Imara SSA Cement Report Cementing the investment case...

Imara SSA Cement Report Cementing the investment case...

Imara SSA Cement Report

Cementing the investment case...

August 2012


Farai Vengesai Nontando Zunga Jimmy Mwambazi

Table of Contents

Executive Summary .............................................................................................. .. 3

Valuation Summary................................................................................................... 4

Valuation ratios ....................................................................................................... 5

SSA cement story: the selling points .............................................................................. 6

A recap of the cement making process ..................................................................... 6

Drawing a parallel with emerging markets ............................................................... 7

Ashaka Cement ....................................................................................................... 8

CCNN ................................................................................................................... 12

Lafarge Wapco ....................................................................................................... 16

Dangote Cement ..................................................................................................... 20

Athi river Mining ..................................................................................................... 24

BamburiCement Limited ........................................................................................... 28

East African Portlant Cement Company ......................................................................... 32

Simba Cement ........................................................................................................ 36

Twiga Cement ........................................................................................................ 39

Lafarge (Zimbabwe)................................................................................................. 43

Lafarge (Zambia) .................................................................................................... 47

Executive Summary

In our maiden coverage of the SSA cement industry,

we characterised it as the world’s last cement

frontier and focussed our discussion on what makes

the cement sector in SSA generally attractive. Our

sentiment then was bullish and we remain so. We

believe most of the buy factors we touched on then

are now playing out as production ramp up occurs

after a period of capacity additions, while

infrastructure development gathers momentum,

underpinning consumption in the region. We

followed up that initial coverage with a report

aroundcapacity and consumption in East and West

Africa. We expressed our opinion that while, in

theory, capacity may close the gap and possibly

outgrow consumption with West Africa likely to see

that scenario by 2015, consumption will always be a

moving target. We expect cement demand toevolve

with improved availability, while other variables

such as prices move to accommodate higher

volumes. We have focused on the market dynamics

for cement as new production capacity comes on line

and volume ramp ups start.

We note the slowdown in economic growth across

SSA occasioned in the main by a hawkish stance by

central banks in the region as they battle to stabilise

prices and stop depreciation of the currencies. The

result has beena proportionate slowdown in growth

of cement consumption in the region, although

growth remained higher when compared to other

global regions. We have, however, recently seen

some easing notably in East Africa and we expect

this to spur another cycle of fast paced growth and

hence impact cement consumption favourably. Risk

however remains with Europe in recession, the US

growing at a snail’s pace and emerging markets

slowing down significantly. While African economies

have previously been resilient in the face of global

slowdown, a fall in commodity prices will clearly

hurt the region this time.

East Africa maintained its pole position as the fastest

growing SSA region as regards cement consumption,

albeit on the back of slower growth across the region

compared to previous years. Lafarge Bamburi’s

management stated that consumption grew by an

average 9% in 2011 compared to 14.4% growth in

2010. Growth was higher in the first half of the year

with the second half negativelyimpacted by the full

effects of the tight liquidity conditions in the market

and the resultant high cost of capital.Kenya grew by

10.5%, mainly resultingfrom continued government

investment in infrastructural development and

growth from individual home builders. For Uganda

and Tanzania, the market grew by 16.2% and 2.5%,

respectively. Tanzania was hamstrung mainly by

persistent power challenges.

Competition for the East Africa cement market

also intensified with grinding capacity increasing,

and cement imports remained competitive as the

previously restrictive duty is yet to be reinstated.

In Nigeria demand for cement grew by c8% to

almost 20mtpa in 2011. However, unlike in

previous years,the proportion of imported cement

in the overallconsumption numbersbegan to

reduce significantly with increasing production

among local companies. However, plant

utilisationrates for the Nigerian companies are low

reflecting the gap that is still there between

demand and local supply while instability in the

supply of energy- fuel and electricitycompounded

the situation. Nigeria’s central bank

also adopted a tightening stance in line with its

peers in East Africa. The monetary policy rate was

hiked from 6.25% at the beginning of the year to

12%. The rate remains at those high levels with

the authorities showing great resolve to defend

the naira and tame consumer prices.

PPC, the dominant cement producer in Southern

Africa reported a halt in consumption contraction

in in its major market of South Africa. The cyclical

nature of cement consumption potentially points

to a pending period of sustained growth. The

company however reported significant volume

growth in Zimbabwe and Mozambique. The former

is recovering from a decade long economic

meltdown, while mining activities in Mozambique

are driving demand. 2012 thus looks positive for

Southern Africa.

We expect to see strong volumes driven growth for

companies that have recently commissioned

additional capacity. We have generally revised

upwards our ratings and/or target prices for

companies like DCP, ARM Holdings and Lafarge

WAPCO which fall in this category. We also note

PPC’s efforts to follow other major cement

manufacturers by transforming its business into a

pan African Business.

We maintained our recommendations on Tanga

and Twiga (both Buy); Dangote Cement

(Accumulate); CCNN (Speculative Buy); Lafarge

Bamburi and Ashaka Cement (both Hold) as well as

EAPCC (Sell). We upgraded our ratings on ARM

Holdings and Lafarge Wapco (both from Hold to

Buy). We resumed our coverage on Lafarge

Zimbabwe and Lafarge Zambia with buy ratings on



Valuation Summary


Valuation Ratios


SSA cement story: the selling points

SSA is by all measures the world’s last cement frontier

and as such provides the brightest growth opportunity

for cement and aggregate producers unparalleled in

any region globally. The cement story becomes even

more compelling when path travelled by its peers

especially in the BRIC nations is concerned. If history

is to repeat itself, SSA cement companies are poised

to register significant growth in valuations as capacity

and consumption increase over the next decade. While

such can obviously not be stated with certainty, the

region’s economic growth prospects and the huge

investments currently being made by cement

companies in the region, gives us reason to believe

that growth in the long term will not be too different

to what obtained in BRIC nations.

