I did not own ARM then but later around 2004-5 it was trading in the 20s. One thing is for sure, Praedeep has worked very hard and he took the company to different levels from the one he inherited from his dad.

ARM - KES 60 in March 2009 & now 198
KQ - KES 18 in March 2009 & now 14.10

Why the big drop on ARM today?

We initiate coverage on Athi River Mining Limited (ARM) with a BUY recommendation based on a fair value of KES 240.00, representing a 15.0% upside risk potential on the current market price. Our investment case is informed by the Group’s high CapEx intensity (FY 2012e: 20.3%) to complete work on the remaining 0.75mtpa capacity cement plant in Tanga. This will significantly increase the total installed capacity to 2.6mtpa by 2013 from the current 1.85mtpa. We anticipate that the capacity ramp up, 0.65mtpa clinker manufacturing capacity and the expected 33MW power plant will drive earnings and reduce power costs, where we project a 3year CAGR of 23.2% in EBITDA as well as sustained growth in the EBITDA margin (FY 2014F: 24.4%), occasioned by increased operating efficiencies. Presently, the company has a combined 18-20% market share of cement sales (expected to rise above 25.0% by 2014) in a market dominated by 7 players. The company is currently trading on a PE of 17.9x, EV/EBITDA of 16.7x and EV/sales of 2.5x.



· Infrastructure development to shore up cement consumption. Cement demand is expected to remain strong as a result of infrastructure projects and a vibrant Individual Home Builder (IHB) segment. Total cement consumption in the country stood at 1.7mt for 6 months to June 2012 (vs. 1.6mt in the same period last year). Consumption remains in line with our full year estimate of 3.6mt (+12.0% y/y from 3.2mt in FY11). With support from the government and private sector infrastructure projects, we expect cement demand to remain elevated over the medium term. There has been a graduated increase in Government budgetary allocation towards infrastructure development over the past 8 years through the Ministry of roads and other government agencies. Foreign funding from international financiers like EADB, AfD, IMF and WB have also helped stimulate growth.



· Capacity expansion to accelerate net sales. We estimate a 27.7% y/y jump on net sales in FY 2012e (3 year CAGR of 26.8% by 2014F) on capacity expansion with the commissioning of 0.75mtpa capacity plant in Dar es salaam in August this year along with additional 0.1mtpa capacity grinding facility in Rwanda, which it acquired late 2011. Once the outlined expansion programme is completed by 2013, we believe that ARM will be the second largest regional player in East African region with a total installed capacity of 2.6mtpa after Bamburi which has 3.2mtpa.



· Huge limestone deposits give a leeway to capacity ramp up. ARM has over 100 years of limestone deposits, which gives the Group the ability to expand its cement grinding capacity. In Kenya, limestone deposits lie 5km away from its Kaloleni plant, while the Tanzania’s plant lies on the limestone deposits. The Group is in the process of constructing a limestone conveyor belt, which will span 6km from Chauringo limestone quarry to the Kaloleni plant in order to save on transportation costs. This is expected to cost KES 1.02b and will be state of the art equipment capable of conveying approximately 5,000 tons per day.



· USD 50m convertible loan notes to cut back on term debt. Africa Finance Corporation (AFC) loan will in part be used to complete the Tanzania project, as well as reduce existing term debt. The notes are convertible any time within 6 years, at AFC’s option, at a fixed rate of USD 3.20 per share (KES 268). The loan is otherwise redeemable at the end of 6 years at a 10% premium. It attracts a rate of 7.5%. Conversion would result in a dilution of 13.62% for existing shareholders.



· Power plant to reduce production costs. ARM plans to set up 33MW power plant in Tanzania, which is expected to cost approximately USD 55m. In Kenya, they have signed a PPA agreement with Kenya Power to supply 66MW of power whose cost stands at USD 95m to be implemented in 2-3 years



· REITs augur well on the building and construction sector. The Capital Markets Authority (CMA) is in the process of setting up Real Estate Investment Trusts (REITs) products on the Nairobi Securities Exchange to attract more investments into this area and encourage trading in addition to raising more capital for infrastructural projects.



· Easing funding costs to drive housing demand: With the downward adjustment on the Central Bank rate (CBR) to 13.0% in September from 16.5% previously, we believe that the construction sector will be stimulated by funding at attractive interest rates. In addition, we also anticipate increased mortgage uptake as the rates bow down. In Q2:12, housing prices – according to Hass Consult (a real estate agency) - remained almost flat (+0.9% y/y) compared to 15.7% y/y prior period, convoluted by higher cost of funding. Rental prices rose 7.7% y/y compared with 6.8% y/y in 2011.