BUA Cement (BUACEMENT) released its FY 22 audited results after trading hours last week Friday (24 February). The company reported an EPS growth of 11.3% y/y in Q4 22, translating to a FY 22 EPS growth of 12.0% y/y. The company proposed a final dividend of N2.80/s, implying a dividend yield of 2.8% based on the last closing price of N99.75 (01 March). Driven by the elevated pricing environment and improved volumes, the group reported double digit bottom-line growth despite elevated production and operating costs, as well as its weighty finance expenses. As a result, the achieved EPS is 3.72% above our forecasts for FY 22. The market’s reaction to the results has been neutral. Year-to-date, the stock is up 1.7%.
Price growth drives double-digit revenue growth
The company’s revenue grew by 39.7% y/y in Q4 22 (FY 22: 40.3% y/y). The achieved revenue is in line with our FY 22 forecasts (+0.75% variance). We note that BUA Cement delivered the most revenue growth y/y amongst its peers in Nigeria in Q4 22. While management Is yet to provide details on the drivers of the company’s strong revenue growth, we believe this to be driven by strong Industry-wide growth in price per tonne and recovery in sales volume growth. Recall in 9M 22, revenue growth was a combination of volume (+16.3% y/y) and price (+20.9% y/y) growth. For FY 22, we expect that the firm started to take advantage of the additional 3.0MMT Kalambaina line 4 plant commissioned in January 2022. Nevertheless, it is not unlikely that factors such as record high inflation, disruptions in gas supply and elevated variable production costs impede the pace of sales volume growth.
EBITDA remains resilent despite surging OPEX
Gross margins shrank by 385bps to 44.0% in Q4 22, owing to heightened Cost of sales growth (+50.0% y/y). Cost of Sales continued to be pressured mainly by the surge in Energy Cost (+78.1% y/y), which reflects the sustained hike in prices of alternative energy sources. In addition, Quarry fees and royalties (+103.8%), Water Supply (+582.1%) and Other Production Expenses (+96.5% y/y) contributed to the elevated Cost of Sales recorded. However, we are encouraged that the company managed to keep Raw Material costs (+9.04% y/y) under control despite the worsening FX situation as it relates to imported inputs. Nevertheless, Revenue growth in absolute terms offset Cost of Sales growth as the company reported Gross Profits growth of 28.5% y/y in Q4 22.
EBITDA rose by 15.7% y/y in Q4 22, despite a 101.3% y/y jump in Operating expenses. Selling and Distribution costs more than doubled, up 129.7% y/y. The distribution cost component (accounting for c.70% of total Selling & Distribution costs) surged by 216.9% y/y as the sustained high cost of Automotive Gas Oil (AGO or Diesel) in Nigeria remained a major headwind. In addition, Advertising and sales promotion cost rose by 75.5% y/y, contributing to overall OPEX pressure (FY 22: 86.7% y/y).
The company, like the rest of the industry intesifies efforts to lower its energy bill by consuming locally-sourced Liquefied Natural Gas (LNG) to diversify its energy mix and reduce its reliance on imported Coal, Low Pour Fuel Oil (LPFO) and AGO. However, sustained disruptions in LNG supply continue to militate against this objective. This has forced the company to remain reliant on diesel and imported coal for production and distribution.
We expect that as the company transitions to gas powered plants, ultimately its energy bill will be lowered in the long term. However, in the short to medium term, these costs are likely to persist as the company relies on these existing fuel sources for backup.
Strong earnings offset heightened finance costs
While the company recorded Net finance income of N1.11bn in Q4 22 after a Net finance cost of N36.07m In Q4 21, for FY 22, the company recorded a 693.6% increase in Net finance cost to N8.61bn. This is consistent with its policy to unwind earlier capitalisation of bonds and loan interests on its Sokoto line 4 plant and other qualifying assets. Nevertheless, Profits Before Tax grew by 10.8% y/y in Q4 22. Tax expense in Q4 22 was flat (-0.5% y/y), hence Net Income grew by 11.7% y/y In Q4 22.
Conclusion
BUA Cement’s revenue performance in FY 22 was in line with our expectations (+0.75% variance). Amongst its peers in the industry, we are pleased with its improved capacity utilisation (57.3%) reflecting in decent volume growth while also taking advantage of the elevated pricing environment. On the flip side, the elevated operating expense profile is worrisome. Like its peers, in the medium term, given the disruptions in LNG supply, we expect the company to continue to rely on diesel and coal for its production and distribution activities and this is likely to further pressure its Cost of Sales and Operating expenses. Recall In Q3 22, we anticipated rising net finance costs as the company continued to unwind earlier capitalised borrowing costs as plants become operational. We expect this going forward until the capitalised borrowing costs for operational plants are exhausted.