Key selling points to SSA’s cement story have been

discussed extensively, the major ones being:

The low per capita consumption which stands at

c60kg compared to c230kg for South Africa,

c420kg in Russia, a member of the BRIC nations as

well as c300kg for US in the developed world. The

gap represents the potential for growth among

cement producers in SSA.

The brisk pace in GDP growth across SSA, which

has averaged upwards of 6% aided in the main by

firming oil and commodity prices (metals and

minerals), a higher degree of political stability,

debt relief, the repatriation of funds by African

expatriates living in the West and massive

investment by China. Given that cement

consumption is known to grow at a multiple to

GDP growth, this fast paced growth invariably

translates to robust demand for cement.

Rapid urbanisation which is double edged as it

improves affordability especially for the retail

market while developments such as housing as

well as water and sewer reticulation systems all

push up the demand for cement. The map below

compares SSA with the rest of the world as regards

population growth, urban population growth and

working age population growth.

Source: Lafarge Group

A recap of the cement making process

Source: Climatetch

Portland cement, the fundamental ingredient in concrete,

is a calcium silicate cement made from the combination of

calcium, silicon, aluminium and iron. The first step in

themanufacturing process is obtaining raw materials.

Generally, raw materials consisting of combinations of

limestone, shells or chalk, and shale, clay, sand, or iron

ore are mined from a quarry near the plant. At the quarry,

the raw materials are reduced by primary and secondary

crushers. Stone is first reduced to 5-inch size (125-mm),

then to 3/4-inch(19 mm).

The picture above takes the process from when the raw

materials arrive at the cement plant. The materials are

proportioned to create cement with a specific chemical

composition. Two different methods; dry and wet, are used

to manufacture portland cement. In the dry process, dry

raw materials are proportioned, ground to a powder,

blended together and fed to the kiln in a dry state. In the

wet process, a slurry is formed by adding water to the

properly proportioned raw materials. The grinding and

blending operations are then completed with the materials

in slurry form.

After blending, the mixture of raw materials is fed into the

upper end of a tilted rotating, cylindrical kiln (rotary kiln

in the picture). The mixture passes through the kiln at a

rate controlled by the slope and rotational speed of the

kiln. Burning fuel consisting of powdered coal or natural

gas is forced into the lower end of the kiln. Inside the kiln,

raw materials reach temperatures of 2,600°F to 3,000°F

(1,430°C to 1,650°C). At 2,700°F (1,480°C), a series of

chemical reactions causes the materials to fuse and create

cement clinker, -greyish-black pellets, often, the size of

marbles. Clinker is discharged red-hot from the lower end

of the kiln and transferred to various types of coolers to

lower the clinker to handling temperatures.

Cooled clinker is combined with gypsum and ground into a

fine grey powder in the cement mill, so fine that nearly all

of it passes through a No. 200 mesh (75 micron) sieve. This

fine grey powder is what is called portland cement.


Increasing realisation by authorities that the

aforementioned growth cannot be durable without

the supporting physical infrastructure (such as

roads, power stations and houses), the instalment of

which generates significant demand for cement.

Efforts by governments and regional organisations to

improve infrastructure will provide significant

uptake for cement going forward.

These positives have not gone unnoticed by cement

manufacturers operating in SSA. There has been an

unprecedented investment in improving production

capacity. Lafarge initiated the scramble to add

capacity, but DCP stole the limelight by doubling its

capacity in Nigeria and unveiling plans to create

Africa’s foremost cement company. We believe

these investments will help the respective

companies to profit from the opportunity at hand,

and hence our bullish view on the sector.

The opening up of bond markets is a pre-cursor to

large scale infrastructure projects. SSA nations are

increasingly accessing international debt markets

via a cocktail of funding structures from Eurobonds

to syndicated loans. The funds are largely for

infrastructure development and hence we expect

this to largely aid cement consumption.

Africa getting richer.Research indicates that

poverty is declining in Africa. SSA GDP is growing at

a faster pace than its population with the

continent’s collective GDP expected to exceed USD

2.6tn, while consumer spend, likewise, is forecast

to exceed the USD 1.3tn mark by 2020.The impact

on cement consumption and hence producers of

cement can only be positive.

The bears

SSA’s cement story is not without its own obstacles. Key

bear factors include:

Energy constraints: low electricity generation

capacityis generic across the region. Infrastructure

to deliver gas in Nigeria for instance is inadequate

and often leads to work stoppages. The alternative,

LPFO, is very expensive and often erodes margins


Stiff competition from Asian nations particularly

Pakistan. This challenge affects coastal markets

especially those in East Africa that are closer to


High cost of capital stifles investment and

mortgage extension. The expansion programs

recently embarked on were largely funded by an

existing anchor shareholder. Companies like EAPCC

in Kenya and CCNN in Nigeria for instance are failing

to deliver on their expansion programs owing to

capital constrain.

SSA susceptible to commodity price shocks. A

sharp fall in oil prices will significantly stifle growth

in the region as most of the high growth nations are

oil reliant.

