Meristem Securities Rates BUA Cement Hold despite Stock Gains
Olayemi Esan (Market Watch Report) A Slew of equity analysts at Meristem Securities have advised...

Olayemi Esan (Market Watch Report)

A Slew of equity analysts at Meristem Securities have advised investors to stay neutral on BUA Cement share due to estimated downside.Though, as at noon, the cement company’s share had gained 10% to ₦51.15 per share, having peaked at ₦46.50 per share as at Wednesday.In January 2020, BUA Cement formally listed on the Nigerian Stock Exchange with a market capitalisation of ₦1.18 trillion.The cement company share price was ₦35 at listing date, now trend higher to ₦51.15 means a positive addition to investors’ portfolio.The listing brings a conclusion to the merger process between the BUA-owned entities, Cement Company of Northern Nigeria (CCNN) and Obu Cement Co.However, despite its neutral recommendation on BUA Cement stock, Meristem Securities has noted that planned debt issuance will support the company’s working capital requirement.Equity analysts at Meristem stated that in line with expectation, the company has expressed intentions to access the bond market.A slew of analysts considered this necessary given the need to shore up working capital and funding for BUA CEMENT expansion activities.It was also noted that the company will take advantage of the low interest environment and as well refinance its related party source of funds with cheaper debt.Its unaudited financial statement showed that related party liabilities expanded by +1,974.05% in H1:2020.“We note that the company maintains a decent leverage position with a negative net debt of – ₦42.97 billion and an interest coverage ratio of 20.02x.“Hence, given its consistent cash flow generation and decent leverage, we expect a fair credit rating of the company and consequently, a modest cost of debt”, Meristem stated.Currently, analysts explained that BUA CEMENT’s debt to equity ratio stands at 0.08x and thus we anticipate the company to aim for a more balanced capital structure going forward.In its projection, Meristem maintains earnings before interest tax depreciation and amortisation (EBITDA) of ₦81.85 billion and an enterprise value (EV) to EBITDA of 17.23x for 2020.Further Revenue Growth in Q3 Boosts Overall 9M Topline PerformanceIn Q3-2020, BUA Cement Plc improved on the revenue gains made in H1-2020 to deliver another impressive topline performance in 9M-2020.The company grew sales volumes by 15.95%, from 3,291 kilotons in Q3-2019 to 3,816 kilotons in Q3-2020.This puts standalone revenue for the quarter at ₦55.29 billion, representing a 39.72% improvement compared to ₦39.57 billion in Q3-2019.Since the merger, Meristem Securities said the company has focused on leveraging on its wider geographical footprint to access new markets and claim a stronger market share.Analysts explained that while its efforts have resulted in enhanced brand awareness and a wider distribution chain, performance in Q3:2020 was largely supported by the pickup in economic activities.This happened following the easing of lockdowns in Q2-2020 and the relatively short rainy season which aided cement distribution.Overall, the 9M-2020 financial scorecard showed a revenue growth of 20.95%.For 2020, Meristem Securities maintain expectation of a total turnover of ₦211.65 billion, representing a growth rate of 20.59% when compared to ₦175.52 billion in 2019.Lower Net Finance Costs Delivers Stronger BottomlineIn spite of the improvement in topline, energy costs remain a persisting problem pressuring margins.Meristem Securities had highlighted how the Naira devaluation triggered higher energy costs for the company and this narrative remains unchanged in the period under review.Analysts explained that a devaluation induced spike in energy costs at +23.07% in 9M-2020 pushed the cost to sales ratio to 54.18% from 51.23% in 9M-2019.In subsequent periods, Meristem Securities said while fuel mix optimization efforts are expected to yield some gains, a lot still depends on exchange rate stability.Similarly, higher operating expenses (+15.72%) due to higher marketing and distribution costs further pressured the company’s operating margin.Hence, earnings before interest and tax (EBIT) margin declined from 41.65% in 9M-2019 to 39.83% in 9M-2020.However, sizable amounts in interest income totaled ₦233.80 million as against ₦96.63 million in 9M-2019 and a 19.77% dropped off in interest expense lifted bottom-line.Hence, Profit after tax for the period came at ₦53.57 billion, higher by 23.85% when compared to ₦43.25 billion in 9M-2019.Based on the performance review, analysts slipped into bearish mood as they think dealing in BUA Cement stock present a downside risk to investment.“We retain our 2020 target price of ₦42.03 which represents an downside of -7.63% compared to its reference price of ₦45.50; thereby rate the counter as HOLD”, Meristem Securities stated.

Source (Market Watch)

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