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BUA Cement: King in the North

In this report, analysts at Coronation Assets Management discussed the investment case for BUA Cement. Following its acquisition of Cement Company of Northern Nigeria (CCNN), Kalambaina and Obu Cement in 2009 and their eventual consolidation in 2020, the creation of BUA Cement sought to obtain synergies from increased capacity to service new and existing markets, operational efficiency and economies of scale. As the second-largest cement manufacturer in Nigeria, BUA Cement has recorded consistent double-digit revenue growth (CAGR: 29.3%), which translates into EPS CAGR of 12.07% between 2018 and 2021. This performance was supported by increased private sector demand for housing and commercial construction, increased output, and significantly increased cement prices. While our view is that opportunities abound for volume and price growth in the forecast years, 2022F onwards, we believe BUA Cement’s valuation is rich compared to its emerging market peers. Consequently, we recommend BUA Cement (BUACEMENT) as a SELL with a Target Price (TP) of N44.60.

Aggressive capacity rollout to capture demand opportunities.

BUA Cement has embarked on an aggressive capacity rollout growing from 5.0 million metric tonnes (mmt) in 2018 to 11.0mmt as of January 2022, with an additional 6.0mmt across its Kalambaina plant in Sokoto state and Obu plant in Edo State. Management has also highlighted steps to add an additional 8.0mmt in a memo discussing its capital-raising strategy with the International Finance Corporation (IFC). This is intended to increase economies of scale and lower downtime; these developments are likely to be positive for cash costs per ton and margin performance. As a result, our revenue growth forecast for FY22-27F is set at a CAGR of 18.0% in nominal terms. In addition, we forecast EBITDA to grow by a CAGR of 18.8% over the forecast period from FY 2022F to FY 2027F, translating into an EPS CAGR of 17.6%. We expect the growth to be driven primarily by steady growth in both output and prices, and expansion of the company’s operating margin, while at the same time allowing finance costs on completed projects to rise as these were earlier capitalised.

Low consumption per capita, rising prices to support growth.

We continue to see potential growth opportunities in the domestic cement market, of which BUA Cement is the second largest producer in Nigeria. Nigerian infrastructure growth and cement consumption per capita are among the lowest globally, considering its population, demographics, and urbanisation rate. Coupled with the rising retail price of cement, management highlights that excess production could be exported, taking advantage of the African Continental Free Trade Agreement (AfCFTA). Such an outcome could present an upside risk to our volume and revenue growth expectations.

Valuation and Rating.

We initiate coverage with a Target Price (TP) of N44.60/s, implying a potential downside of 35.6% from the current price, and a SELL rating. According to our estimates, BUA Cement is trading on a 2022E P/E of 23.2x and EV/EBITDA multiple of 17.9x, which are significant premiums to its emerging market peer multiples of 14.1x and 7.2x. In our view, the current rich valuation is likely a result of investors over-estimating the future speed of the company’s capacity expansion, volume sales growth and the operational efficiency of new plants. Another factor, in our view, is the stock’s low free float (1.79% of shares outstanding, or N43.60bn) and its consequent low liquidity.

*Additional Reports From Coronation Assets Mgt.