Drawing a parallel with emerging markets…

A major driver to our bullish sentiments on SSA

cement producer is because we see history

repeating itself, with the BRIC cement story being

relived once more. What we cite today as drivers to

cement industry growth in the region are no

different to what was obtaining in the emerging

markets. Over the past several years, emerging

markets have become the largest producers and

consumers of cement. Their share of global cement

consumed rose from 70% in 1990 to almost 90% in

2010. Favourable demographics, rising urbanisation

and increasing demand for housing and

infrastructure are all credited for driving demand.

China emerged as the largest cement market,

producing and consuming half of world production

each year.

China consumed 203mtpa as of 1990 and over two

decades, consumption soared more than 8.0x to

1,800mtpa in 2010. Sustained infrastructure

development and urbanisation measures

implemented by government were the major drivers

of demand. Capacity has also been increasing and

expectations are that China will have 2,245mtpa as

at the end of 2012. Cement prices in China are

lower than those in SSA, with a tonne going for

USD40-45, compared to the USD 180-200 for SSA.

Per capita consumption is also way higher at cUSD

1,210 against cUSD 433 for the rest of the world.

Global Demand Break down

Source: Cementing Growth, Nitin Gupta.

India’s cement consumption rose from 46mtpa to

260mtpa, primary drivers were buoyancy in the

country’s economy which increased investments in

the infrastructure and real estate sectors.

The current consumption drivers for SSA are clearly

not different from what drove cement consumption

in India and China. Africa is where these emerging

markets were more than a decade ago. The outturn

maybe different, but we see cement manufacturers

in Africa growing significantly in the coming




As Cement




Ashaka dominates the north-eastern market of Nigeria

and has been making capacity additions (0.35m

tonnes/year), with the expansion due for completion in

2012. Additionally, the company has been undertaking

a project to substitute the more expensive LPFO fuel

with coal from its own coal mine. Our call for investors

to buy Ashaka shares was driven by expectations that

these two factors would drive efficiency and

profitability through economies of scale as well as a

lower energy bill. We held the view that the risks to our

call included intensifying competition on the back of

increased deliveries to the north from players such as

DCP. We expected this to take away its pricing power

and eat into margins. Further, fuel substitution was

taking longer to fully deliver the expected cost savings.

Nevertheless, we believe Ashaka’s relatively lower

valuation more than discounts all these negatives and

we hence reiterate our call. BUY

The company’s drive to substitute LPFO with coal

remains a key attraction. Coal is mined from own

coal fields and there is a strong case for Ashaka to

attain self-sustenance in as far as energy to fire its

kilns is concerned. However, substitution ratios are

still fall far behind expectations; hence profit

margins are not reflecting improved efficiency.

Capacity addition is on-going and is due to be

delivered in 2012. Lafarge led its peers in

increasing capacity across the region and there is

no doubt that this will be delivered. We see this as

being vital in buttressing efficiency gains, a

necessary ingredient that will be handy in

defending its market share in North Eastern Nigeria.

The company’s share price took a severe battering,

sliding from a high of around NGN 27.50 in January

2011 to a low of around NGN 7.70 in April 2012. The

decline has shown clear signs of bottoming out and

we believe this offers a very good entry opportunity

for a company that is taking concrete steps to

improve efficiency and restructure its cost base.


Nature of business

Ashaka, like WAPCO, is a member of the Lafarge group

and the second smallest among Nigerian plants covered in

this report. Cement capacity, which is expected to reach

1.2mtpa this year, will represent c4% of Nigeria’s installed

capacity. Ashaka has 0.30mtpa coal production capacity

on its proven coal reserve which is enough for 25 years of

cement production requirements. Its cement plant is

situated in North Eastern Nigeria in Gombe state and as

such controls a lion’s share of the market in that region.

Recent capacity additions and the setting up of

distribution depots in its backyard by the likes of DCP is

threatening this dominance. We also note the fact that

planned capacity additions will not help it retain its

capacity market share which stood at 7% before DCP’s

additions. Nonetheless, with improved volumes and

efficiency, we believe the company will hold its own in

defending its market.

Anchor investor...

Ashaka became part of the Lafarge group in July 2001

after the acquisition of Blue Circle Industries plc by

Lafarge. Lafarge is the world leader in cement materials,

the second largest aggregate producer, the third largest

concrete producer and the third largest gypsum wall board

manufacturer worldwide. The company’s investments are

now skewed towards the developing world with the MENA

region and SSA contributing the highest towards revenues

(EUR 3.9bn or a quarter of its revenue worldwide). Lafarge

views SSA as critical for its growth going forward and as

such it pays special attention to its investments in the

region. We view this as positive especially as regards

corporate governance, which gives Ashaka an edge over

locally owned companies. We view Lafarge’s presence in

the company as being vital to the implementation of the

expansion program.

FY 11 financials review

Ashaka’s FY 11 performance surprised on the downside.

The historically strong fourth quarter saw revenue slip

10.50% q-o-q, which translated to a muted 8.5% growth in

FY 11 revenue (y-o-y). Gross margins improved marginally

to 38% from 37.8% while efficiency made up for some of

the lost ground sending operating profit 15.0% higher y-oy.

The company had, however, shown significant gains in

containing operating costs during the first nine month of

2011, but efficiency suffered in Q4 11 with the company

managing only 3.10% growth in operating profits q-o-q. We

still believe inefficiency is driven by delays in

implementing the energy substitution project which was

compounded by the contraction in revenue in the fourth

quarter. We nevertheless see EBITDA margins gradually

expanding in 2012 and beyond driven by energy savings. As

such, Ashaka’s energy management project remains the

largest risk in our valuation model.

