Investor confidence in BUA Cement has seen a continuous upswing, with the share price surging by 12.55% over the past week, reaching an all-time high of N105.80 on October 13, 2023.
The last week’s price increase significantly boosted year-to-date gains to 8.24%, underscoring the sustained positive sentiment among investors.
However, the sustainability of this share price rally, which has consistently outpaced earnings growth, will largely hinge on the company’s financial outlook and performance.
This challenge may be compounded by escalating costs and the volume of products sold, which might be impacted due to the recent downward price adjustment.
Approaching the Q3 earnings reporting period, investors will be closely monitoring how the company manages these factors.
Investor sentiment is often influenced by a company’s financial health, its performance, market conditions, positive industry outlook, recent company announcements, etc.
A stock’s price, in essence, represents the market’s attempt to incorporate and “price in” all these changes, both known and anticipated.
In this context, BUA Cement’s stock price has displayed impressive growth, showing a 202% increase since its initial listing at N35 per share on January 9, 2020.
Over the past five years, the company has maintained earnings compound annual growth rate of about 25%. During the first half of 2023, despite the prevailing economic environment, BUA Cement recorded a stable performance, growing its earnings to about N64 billion, compared to N61 billion recorded in the corresponding period of the previous year.
Recently, the company announced a reduction in the ex-factory price of its product to N3,500 per 50kg per bag, which became effective on October 2, 2023. Since this price adjustment, the company’s share price has surged by 24% from its pre-effective date price.
However, a survey by Nariametrics last week reveals that the price of BUA Cement still retails at the old price between N5,300 and N5,500 in Lagos.
BUA Cement’s share price rally since its listing can be attributed to the growing confidence among investors in the company’s earnings potential and prospects.
This increase in confidence has been further boosted by the recent downward price adjustment.
Considering the sustainability of the share price trend ultimately hinges on the company’s financial outlook and performance.
BUA Cement’s outlook appears promising considering its strong brand attribute, expansion drive, and revenue growth, though supported by an upward price adjustment, especially in the first half of 2023.
However, there are potential challenges ahead due to a difficult cost terrain, as rising costs remain a mitigating factor.
For example, the company’s EBITDA margin in H1 2023, contracted by 1.3pp to 45.2% (H1’2022: 46.4%) due to the cost line.
This is despite the increase in revenue per ton, rising to N67,192/ton from N56,454/ton in H1 2022, boosted by an upward price adjustment.
Some of the cost drivers that led to an about 18% increase in the cost of sales and a 74% rise in selling and distribution expenses in H1 2023 remain evident, stable, and ongoing.
In essence, even as revenue per ton may be affected due to a downward price adjustment, the cost of sales per ton and selling and distribution per ton may continue to deteriorate.
Increasing the volume of cement sold becomes a vital goal. The encouraging aspect is that the demand for cement in Nigeria remains substantial, estimated at roughly 30 million tons annually.
If these costs are not effectively controlled, or production volume improves to offset the rising cost, it will impact future earnings growth, margins, and dividends. Eventually, the share price will reflect these changes in its valuation.
Investors hold high expectations for BUA Cement’s future earnings and growth prospects, which is evident in its price-to-earnings ratio.
Presently, BUA Cement stock is trading at a price-to-earnings (TTM) ratio of 34.39x, significantly exceeding the average P/E (TTM) of cement producers at 19.20x, as well as Dangote Cement’s 13.75x and WAPCO-Lafarge’s 9.16x
In Q2 2023, the company achieved a four-quarter high earnings per share of N1.09, bringing the EPS (TTM) to N3.05.
Analysts forecast that it may reach N3.40 for the full year 2023. Achieving this and surpassing it becomes a critical success factor.
One avenue for addressing these challenges is through cost containment. During its H1 2023 conference call, the company revealed that it has implemented measures and is considering additional steps to manage the inevitable increase in costs.
Among these measures, the company has made significant investments in state-of-the-art pyro-processing systems aimed at reducing production costs.
Additionally, they have initiated plans to invest in Compressed Natural Gas (CNG) powered trucks, a move designed to lower distribution costs.
While the company’s downward price adjustment is good, its final effect also would depend on the collaboration in the same vein as other bigger producers like Dangote cement, which controls about 60% of the market share, as well as ensuring the distribution chain does not impinge on it.
It’s crucial to ensure that the distribution chain does not negatively impact the adjustment
Reportedly, one week after the expected implementation date, the revised price has yet to take effect. Several retailers and cement distributors have confirmed that the price remains unchanged.
Thank you BUA cement. I’m from Abia State. The price reduction have not reach here in Abia. Please I’m still expecting your hand of POOR CAN BREATH here in Abia State. May God continue to bless and strengthen your efforts 👏