BUA Cement’s rising production costs threaten shareholders’ investment

BUA Cement, owned by billionaire, Abdulsamad Rabiu, reported its revenue grew by 51.7% in the second quarter of 2022. While this is an impressive growth, the company has a spending problem.

During Q2 this year, BUA Cement generated N188.56 billion, surpassing the N124.27 billion the manufacturer had grossed as revenue in the corresponding period of last year.

While the company doesn’t have an issue raising revenue, its financial problem rears its head as a result of the management’s inability to curb rising production cost, which is eating deep into BUA Cement’s revenue, and sinking its profit – this threatens shareholders’ investment growth.

Analysis of the company’s financial statements showed that cost of sales, which represents cost of production, rose by 47.3%, growing almost as high as revenue, and gulping the whole of its profit.

Ripples Nigeria understands that BUA is spending more than its generated profit on production of its products, considering its gross profit for Q2 2022 was N91.05 billion, which is N6.44 billion lower than its N97.5 billion cost of sales.

Last year second quarter, BUA Cement’s production cost, N66.15 billion, also surpassed the N58.12 billion profit grossed for the same period, and the former stood 47.3% behind that of Q2 2022.

The impact of the rising cost and the management’s inability to find ways to reduce its expenses was felt on the profit after tax (PAT). Despite growing by 41.4% to N61.36 billion in Q2 this year, surpassing the N43.3 billion of Q2 2022, there was nothing left in the profit to share.

It is worrisome considering BUA Cement also spent N136.4 billion on production of its products in full year 2021, but generated N120.9 billion as profit. And the Q2 earnings report is showing history is trying to repeat itself this year.

This will impact shareholders’ investment, considering dividends are paid out of profits, and with BUA unable to keep expenses low, the company wouldn’t have enough cash to fund its operation, forcing the management to increase its debt level, which might in turn affect its future profit and investment value.

For this reason BUA Cement informed investors on Monday, that it is in talks with International Finance Corporation (IFC), as well as a number of other lenders to borrow a yet to be disclosed amount for the expansion of its production capacity, from 2.0 million tons per annum (MTPA) to 8.0 MTPA, as the firm seeks to increase its revenue generation.

Part of the loan will also be expended on the development of other ancillary utilities. While this will increase BUA Cement’s longterm turnover, it will also increase the burden of debt on the company’s revenue and profit in the long run.

Read also: N136.40bn production cost eats into BUA Cement’s revenue

This is because BUA Cement already has a standing N82.3 billion debt, as well as a debt security (Series 1 bond) of N113.72 billion. To service these debts when their maturity dates arrive, the company will have to dig into its revenue or profit, and if the management continues to struggle in curbing the rise of expenses, there will be nothing left to pass to shareholders, thereby hurting investment in the company.

In light of this current financial problem creeping into future growth of BUA Cement, shareholders might sell off their stocks when there’s no possibility of investment growth, making the firm’s stock volatile and sending the share of BUA Cement down, while tanking its market valuation.

This is already reflecting in the stock market, as investors’ confidence in the company drops. Since BUA Cement share hit its 52 weeks high of N74.50kobo in Q4 2021, shareholders have lost -6.97% of their investment, as the stock trades at N69.30kobo as of July 26, 2022.

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