Tax benefits enabled PAT to grow by a respectable 18.9%

which translated to an EPS of NGN 1.60. The company

paid a 0.40 kobo dividend which works out to a yield of



Outlook, Valuation and Recommendation

The ban on cement imports in Nigeria, its relatively lower per

capita consumption rates, higher factory gate prices compared

to the rest of the world and increasing funding by the federal

government for infrastructure projects all make cement

production a worthwhile venture in the country. The major

factors that are likely to determine Ashaka’s success as an

investment case in this setting include the following:

Energy savings…

Energy savings have to kick in at some point in time and

efficiency will also improve as new capacity comes online.

We do not expect a significant impact from capacity

additions to have occurred in H1 12, with Q4 12 more

likely to give clearer indications of the impact.

Intensifying competition…

Competition is set to increase in Ashaka’s North Eastern

niche. DCP, in particular, is likely to pose challenges, but

we believe Lafarge has the capacity to manage that and

enhance shareholder value.

Further downside on share price looks limited…

We note that Ashaka’s share price declined from NGN

15.01 (-29.70%) since we upgraded our rating from sell to

buy, which was conditional on clear signals of a market

turn obtaining. This has however been in line with the

trend observable among its Nigerian peers. Indications now

are that the decline could be bottoming out with support

building at current levels.

We relied on a DCF to establish a target price for Ashaka. The

company’s relatively lower valuation still makes it a

compelling investment. Our model led us to NGN 14.6 as being

the intrinsic value for Ashaka. The target price is lower than

our previous estimate. We have become less optimistic about

the LPFO-to-coal substitution program and toned down cost

savings estimates. Nevertheless our target still represents 56%

upside from current levels, hence our constructive stance. BUY






CCNN is the smallest amongst its Nigerian peers

covered in this report and is further disadvantaged by

its anchor shareholders who are not as financially

endowed as those of its peers, a fact that has worked

against the company’s efforts to increase production

capacity. The company plans to increase its cement

capacity to 1.7mtpa and to fund this it is targeting to

raise NGN 45bn via a rights, public and convertible

debenture offer. Apart from these initiatives coming

late relative to competition, we believe they are also

dilutive and hence place equity holders at a

disadvantage. Given the significant slide in the share

price over the past two years we had looked at CCNN

positively especially in light of plans to add capacity.

However, the aforementioned dilution has led us to

tone down our optimism especially given competing

options in the Nigerian cement space, and more so SSA

as a region. CCNN thus makes a good Speculative Buy.

To fund expansion, the plan remains to raise NGN

15bn each from a rights offer, public offer and

convertible debenture offer. The public offer

entails issuing shares upfront which will be dilutive

and will be exacerbated further by the proposed

convertible debenture.

We however believe CCNN needs this investment to

survive. The flip side is that its energy bills will

remain the highest amongst its peers, with

efficiency continuing to suffer owing to lower

volumes at a time that increased supply in Nigeria

will bring cement prices down. Its haven in the

north is also becoming more easily accessible to

competition as lower production costs makes it

economic to move cement by road over a relatively

longer distance.

From a peak of NGN 22.65 in 2010, the company

currently trades at close to NGN 5.00 and

indications are that support has been found at

these levels. Any positive change in the outlook is

likely to trigger a retracement hence our belief

that the CCNN makes a good speculative purchase.



Nature of business

CCNN is a 51% owned subsidiary of the BUA group, an

indigenous conglomerate with interests in sugar and flour

milling. Its major market is in northern Nigeria where it has a

secluded existence and hence dominates. The company has

struggled with its expansion plans as capital has been hard to

come by and has since taken a route that we believe is

dilutive and not in the best interestss of equity holders. As is

the case with Ashaka, competition in its backyard is

increasing as improving efficiencies amongst peers, notably

WAPCO and DCP, is making it more viable for cement to be

trucked to the north at competitive prices. We see plans for

expansion and investment in alternative energy sources now

being vital for survival.

Anchor investor...

The BUA Group started business over 24 years ago as a

Private Limited Liability Company specialising in the

importation and marketing of iron & steel, agricultural and

industrial chemicals. Since then it has rapidly developed into

a fully-fledged, fledged, diversified business with a stake in a wide

range of business sectors. Today, the company’s areas of

business interests span from manufacturing to port

concessions, real estate development, oil & gas and shipping.

Its acquisitions and business interests include the Cement

Company of Northern Nigeria (CCNN), Edo Cement, BUA

Cement PH, BUA Flour Mills, BUA Oil Mills, BUA Ports &

Terminals and real estate businesses. CCNN’s acquisition took

place in 2010, when BUA International Limited acquired

Damnaz Cement Company Limited and became indirectly the

majority shareholder in CCNN and its technical partner.

Damzan is seeking technical partnerships with some of the

leading cement manufacturers in the world in a bid to raise

its competence. The company disclosed that it is in

discussions with Ultratech Cement of India aimed at having a

very meaningful technical and managerial co-operation.

Additionally it is entering into similar cooperation with

Heidelberg Cement Group in areas of its competence which it

has signalled its intention to accept. CCNN is set to benefit

from these arrangements, which is vital for survival in the

highly competitive Nigerian market.

Q1 12 financials review

The Q1 12 performance came in worse than we expected.

