A stock’s price is, at its core, the total worth of one share of stock of a company, which includes the company’s operating profits as well as the dividend it chooses to provide to the shareholders. As the predictions regarding the company’s future profitability change, the stock price will attempt to “price” those changes.
BUA Cement’s share price has been tracking significantly ahead of earnings growth, since it was listed on January 9th, 2020. On the listing of 33.86 billion shares at N35 per share on the Nigerian Stock Exchange, the company emerged as the third most valuable company with a market capitalization of N1.185 trillion. Since then, the share price has increased by about 184% from the listing price of N35 per share. That is not all.
Recently the Cement giant released its 2022 FY results showing that earnings per share increased by 12%, whereas the company’s share price posted a year-to-date gain of 35.86%; outperforming the All Share Index performance of 19.98% and the company’s three-year EPS CAGR of about 12%.
This year, the share price has increased by 1.7%, making the company the fourth most valuable stock on the NGX with a market capitalization of N3.37 trillion, which is about 11.1% of the entire Nigerian Stock Exchange equity market.
As good as this seems, it appears not to reflect the company’s fundamentals, though not everybody buys stocks based on fundamentals. People may buy stock based on futuristic fundamentals, company outlook, and supportive environment/market.
Perhaps that could be the reason why the share price is tracking significantly ahead of earnings growth.
BUA cement’s outlook looks promising, supported by a positive market/environment situation. The company has set its sight on expanding its current output plan in Edo and Sokoto by 6mmtpa. This will increase its total capacity to 17mmtpa and thus increase its revenue. Currently, the company is the second-largest producer of cement by volume in Nigeria and boasts of 20-24% market share behind Dangote Cement.
The demand for cement in Nigeria remains strong and curiously low compared to neighbouring countries. This means there is room for an increase in demand. For example, in 2021, cement consumption per capita in Ghana, Senegal, and Ivory Coast was around 230kg to 250kg, whereas, in Nigeria, it was 140kg.
Probably in reverence to this environmental strength and opportunities, BUA Cement has continued to post impressive performance and remains profitable. Its performance over the years has been upheld by consistent market demand, supported by an excellent business model.
In 2022FY, revenue increased by 40% to N361 billion from N257 billion in 2021 on the back of increased volumes dispatched and pricing activities.
However, its major drawback has been cost, which has continued to contract its margins. In 2022, the company’s cost of sales increased by 45% y/y to N198 billion on the back of high input and energy costs. Energy cost remains one of the main costs representing about 46% of the cost of sales in 2022. Whereas input costs increased marginally by 9.06%, energy costs increased by 78% y/y.
This calls for concern, considering that the company had informed stakeholders that as part of measures to reduce the impact of higher energy prices, the company in June 2021, successfully commenced the usage of Liquefied Natural Gas (LNG) at the Sokoto plant to help reduce its dependence on imported LPFO and AGO.
Last year, BUA Cement paid N136.982 billion in loan repayments to banks, N4.838 billion in interest payments, and N8.625 billion in interest on debt securities. Most of this was funded from bank borrowings.
The impact is immediately felt on its net finance cost, which rose 6.94 times to N8.612 billion. Finance cost now takes up 8.14% of the company’s operating profits, up from 1.64% a year earlier.
As long as these costs are not contained and sales increase, they will affect the future earnings growth, margins, dividends, and eventually, the share price will ‘price’ these changes in.
BUA Cement on average pays about 95% of its earnings as dividends to its shareholders. For the 2022 FY, the company paid dividends of N2.80 out of the N2.98 EPS. At the current share price, it delivers a dividend yield of 2.82%. This is low compared to Dangote Cement’s 7.19% and WAPCO’s dividend yield of 7.41% and may make the stock less attractive to investors.
Also, at the current share price, BUA Cement is trading at 33x its earnings, higher than Dangote Cement’s 12.48x and WAPCO’s 8.13x multiples. This is an indication that the stock is expensive.
Notwithstanding, our sentimental analysis and review of BAU Cement bring us to believe that though its current valuation is relatively not too impressive, the company’s outlook offers optimism for growth and better returns to its shareholders.
BUA Cement is the second largest producer of Cement in Nigeria with an installed plant capacity of 11 mmpta With the planned addition of 6mmtpa capacity plants, will bring the total capacity to 17mmpta.
All it needs to do now is to be more efficient and apt in executing its sustainability plans to mitigate the rising energy costs and other overhead costs, which have become systematic risks.
We do not expect much increase in terms of production volume this year. The additional 6mmpta capacity plants under construction in Edo and Sokoto are expected to come on stream in Q1 2024.
This is an indept and unbiased analysis. At its present price, Bua Cement is overvalued taking all its fundamentals into consideration. Thanks for your analysis.