottom 25% of dividend payers (yield of 4%) and the top 25% of dividend payers (yield of 8.57%) in the NG market and is considered not notable.
  • Based on our fundamental valuation, Bua Cement is expensive and overvalued.

However, our sentimental valuation brings us to believe that though the remnants of 2022’s horrors (The rising prices of key energy input operational costs, other related overhead costs, and low plant capacity utilization) are still available and may squeeze the bottom line, the company has already taken actions to moderate them.

  • One of the takeaways from the company’s “9M ‘22 Presentation to Investors and Analysts Report is the company’s sustainability plans to mitigate the rising energy costs and other related overhead, which include deploying solutions that would drive internal efficiencies, the building of 70MW gas power plants at Obu and Sokoto to smoothen the transition from Heavy Fuel Oil to Liquefied Natural Gas.
  • Also, the company expects increased volume with the Sokoto line 4 coming on stream and the additional 3 million-capacity plants being constructed both in Edo and Sokoto expected to come on stream in Q1 2024,

Due to these issues, we place a Hold recommendation on the sticker.

 

 

 

 

 

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