Revenue was largely flat and gained a marginal 1.4% while

COGS soared 86% to NGN 2.74bn. Gross margins consequently

slumped from 52.4% to 12.8%. Operating cost also grew ahead

of revenue and saw the company’s operating profits halving

compared to Q1 11. Profit for the year ended 48% lower at

NGN 268m. CCNN is located in northern Nigeria an area that

has recently been rocked by political violence. The muted

growth in revenue reflects the impact of challenges in moving

product to the market. Gas supply constraints that were felt

across the whole country weighed on gross margins. We

however believe that the decline is too steep to be sustained.

We expect a recovery in the margins as the year progresses,

but still anticipate 2012 net income to end significantly lower

than 2011.


Outlook, Valuation and Recommendation

We do not see CCNN improving its performance

significantly without investment in alternative sources of

energy and an increase in its production capacity. The

company has however been slow to implement a capital

raising exercise and it has settled for an option that

dilutes shareholders’ interest in the company.

Nonetheless, we see CCNN’s planned strategic

partnerships with some of the biggest names in the

cement industry as value adding. We however do not

expect the arrangements to improve earnings in the

short term and as such we expect the company to

continue lagging its peers. CCNN’s profitability margins

are the thinnest and we expect the situation to remain

so until the planned expansion project is fully


We expect FY 12’s performance to be disappointing

judging by performance in Q1 12. We are forecasting a

small improvement from Q1 12 in which net income

halved on a y-o-y basis. Nevertheless, CCNN’s share price

has declined significantly and any improvement on the

outlook can see a bounce back in the share price. Our

speculative buy call reflects our opinion that the worst

seems to have been discounted in the price and the

company can only improve from the current levels. In

estimating the fair value, we assume that the company

will revert back to its historic performance with no

added uplift from new expansion. We see the share price

being capable of more than doubling at the sight of a

better outlook for CCNN. Speculative Buy.







Lafarge WAPCO, (WAPCO)’s story hinges on the successful

implementation of production increases at its Ewekoro

plant, dubbed Lakatabu. Q1 12 showed spirited intent to

succeed in the otherwise delayed ramping up of

production and we see continued improvement in both

volumes and efficiency going forward. With 4.5mtpa

cement capacity, 90MW own generated electricity and a

retooled distribution network, the future can only be

bright for WAPCO. We have previously been less

constructive on WAPCO as we felt the company was not

moving fast enough to capitalise on its first mover

advantage in as far as capacity additions is concerned. As

stated, indications are clear that we should be entering a

period of rapid volume growth for the company and as

such revise our call from hold to Buy.

Production ramp up is reportedly going on well and by

our estimates capacity utilisation is closer to 80%,

way ahead of DCP which we estimate to be around

65%. We see this improving further in 2012 which

should translate into a huge jump in revenue growth

and profit margins.

Self-sustenance in power will improve plant

availability and act to tone down the energy bill. Gas

supply bottlenecks may negate this as the year

progresses, but broadly, we expect a positive impact

on profit margins from energy savings.

Imports have also shown signs of significantly slowing

down and the authorities also look intent on seeing

their backward integration program bearing fruit. We

believe this will be key in supporting cement prices in

Nigeria, safeguarding the company’s healthy margins

in 2012 and beyond.

In establishing WAPCO’s intrinsic value, we used the

DCF method which led us to a target price of NGN

58.2, indicating significant upside from the current



Nature of business

Lafarge WAPCO is a member of the Lafarge Group and

manufactures Elephant Cement, a formidable brand in

Nigeria on two production sites, one in Ewekoro and the

other in Sagamu in Ogun State. It is the only company with a

plant linked to the national railway network, a feature that

we believe will be helpful in transporting its expanded

volumes. Apart from expanding cement producing capacity,

the company added a ready mix concrete business to its

portfolio of offerings in 2010, with operations commencing

only in Q4 11. This is in line with the Lafarge group’s stated

strategy of seeking to generate more out of its current client

base through value added products.

Anchor investor...

WAPCO became a part of Lafarge following the acquisition of

Blue Circle Industries by the Lafarge group in July 2001.

WAPCO is a clear demonstration of Lafarge’s capabilities in

funding expansion projects and the focus being given to the

frontier market by the group as it seeks exposure in high

growth regions. We believe the attention being given to such

ventures makes companies like WAPCO more attractive and

investors stand to benefit by aligning their investments to

this jewel in the world’s leading cement producer’s crown.

H1 12 financials review

WAPCO released a set of solid H1 12 results. Revenues

went up 57.1% to NGN 46.84 on the back of increased

volumes as ramp up in production continues. By our

estimate, the company’s utilisation levels stands at c70%

and we expect it to increase as the year progresses.

Revenue growth is thus likely to be driven largely by

volumes for the rest of 2012.

Gross margins stood at 38.8% having climbed down from

the 57.4% of Q1 12, but an improvement from 31.4% for

FY 11. Gross profit resultantly grew 81.1% to NGN

17.97bn. Slower growth in operating expenses which

stood at 31.7% saw operating income soar 186.6% y-o-y to

NGN 14.70bn. We expect margins to improve as the year

progresses, underpinned by improved gas supplies and

increasing volumes.

Net income stood at NGN 8.81bn, 175.7% higher than the

comparable period in 2011. Growth ratios in Q1 12 were

way higher and we expected them to be toned down as

the year progressed. Q1 12 was a particularly low base

for comparison while tax rebates that were booked latter

on in 2011 will provide a relatively higher comparative

base. Added to that is the fact that WAPCO should now

start absorbing the full tax impact at 30% in 2012.

We note also the company’s move to branch from its core

market in the south-west region and target the northern

region, the Niger Delta, as well as the south east regions.

Access to the railway network is making a difference in

these efforts in as far as reaching the market is

concerned, while a slowdown in imports is also expected

to underpin demand.


