ARM Cement Ltd ( BUY, KSh 80.00 )
ARM Cement has released its 1H13 results, posting 28% y/y revenue growth. On a seasonally-adjusted run-rate basis, revenue was 8% short of our forecasts. We anticipate stronger production in 2H13, driven by new capacity. From the limited disclosures, we infer that the implied production numbers were lower-than-expected; we thus cut our FY13e EPS by 9%, but upgrade our TP after having revised our assumptions.
■ FY13e revenue target cut by 6% on lower production: Given the reported revenue growth for 1H13, we make slight adjustments to our production estimates; we cut the Tanzania utilisation rate from 54% to 45%, implying production of c.0.42mt, based on available capacity. This adjustment reduces our FY13 revenue target by 6% to KSh15 . 0bn. We leave our FY14e utilisation rates and production estimates unchanged.
■ Margins still under pressure from imported clinker: The 1H13 results suggest that the reported 10.8% net margin is still under pressure, which we believe is due to the higher cost of the imported clinker (+c.74% more expensive than locally produced clinker on our estimates) being used at the Dar es Salaam grinding plant. We expect some margin recovery in FY14e (+400bps), with the Tanga clinker plant expected to be operational in 4Q13e.
■ Medium-term revenue outlook still strong: The 28% y/y reported revenue growth accentuates the upside from new capacity in Tanzania. We therefore continue to track developments on the commissioning of the Tanga plant, given that clinker production is key to margin improvement and cement production. We estimate total cement sales to accelerate by c.30% y/y to 1.3mtpa in FY13e. We still view ARM as our preferred sector pick, given the anticipated growth from the deployment of new capacity.
We upgrade our TP to KSh80.00 (previously KSh70.00) on minor assumption changes; we adjust our average EBITDA margin to 26.4% (+40bps) on improving efficiencies over our forecast period. Our core view on ARM is unchanged; we still foresee upside from operational gearing and ROE improvement in the medium term. Reiterate BUY.
Source - SBG Securities (Pty)