Image Credit: United Capital

May 23, 2023/United Capital Report

BUA Foods Earnings Update | BUA Foods Plc Q1-2023 Earnings note

In its financial results for Q1-2023 ended 31-Mar-2023, BUA Foods Plc (“BUAFOODS”) recorded a 60.2% y/y increase in turnover to N144.3bn, driven by revenue growth across its 5 business divisions, and the commencement of sales in its rice division.  Cost of sales was up 42.0% y/y to N87.7bn due to the increased cost of raw materials, and energy costs. Operating expenses rose 299.8% y/y to N8.9bn, primarily due to a sharp rise in selling and distribution expenses as the company sought creative ways to penetrate new markets and navigate the challenges presented by the macroeconomic environment. BUAFOODS also had a 28.6% y/y increase in finance costs to N2.1bn. Nonetheless, the strong top-line performance enabled the company to post impressive bottom-line results. Q1-2023 PBT came in at N45.9bn, 85.0% higher than the comparable period in 2022, while Q1-2023 PAT rose 77.1% y/y to N40.5bn. Below, we give our take on the result, the company’s strategic steps, and our expectations.

Comprehensive revenue growth, spurred by a strategic focus.

BUAFOODS’s Q1-2023 turnover surged 60.2% y/y to N144.3bn (vs N90.1bn in Q1-2022). The growth in revenue was driven by price adjustments, improved sales volumes, and export sales amid a tougher economic and operating environment. The management attributes the increased sales to growing market acceptability of its products. The company reported revenue growth across its 5 business segments, i.e., Sugar (up 71.7% y/y to N93.0bn), Flour (up 57.8% y/y to N31.2bn), Pasta (up 21.8% y/y to N19.4bn) and Wheat (up 10.1% y/y to N1.7bn). The new Rice division also earned N384.0mn in revenue. The quarter brought forth unique obstacles to growth, particularly due to the economic impact of rising food inflation (24.45% in Mar-2023), a shortage of currency in circulation, and the 2023 general elections. The company mitigated these by boosting selling and distribution expenses (up 787.0% y/y to N6.3bn) as part of an aggressive strategy to boost sales volumes, eliciting third parties to facilitate market development and product development.

Managing costs

BUAFOODS cost-of-sales rose 42.0% y/y to 87.7bn amid increases in production and distribution costs i.e., cost of raw materials, and unavailability of fuel. At the end of the quarter, the proportion of raw materials to cost-of-sales was 91.2% (from 88.4% in Q1-2022). This increased cost saw inventories decline 6.5% to N27.8bn. Also, due to the depreciation of the Naira against the US Dollar, the company was exposed to currency vulnerabilities. Despite this, the impact on gross margin was marginal as gross margin rose 780bps to 39.3% from 31.5% in Q1-2022. Although operating expenses rose 299.8% y/y, the company’s operating profit margin rose 4bps to 33.4%, giving credence to BUAFOODS market development strategy. Net profit grew 77.1% y/y to N40.5bn while net profit margin increased by 268bps to 28.0%.

Noteworthily, the company has incurred more expenses and liabilities due to its expansion drive. Administrative expenses rose 72.4% y/y to N2.6bn, lease liabilities rose to N6.5bn from N37.8mn in FY-2022, and ROU assets rose to N6.0bn from 31.2mn in FY-2022. In all, BUAFOODS enjoys a healthy balance sheet, as net assets expanded 17.5% in the quarter to N271.4bn. Total assets were up 7.0% to N649.6bn, mostly driven by improved Cash and Cash Equivalents, up 59.7% to N51.4bn. On the contrary, total debt fell 1.3% to N210.1bn. Also, Leverage has fallen 14.8%. Overall, the balance sheet strengthened. Retained earnings grew 18.1% to N263.3bn and EPS grew to 2.25, showing increased value for shareholders.

BUAFOODS rated BUY at current price.

We expect stronger revenue to buoy bottom line growth. A rebound in economic activity will increase demand for the company’s products. Also, in the absence of movement restrictions countrywide, we expect an improvement in the company’s asset utilisation. Furthermore, we expect the increasing sales volumes and the company’s new business lines will provide support for revenue. The company is looking to fully integrate its supply chains in the long term. This will also reduce its exposure to currency vulnerabilities. The company also has long-term plans to improve its logistics and distribution networks. However, due to its expansionary activities, we anticipate that the rising administrative expenses and high interest charges will constitute a drag on BUAFOODS’ earnings in the near-term.

Overall, BUAFOODS is a solid option for the future in our view and we maintain our model assumptions for the stock. It is currently trading at a P/E of 18.75x and P/B of 7.76x compared to its peer group average of 9.65x and 5.00x respectively. With today’s close price of N117.0, the stock has appreciated 80.0% YTD but is at a 34.0% discount to our 12M TP of N156.80. We expect investors to bargain hunt. Therefore, we recommend a BUY rating.