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Kenya Cement Sector Commentary
mwekez@ji
#1 Posted : Monday, August 19, 2013 8:46:26 AM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
We recommend an ACCUMULATE on the cement sector in Kenya. In 2012, the East African region produced approximately 8.4m tonnes of cement, with Kenya as the lead cement manufacturer. (Kenya- 4.6m tonnes, Tanzania- 2.5m tonnes and Uganda- 1.7m tonnes of cement). The region however suffers from a clinker capacity shortfall due to lack of sufficient cement grade limestone deposits. Kenya and Tanzania are the two countries with substantial limestone deposits along the limestone belts estimated to be well over 400m tonnes. With regional GDP expected to grow at 6.0%, 5.5% and 7.0% (In Uganda, Kenya and Tanzania respectively) in 2013, 2014 and 2015, we believe regional consumption will grow at a 3 year CAGR of 13.2%. In light of a growing regional construction sector and cement deficit in the inland export markets, Kenya and Tanzania continue to attract cement manufacturers who aim to gain domestic market share, while focusing on inland export markets where average cement prices command premiums (Uganda- 41.7%, Rwanda- 141.7%, South Sudan- 233.3%, East D.R.C- 233.3% and Burundi- 141.7%) to Kenya’s average cement price of USD 120.00 per tonne. Going forward, we expect in-house clinker production and sufficiency to be the critical core competency that creates competitive advantage. Regional cement producers however face the challenge of high energy and power costs as well as the reliability associated with cement grinding, resulting in margin compression.

Based on a 1 year target price of KES 234.42, indicating a 7.5% upside potential from the current price, we maintain our HOLD recommendation on Bamburi Cement. Our outlook is supported by a 3 year CAGR in revenue of 4.7% to FY15F driven by both domestic and export sales. Though we anticipate an increase in direct costs to compress margins, we believe cost management measures currently employed are bound to yield improved efficiency in the medium term. We estimate +124bps y/y and +66bps y/y in gross profit and EBITDA margins to 27.5% and 22.4% respectively in FY13F.

We recommend an ACCUMULATE (buy on price dips) on ARM Cement with a target price of KES 77.50, implying an upside of 10.7% from the current price. ARM Cement’s revenue growth will largely be driven by volume growth as a result of additional capacity in Tanzania (a 750,000 tonne cement plant in Dar es Salaam commissioned in 4Q12 and another 750,000 tonne plant in Tanga to be commissioned by 1Q14. The 1.2m tonne clinker plant in Tanga (by 1Q14) will result in less reliance on expensive imported clinker and, therefore, an improvement in margins (EBITDA margins up 184bps to 25.3% by FY15F). ARM Cement currently trades at a P/E and EV/EBITDA of 28.1x and 18.9x respectively compared to the regional cement sector median P/E of 16.3x and EV/EBITDA of 8.9x. With a PEG ratio of 0.9x, we believe that the 3 year forward EPS CAGR of 30.4% just about justifies the higher valuations.

We issue a BUY recommendation on EA Portland with a target price of KES 111.09. We believe that higher utilization rates will drive revenue growth going forward while increased clinker capacity, internal reorganization and cost management will lead to higher earnings. For FY13E, we expect an EPS of KES 7.48 from a loss of KES 9.13 per share. EA Portland is trading at a forward P/E of 7.2x and EV/EBITDA of 4.9x which is significantly below the regional medians of 16.3x and 8.9x respectively.

(Source: Kestrel Capital - 19.08.2013)
mwekez@ji
#2 Posted : Monday, August 19, 2013 11:14:24 AM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
Ericsson
#3 Posted : Monday, August 19, 2013 2:56:57 PM
Rank: Elder


Joined: 12/4/2009
Posts: 10,702
Location: NAIROBI
The cement industry in Kenya has many the following players with each catering for the interest of their major shareholders;

Bamburi Cement;Will be reliant on European contractors and partly NSSF since NSSF has a major shareholding and will want to promote it.European contractors will consider it as giving business to one of their own.

East Africa Portland;Gets the major NSSF and GOK contracts since the two have major shareholding in it and will want to promote it.

Athi River Mining;Is reliant on Indian contractors because of the indian background/ownership.

Simba Cement;Also reliant on Indian contractors because of the Indian connection/ownership.

Mombasa Cement;Mostly used by individual kenyans and the kenyan contractors due to it's affordability;cheaper compared to the rest

Savannah Cement;This is the new entrant to the local market majority owned by the Chinese who are using it's cement for the contracts they get.It also has a minority local ownership by kenyans with Ben Nteta being the frontman.It's entry has been a big dent to Bamburi Cement as the Chinese contractors tend to shy it in favour of Savannah
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murchr
#4 Posted : Monday, August 19, 2013 4:02:42 PM
Rank: Elder


Joined: 2/26/2012
Posts: 15,980
Of these, which companies produce clinker?
"There are only two emotions in the market, hope & fear. The problem is you hope when you should fear & fear when you should hope: - Jesse Livermore
.
Ericsson
#5 Posted : Monday, August 19, 2013 4:07:36 PM
Rank: Elder