Outlook, Valuation and Recommendation

2012 has clearly started on a solid footing for WAPCO and

we expect the growth tempo to be carried forward

through to year end. We had a hold recommendation on

WAPCO, premised largely on the delayed accrual of

benefits from its capacity expansion program. H1 12

results have, however, shown that WAPCO’s 15%

production capacity share in Nigeria, the rejuvenated

distribution system and investment in the 90MW power

plant have started to positively impact earnings.

Higher plant utilisation rates…

We expect WAPCO to realise close to 70% utilisation of

its 4.5mtpa cement capacity by the end of 2012. As

stated earlier, we see revenue being broadly driven by

volumes in 2012, premised upon our expectations of

success in the production ramp up process.

Improved plant availability

The commissioning of the power plant and

expectations that gas supplies will improve for the

remainder of 2012 will result in WAPCO recording

fewer work stoppages. Apart from positively impacting

volumes, we see this as being a key source of

efficiency and is the driver behind our optimism on

improved profit margins.

Efficiency gains…

We expect economies of scale, access to own

generated power - which is cheaper - investments in

the distribution channel and the banning of imports all

on the back of stable factory gate prices to see profit

margins improve significantly in 2012 and beyond.

We therefore expect the above to drive WAPCO’s growth

while improving free cash flow generation in future. Using

a DCF, we arrived at a target price of NGN 58.15 which is

33.7% above the current price. We thus upgrade our rating

from hold to BUY.




Dangote Cement



Dangote Cement (DCP)’s growth tempo continues

uninterrupted, but the drive to list on the London stock

Exchange looks to have stolen the limelight lately.

Transparency is growing deep seated roots with

disclosure levels well ahead of its Nigerian peers, while

reports indicate that the company will soon get a new

look board of directors with majority shareholder Aliko

Dangote stepping down as the Chairman. We see this as

being positive to the tightly held company and should

help shore up the valuations even in the face of

increased liquidity. The ramp up in production has also

commenced and commissioned plants have since

doubled capacity. We have previously expressed

reservations as regards DCP’s ambitious expansion

program, but events on the ground have significantly

altered the market’s capacity to consume higher

volumes. The protectionist stance taken by the Nigerian

government as regards cement imports plays into the

hands of DCP and its peers and hence we do not expect

cement prices to come down significantly even as DCP

increased utilisation levels. We advise accumulating

DCP shares as its foray into the region continues to

unfold. Accumulate

Capacity utilisation currently stands at c65% and we

expect to see further improvements as the year

progresses. We believe DCP will be capable of

achieving this while maintaining EBITDA margins

well ahead of 50%.

With WAPCO also increasing deliveries to the

market, pressure on factory gate prices is

inevitable. However we expect a ban on imports to

support higher prices despite increased availability

of cement.

DCP’s share price has remained largely range

boundsince listing mainly due to the illiquid nature

of the counter. We however expect valuations to

move above the prelisting levels as liquidity

improves on the back of improved earnings

generation and the impending London listing hence

our call to Accumulate shares.


Nature of business

DCP is the market leader in the Nigerian cement industry

with a 63% market share. In Nigeria, production capacity has

since doubled as the Obajana and Ibese plants came on line.

Production ramp up has also commenced and we expect

utilisation levels to be above 70% by year end. DCP has the

biggest regional expansion plans amongst its African peers.

The company has plans to build integrated plants in Senegal,

Zambia, Tanzania , Republic of Congo, Ethiopia, Gabon

(all 1.5mtpa), as well as South Africa with 3.3mtpa. In

Cameroon, DCP wants to install 1mtpa clinker grinding

capacity, while import terminals will be constructed in

Ghana (Tema&Takoradi -3mtpa), Cote D’Ivoire Terminal

(1mtps) as well as Sierra Leone and Liberia both (0.5mtpa).

Anchor investor…

DHL represents the interests of Aliko Dangote, the richest

man in Africa, according to a Forbes magazine survey. DCP

represents Aliko’s prime asset as its listing significantly

boosted his net worth. As such a lot of good decisions have

been made as regards DCP with its unparalleled

transparency and higher levels of corporate governance,

when compared to fellow indigenous cement operations in

Nigeria, being the most notable.

The drive to list on the

London Stock Exchange has even seen Aliko considering

stepping down as Chairman and hiring a professional to

replace him. His stated desire to refocus the group’s

attention towards infrastructure re development can only mean

a captive market for DCP. Our opinion is that DHL’s presence

in DCP is value adding and a big positive for investors.

Dangote is Africa’s richest person for a reason, and it can

only be positive to align one’s fortunes with those of

someone who understands navigating Africa’s biggest market

and has a history of creating value from it.

Q1 12 Financials Review…

Q1 12 production volumes were up by 38%, to c2.2m

tonnes, and the company managed to significantly

reduce imports to negligible figures. As a result,

turnover went up 18.0% to NGN 64,114bn.

Ibese and Obajana (line 3) commenced production ramp

up, achieving utilisation levels of 38% and 75%

respectively, and hence negatively affected overall

utilisation levels for the whole group. We expect DCP to

achieve c65% utilisation levels by year end with double

the production capacity that was operational at the

beginning of 2012.

Profit margins however came under pressure from

energy prices. Unstable gas supplies saw DCP use more

LPFO than previously planned, raising the company’s

fuel cost significantly. PBT margins ended Q1 12 at 47%

against 51% for Q4 11. Management is however confident

that the gas supply challenges will be resolved before

the end of H1 12. Nonetheless, DCP invested in

significant backup fuel reserves which will ensure no

stoppages occur to affect the anticipated upward

momentum in volumes in 2012 and beyond.

