BUA Foods Plc Valuation

BUA FOODS PLC

Ticker:                       BUAFOODSNature of Business:    Food ProductsLocation :                            Nigeria
Recent Price:              NGN64.4052-Week High/Low: NGN66.00/40.25Estimated Fair Value:    NGN15.39-NGN21.18
Expected Return:      26.5%Consider Buy:                   Below NGN18.29Business Risk:            Average
Financial Risk:       AverageEconomic Moat:             WeakCorporate Governance:  Average

Company Overview
BUA Foods Plc (BUAFOODS), a consumer goods company, emerged from the combination of the food businesses of BUA Group in November 2021. BUA Group is a Nigerian conglomerate with investments in consumer goods, industrial goods, real estate and ports management. IRS Flour Mills Limited, IRS Pasta Limited, BUA Rice Limited, BUA Oil Mills Limited and BUA Foods Limited were absorbed into  BUA Sugar Refinery Limited. BUA Sugar Refinery Limited was incorporated in April 2005 but commenced business operations in September 2008. BUA Rice Limited has yet to begin operations even though it was set up in   December 2014. BUA Oil Mills Limited was established in September 2009 while IRS Flour Limited and IRS Pasta Limited were founded in 2019. BUA Sugar Refinery Limited was subsequently renamed  BUA Foods Limited (BFL) and was converted to a public company in December 2021. 

BUA Sugar Refinery FZE and LASUCO Sugar Company Limited (LASUCO) are the two wholly-owned subsidiaries of the company. BUA Sugar Refinery FZE, located in Rivers State Nigeria,  began the production of sugar in 2020.  LASUCO, established in 2016, has a 20,000-hectare sugarcane plantation and a  sugar factory which is expected to be operational soon.

The management of the company has embarked on the upgrade of its mills, plants, refineries and plantations across Nigeria in a bid to meet the demand for its products. The company has invested in different food products in order to diversify its revenue sources. 

Abdulsamad Isyaku Rabiu, the founder of BUA International Limited, is the chairman and major shareholder of BUAFOODS. BUA International Limited is a conglomerate headquartered in Nigeria.  Engr. Ayodele Abioye was named acting managing director of BUAFOODS in 2021 following the consolidation of the food businesses of BUA Group. Ayodele was employed as the chief operating officer of the food businesses of  BUA Group before his appointment as the managing director of BUAFOODS.

Investment Thesis
Though it has interests in edible oils, sugar, rice, flour and pasta, BUAFOODS realises revenue from only sugar at the moment.  It is taking advantage of the policies of the Federal Government of Nigeria to encourage local production and reduce dependence on imported food products. Tax incentives, concessional loans, embargoes and tariffs are some of the measures adopted in order to encourage investment in food products in the country. Consequently, BUAFOODS is boosting its sugar production capacity aimed at helping Nigeria achieve self-sufficiency in sugar production. It embarked on backward integration to help it source raw materials locally, reduce foreign exchange loss and cut down the cost of borrowing to finance the importation of raw sugar. 

The demand for sugar is strong as Nigeria finds it difficult to locally meet the demand. BUAFOODS’ product portfolio will be broadened when edible oils production and rice milling begin.  BUA Oil Mills Limited, whose operations were suspended in 2012, is being revived. It is now a division of BUAFOODS. Currently, all the revenue of BUAFOODS is derived from Nigeria. We are of the belief that the other markets in Sub-Saharan Africa provide an excellent opportunity for BUAFOODS to bolster its revenue. 

BUAFOODS is being positioned as one of the major players in the food industry with diversified revenue streams. We expect a decent return on investment going forward. However, we are of the opinion that the company’s shares are overpriced at the present moment.

Valuation
A share of BUAFOODS should trade between NGN15.39 and NGN21.18. Currently, the market price of the stock is well above our fair value estimate.

Financial Overview
Sugar sales gained 3.3% from NGN83.5 billion in 2019 to NGN86.3 billion in 2020.  Non-fortified sugar was responsible for the growth in sugar sales revenue. Non-fortified sugar sales, which formed 35.1% of total sugar sales in 2020, jumped by 44.9%  to NGN30.3 billion. Fortified sugar sales, on the other hand, declined by 10.6% year-over-year from NGN62.6 billion to NGN56 billion at 2021 year-end. The sale of molasses, a by-product of sugar refining, produced revenue of NGN12.1 billion as against NGN168 million made in the earlier year. 

The cost of sales jumped by  10.9% to NGN65.1 billion in the 2020 fiscal year from NGN58.7 billion in the prior year. However, the cost of sales to turnover ratio dropped 3.9 percentage points to close at 66.2%.  Operating profit rose by 69.5% year-over-year to NGN27.4 billion in 2020. Profit Before Tax (PBT) more than doubled the preceding year’s figure. The PBT in 2020 was NGN22.8 billion compared to the prior year when it was NGN11.1 billion. Profit After Tax (PAT) gained NGN7.2 billion or 79.7% year-over-year from NGN9.1 billion to NGN16.3 billion.  

The profit margins of BUAFOODS improved in the year under consideration. Gross profit margin added 3.9% to close at 33.8% at the end of the 2020 fiscal year; the operating profit margin of 27.8% represented an increase of 8.5% year-over-year. PBT margin was 23.2%, up from 13.3%. The company’s PAT margin also added 5.7% to 16.5%.

BUAFOODS is a highly geared company with a total debt of NGN133.9 billion at 2020 year-end. The total debt was 40.9% of total assets (2019: 40.7%) and 118.8% of shareholders’ fund (2019: 109.2%).  Liquidity pressure may be exerted on the company due to the fact that most of its loans are short-term in nature. BUAFOODS makes an adequate operating profit to meet its finance costs. However, net cash flow can hardly pay its finance costs. The company has not been able to generate positive net cash flow from operations consistently. Net operating cash flow was -NGN10.2 billion in 2020 as against NGN2.5 billion in the preceding year.  Besides, it requires a lot of finance to import raw materials and capital which has resulted in increased borrowing. It obtained a short-term loan of NGN116 billion in 2020 for importation. 

Business Risk
Sluggish economic activities, with their associated effects on consumers’ purchasing power,  may hurt the revenue and profits of BUAFOODS. In addition, exchange rate volatility may adversely affect profitability as the company imports raw materials and capital from overseas suppliers. 

Recommendation: Overpriced

Earnings Chart of BUA Foods Plc

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