Why BUA Cement will Make Investors Millions This Year

BUA Cement Share Price closed 2020 with a year to date gain of (+43 percent), surpassing Chapel Hill Denham Limited price target of N36.41 and Meristem Securities’ projection of N42.03 as at December 2020.

With the bull market and an unprecedented rally in the equity market, it is no surprise the cement maker is projected to maintain its rapid growth trajectory this year.

Investors should not be left out of the party as the company’s robust working capital and strong balance gives it the impetus to fund future expansion plans and deliver returns to shareholders in form of share appreciation and bumper dividends.

Obviously, the rate cut by the central bank and the accommodative policy environment stoked rotation from bonds to stock as local investors rekindled their appetite for riskier assets.

Local investors are piling into BUA Cement because the company has been resilient even amid the coronavirus pandemic crisis and an economic downturn, and the gradual reopening of the economy after several months of lockdown is a boon to the cement industry.

Listed on the Nigerian Stock Exchange’s main board, BUA market capitalization printed at N2.71 trillion, while it added N723.32 billion to the bourse in 2020.

Meanwhile, a slew of analysts are overly bullish on BUA, the second major force in the cement industry after it successfully merged two of its subsidiaries.

As a member of the cement oligarchy, the company has been noted to have disrupted the price of the products, many thanks to an astute management and board of directors.

In the third quarter of 2020, the top line was bolstered even amid the economic paralysis caused by Covid-19 and its attendant disruption of construction activities across the key commercial hubs (Lagos, Abuja, Kaduna, Rivers).

BUA Cement performed impressively, delivering a top line growth of 21.0 percent to N156.55 billion in September 2020 from N129.42 billion as at September 2019.

Interestingly, the double digit growth in revenue was largely driven by stronger volume growth and a favourable pricing environment. The stronger cement consumption, especially in Nigeria was private sector led.

Exogenous currency shocks weighed on energy costs

During the period, the company struggled with higher costs due to Naira devaluation, as the central bank sought to protect Nigeria’s external reserves from the twin shocks of the coronavirus and macroeconomic headwinds from the oil price collapse.

The company’s energy cost per ton rose by 9.23 percent as gas prices and costs of imported fuel options (LPFO and coal) increased in response to devaluation.

This impacted the company’s cost of sales ratio, which rose to 54.18 percent in September 2020 from 51.22 percent the previous year.

Cost of sales/ton rose by 10.9 percent to N22,138/ton in the period under review from N19,968/ton as at September 2019.  Selling and distribution costs were up by 2.0 percent to N2,596/ton (H1’2019; N2,547/ton), in support of the firm’s distribution strategy.

Nonetheless, the Group profit after tax increased by 23.80 percent to N53.56 billion as at September 2020 from N43.15 billion the previous year.

As a result of strong sales, operating profit otherwise known as earnings before interest and taxation (EBIT) climbed by 15.70 percent to N62.35 billion in the period under review from N53.90 billion the previous year.

BUA has deployed the resources of shareholders in generating higher profit as average return on equity (ROAE) increased to 18.30 percent in September 2020 from 14.80 percent the previous year.

Similarly, the return on average asset (ROAA) increased to 13.20 percent in the period under review as against 10.60 percent the previous year.

Strong Balance Sheet and Robust Cash flow

BUA has enough cash to meet its financial obligation or pay dividend and fund future expansion plans.

The company’s cash flow from operating activities surged by 576.40 percent to N178.96 billion as at September 2020 from N26.45 billion as at September 2019.

BUA has been spending copiously on the acquisition of property plants and equipment as it continues to undertake or embark on major projects across the country.

Net capital expenditure (Capex) spend surged by 452.60 percent in the period under review as against N22.79 billion the previous year.

Positive Outlook Buoyed by infrastructure Spend and Covid-19 Vaccine

Analysts have unanimously agreed that BUA will benefit from Nigeria’s huge infrastructure deficit and housing shortage as the government plans to accelerate spending to shrink the gap.

The 2021 budget submitted to the National assembly showed that the government plans to spend NGN3.60trn on capital projects, an increase of 45 percent from the revised capital expenditure for 2020 (N2.49 trillion).

Also underpinning investors’ optimism is the recent establishment of an infrastructure company by the FGN, which will be funded mainly by the Central Bank of Nigeria (CBN) and Nigeria Sovereign Investment Authority (NSIA).

The gradual reopening of the opening of the economy and the ability of health workers to administer the vaccine will definitely accelerate construction activities, which means bumper gains for BUA investors.