Taxable income ended Q1 12 at NGN 30.33bn, up 11% y-

o-y, with net margins sliding to 47% against 50% for the

comparable period in 2011. Tax benefits remain intact

and the company will continue paying low tax rates at

least up to 2014.


Outlook, Valuation and Recommendation

Q1 12 financials are, at the least, satisfactory, but they do

paint a good picture of what is likely to come from DCP

for the rest of the year. DCP traditionally generates more

towards the end of the year and we do not expect a

change in the trend. In addition to history being on its

side, we expect the following factors to underpin

performance in 2012:

Improving gas supplies which we expect to

significantly cut down the use of the more expensive

LPFO. Management stated that LPFO is at least 4x

more costly than gas in firing the plant’s kilns.

Improving utilisation levels across the group as newer

plants start running at higher levels. As stated earlier,

we expect utilisation to reach 65% by year end, which

should point to significant volume growth as the

company is now running with more than twice its

capacity in 2011.

Tied to the volume growth discussed above is the

price that DCP can achieve at its factory gates. The

banning of imports will significantly aid DCP in

ensuring that prices remain stable. We expect DCP

and its peers to increase deliveries without

significantly altering prices in Nigeria and the market

to easily absorb all products. A look at the experience

in the emerging markets discussed earlier in this

report canalso demonstrate that at current

consumption levels, it is only but a matter of time

before SSA, Nigeria included, creates space for

additional capacity as consumption races ahead of


DCP, traditionally, has the fattest EBITDA margins

amongst its peers. The company has favourable long

term gas supply contracts and newer plants that help

in achieving this. However, imports, which normally

came in at higher prices than own produced cement

used to weigh down the already high margin. With

exports due to stop completely for DCP by substituting

with local production, we see DCP’s profit margins

improving further.

Lastly, DCP’s focus is now turning to regional

operations. Plants in countries such as Senegal have

already started to contribute positively. We expect a

small contribution in 2012 and a significant

improvement from 2013 and beyond.

DCP issued bonus shares at a rate of 1 share for every 10

held which increased shares in issue to 17bn. This is

obviously positive for current holders of the shares. With

the London listing on the way and the increased liquidity

it brings, the move is clearly value adding to shareholders.

We applied the DCF method to estimate the fair value for

DCP’s shares including the bonus shares and arrived at a

price of NGN 131.30, indicating significant upside from the

current level. We remain constructive on DCP and thus

advise purchasing the shares. We however remain cautious

as increased liquidity can sometimes weigh down a share

that has previously been tightly held, hence our more

cautious Accumulate call.

Dangote Cement in Africa (Outside Nigeria)




Senegal IntegratedPlant 1.5

Zambia IntegratedPlant 1.5

Tanzania IntegratedPlant 1.5

SouthAfrica IntegratedPlant 3.0

RepublicofCongo IntegratedPlant 1.5

Ethiopia IntegratedPlant 1.5

Gabon IntegratedPlant 1.5


Cameroon GrindingUnit 1.0


Ghana(Tema+Takoradi) Terminal 3.0

SierreLeone Terminal 0.5

Liberia Terminal 0.5

CoteD'Ivoire Terminal 1.0

Total 18.0



ARM Cement Limited




Athi River Mining (ARM) is executing an ambitious

capacity expansion program that will see it dominate

East Africa, capacity wise. The company has just

completed the first phase of its 1.5mtpa projects in Dar-

Es-Salaam that is expected to start producing in August

2012. To complete its expansion, the company has

accessed a USD 50m convertible note from the AFC

(African Finance Corporation) which will be drawn down

in Q3 12. This will add onto the already bloated foreign

currency denominated borrowed position of the group.

Ratings have appeared dearer relative to peers especially

during periods when the shilling had significantly

depreciated, but we are of the opinion that added

capacity which is coming on line will drive earnings going

forward, unwinding the rating. ARM’s exposure to forex

denominated loans will maintain volatility in earnings,

the positive being that ARM does not crystallise its

exchange losses. We thus revise our rating upwards from

hold to BUY.

The non-cement portion of ARM’s business

contributes c30% of revenues per year and the bulk of

the income is in hard currencies. This, in our opinion,

is a good enough hedge to sterilise the impact of its

forex denominated debt. Additionally, it reduces the

company’s reliance on cement smoothening out

earnings that are bound to fluctuate in East Africa’s

competitive market.

Expansion will always be ARM’s trump card. The

company is seeking self reliance in clinkering; a move

that is positive for profit margins and is a competitive

edge against competition that relies on importing


ARM’s price is at the highest it has been over the past

5 years. 2011 saw fluctuations that mirrored the

loss/profit of the mark to market forex loan

positions, but its price remained capped at around

the KES 200.00 level. We see the price breaking

above this resistance level into unchartered territory

hence or constructive call on ARM. BUY.


Nature of business...