Joined: 12/4/2009
Posts: 10,702
Location: NAIROBI
Athi River Mining,bamburi,Mombasa and Savannah.
east africa portland tender was mired in controversey
Wealth is built through a relatively simple equation
Wealth=Income + Investments - Lifestyle
murchr
#6 Posted : Monday, August 19, 2013 4:36:01 PM
Rank: Elder


Joined: 2/26/2012
Posts: 15,980
Thank you....
"There are only two emotions in the market, hope & fear. The problem is you hope when you should fear & fear when you should hope: - Jesse Livermore
.
mwekez@ji
#7 Posted : Tuesday, August 20, 2013 10:42:46 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
Aguytrying
#8 Posted : Wednesday, August 21, 2013 8:55:11 AM
Rank: Elder


Joined: 7/11/2010
Posts: 5,040


what about gava factor, they should put its as. a disclaimer when peddling these lofty valuations.
The investor's chief problem - and even his worst enemy - is likely to be himself
mwekez@ji
#9 Posted : Sunday, August 25, 2013 1:02:42 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
@guru, wouldn't call a buy on ARM and Bamburi but EAPC ....







mwekez@ji
#10 Posted : Sunday, August 25, 2013 1:08:46 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt
MoneyMonger
#11 Posted : Sunday, August 25, 2013 1:49:33 PM
Rank: Member


Joined: 4/25/2012
Posts: 110
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.
There is nothing as dangerous as an Idea, when there is only one Idea
guru267
#12 Posted : Sunday, August 25, 2013 2:08:55 PM
Rank: Elder


Joined: 1/21/2010
Posts: 6,675
Location: Nairobi
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I remember ARM pre split was trading at 99bob and everyone said the price was full and look where we are today!
Mark 12:29
Deuteronomy 4:16
mwekez@ji
#13 Posted : Sunday, August 25, 2013 2:18:25 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
guru267 wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I remember ARM pre split was trading at 99bob and everyone said the price was full and look where we are today!


That reiterates the fact that should keep off the current price!
mwekez@ji
#14 Posted : Sunday, August 25, 2013 2:27:52 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
Aguytrying wrote:


what about gava factor, they should put its as. a disclaimer when peddling these lofty valuations.


In the comprehensive report, the past corporate governance issues resulting from gava factor have been presented as weakness. While the past issues seems to be settled, a caution has been noted.
mwekez@ji
#15 Posted : Sunday, August 25, 2013 2:30:43 PM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
MoneyMonger wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.


@MoneyMonger, as a value investor, your attention is being genuinely drawn to EAPC
Aguytrying
#16 Posted : Monday, August 26, 2013 7:22:08 AM
Rank: Elder


Joined: 7/11/2010
Posts: 5,040
mwekez@ji wrote:
MoneyMonger wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.


@MoneyMonger, as a value investor, your attention is being genuinely drawn to EAPC


me too but its a fair (bad) company At a good price
The investor's chief problem - and even his worst enemy - is likely to be himself
murchr
#17 Posted : Monday, August 26, 2013 8:10:07 AM
Rank: Elder


Joined: 2/26/2012
Posts: 15,980
Aguytrying wrote:
mwekez@ji wrote:
MoneyMonger wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.


@MoneyMonger, as a value investor, your attention is being genuinely drawn to EAPC


me too but its a fair (bad) company At a good price


Laughing out loudly When are they releasing their results?
"There are only two emotions in the market, hope & fear. The problem is you hope when you should fear & fear when you should hope: - Jesse Livermore
.
mwekez@ji
#18 Posted : Monday, August 26, 2013 8:30:42 AM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
murchr wrote:
Aguytrying wrote:
mwekez@ji wrote:
MoneyMonger wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.


@MoneyMonger, as a value investor, your attention is being genuinely drawn to EAPC


me too but its a fair (bad) company At a good price


Laughing out loudly When are they releasing their results?


Wewe cheka tu. The full year results to June 2013 are a turnaround, refer to half year results to Dec 2012. .... Last full year results were released on 30th October.
mwekez@ji
#19 Posted : Monday, August 26, 2013 8:33:27 AM
Rank: Chief


Joined: 5/31/2011
Posts: 5,121
@Ericsson, doesnt EAPC have a running 450,000 tonne clinker
plant?
murchr
#20 Posted : Monday, August 26, 2013 8:44:50 AM
Rank: Elder


Joined: 2/26/2012
Posts: 15,980
mwekez@ji wrote:
murchr wrote:
Aguytrying wrote:
mwekez@ji wrote:
MoneyMonger wrote:
mwekez@ji wrote:
@guru, ARM price is full. The company's capacity increase has been factored in the price ... And there is the ghost of convertible debt


I have been waiting for ARM price to dip to around levels just before the split but seems this will be a tall order.For now it is overbought from the graph and that is always a purchase hurdle for me. I love growth stocks but I still use some value based assessments to some extent.


@MoneyMonger, as a value investor, your attention is being genuinely drawn to EAPC


me too but its a fair (bad) company At a good price


Laughing out loudly When are they releasing their results?


Wewe cheka tu. The full year results to June 2013 are a turnaround, refer to half year results to Dec 2012. .... Last full year results were released on 30th October.


I dont doubt that....is the loan still yen denominated? if so hows the yen performing?
"There are only two emotions in the market, hope & fear. The problem is you hope when you should fear & fear when you should hope: - Jesse Livermore
.
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