Last week, the Nigerian Stock Exchange added a new member to its Trillion Naira Cap Club (TNC). BUA Cement joined MTN, Dangote Cement, Nestle and Airtel as stocks with a market capitalization in excess of N1 trillion. Unlike its predecessors, it got there in a rather inorganic way, a merger of three Cement making companies.
The journey started two years ago when we observed the share price of CCNN, the relatively unknown Cement Company started gaining momentum. By May 2018, the share price had gained 385% and trading at 10x earnings per share. By the third quarter of the year, the company reported it was planning a merger with Kalambaina cement.
CCNN and Kalambaina were both owned by BUA Cement, one of Nigeria’s leading building materials company and a dominant force in the Cement Business, in the northern part of Nigeria. The merger raised a few red flags but not enough to affect its successful conclusion by the start of 2019 and segueing into its main plans, the reverse listing of BUA Cement. Now, according to the company, the merger is expected to yield immense benefits for all its operating companies.
“The proposed merger will increase the production capacity of the enlarged company to 8 million MTPA. It is anticipated that in addition to meeting the demand from customers in the core regions in the country, the enlarged company would be positioned to distribute its products in new geographical markets, creating the potential for additional shareholder value creation.
“We expect the proposed merger to provide opportunities for significant cost savings and improved operational efficiencies by streamlining operations and optimizing the use of combined resources.
A more disturbing metric is the company earnings per share. This is a better measure of the one plus one equals three mantra. Based on the same result mentioned above it appears things have gotten far worse. CCNN’s earnings per share at the third quarter of 2019 was 67 kobo compared to 319 kobo per share the same period last year representing a 79% drop.
What does this mean? It just means there are more shares to feed for the same amount of profits made a year earlier. If things stay this way with the second merger in less than two years then expect share price to underperform.