ARM is the third largest cement manufacturer in Kenya in

terms of grinding capacity (1.0 mtpa) and has operations in

other SSA market, namely ARM Tanzania, ARM South Africa

(PTY) Ltd as well as Maweni Limestone Ltd. Cement

capacity is being increased to reach 2.5mtpa from the

current 1.0mtpa. The company currently has excess

grinding capacity with clinker coming from its 0.65mtpa

plant in Kololeni. Its Kenya plant is closer to the main

Nairobi market, which makes it highly competitive when it

comes to prices. Cement is the core product accounting for

70% of the group’s revenue. Added to that, ARM produces

quick & hydrated Lime, sodium silicate, various industrial

minerals, fertilisers, special building products such as

Sealmaster tile grout, tile adhesive, Wallmasters such as

Bayramix and Walltek among others. In Kenya, the company

controls 15% of the market and is completing construction

of two plants in the Tanzania market, one in Tanga and

another in Dar-es-Salam with a combined cement capacity

of 1.5mtpa.

Anchor investor...

ARM was founded in 1974 by the Paunrana family who still

control 51% of the company, and was listed on the NSE in

2007. The business started as a producer of agricultural

lime and processed minerals but has grown into a force to

reckon with in the cement industries of Kenya and

Tanzania. The Paunrana family is still active and has been

pivotal in driving the regional expansion initiative. The

family’s history with the company has been value adding as

can be demonstrated by the emergence of ARM as a force in

East Africa.

H1 12 Financials review...

A 60% surge in sales of Rhino cement during the first

half of 2012 underpinned a good set of results from

ARM. Revenue went up 37% as it continues to gain

market share with Bamburi being the main loser.

Efficiency, however, suffered with the group’s PBT

margin sliding 1.6 percentage points to 15.59%. One

would expect higher volumes to be accompanied by

efficiency improvements, but for a company as

leveraged as ARM, above the line costs are prone to

huge fluctuations.

After tax income grew by 25% which is commendable

and we expect the tempo to be maintained throughout

2012 and to be buttressed by income from the new

Tanzania plant that is expected to start coming through

from August 2012.

The group generated KES 520m in cash from operations,

applied a billion to investments Cash at the end of the

period stood at KES 68m compared to KES 1.308bn as at

the first half of 201.

We expect earnings growth momentum to be carried

forward into the second half and the fourth quarter in

particular to be impressive as the ramp up in Tanzania

production occurs. We expect growth ratios to be

particularly high owing to the low base set in H2 11 on

the back of the significant depreciation of the shilling.


Outlook, Valuation and Recommendation

ARM Holdings - Cement Plants

ARM’s management is bullish on the second half of 2012

owing to lower interest rates, a stable currency and

strong demand coming from the infrastructure sector.

We concur with such an assessment, but expect some

factors peculiar to ARM to further drive earnings, the

notable one being:

Control of the value chain.

Unlike some of its peers who rely on importing

clinker, ARM will have capacity to provide all of its

grinding mills with own produced clinker. We

believe this will be positive for profit margins and

can set ARM apart, allowing it to compete on

traditionally sensitive items such as pricing.

Strong demand expected out of Tanzania.

Tanzania imports close to 1.5mtpa annually

because the country has a deficit in production

capacity. We expect ARM to benefit from those

gaps which have ensured prices average USD 140

compared to USD 120 per tonne in Kenya. From Q3

12 onwards, ARM will be capable of making efforts

towards plugging that gap.

Low cost producer...

ARM has the lowest production cost per tonne

compared to competition. The company averages

USD 58/tonne compared to more than USD 70 for

its Kenyan peers, Bamburi and EAPCC.

We expect earnings to improve significantly between

2012 and 2014 as the commissioning of new plants

allows higher volumes. Efficiency will improve in

tandem with increasing volumes as economies of scale

kick in. We are forecasting net income to quadruple

between 2011 and 2013 propelling the share price

beyond the highs attained in 2010. We thus upgrade our

rating from hold to BUY.






Kenya’s largest cement producer now commands a 40%

market share, down from 50% some 2 years ago. The

company has made significant inroads as regards

supplying fellow EAC nations from its revamped Hima

plant and has more than made up for the loss of market

share in Kenya. Bamburi is an efficient cement company

that is endowed with steadily growing earnings

compared to its peers. The company is free from the

government interference that we find at EAPCC or

earnings fluctuation induced by foreign currency

denominated leverage as is the case with both Bamburi

and EAPCC. We like it further owing to its Lafarge

parentage and a diverse portfolio of cement and cement

related products that have leadership position in the

market. Bamburi has steadily recovered out of the slump

on the NSE which bottomed up at the beginning of Q1

12. The share price is clearly on an upward trajectory

and having made successive higher lows since the

beginning of the year. Our valuation model points to a

further 15% upside from the current levels hence our call

for investors to hold on to their shares. HOLD.

Its Ugandan subsidiary; Hima Cement has increased

volumes following capacity expansion and we see

continued growth in 2012 as the ramp up continues

and other regional markets open up. Hima will be

vital in maintaining healthy profit margins especially

in the face of stiff competition in Kenya.

The company retails its products at a premium to

the competition. As expected, competitors resorted

to pricing as a sales promotion tool and over the past

two years, they have managed to wrestle a

significant portion of market share.

Bamburi has an added advantage it having a wider

product offering that includes cement related items

that are not offered by competition. Bamburiblox is

growing into a formidable brand and we see it being

capable of propping up profit margins even in the

face of the stiff competition in Kenya.


Nature of business

Bamburi is a member of the Lafarge group and engages in the

manufacture and sale of cement and cement related

products in eastern Africa, principally in Kenya and Uganda.

It produces portland cement under the Power Plus, Supa Set,

Multi-Purpose, Nguvu, and Plasta Plus brand names. The

company also manufactures paving blocks under the brand

name ‘BamburiBlox’. It is the largest cement manufacturer in

Kenya with an installed annual capacity of 2.2 mtpa. The

Hima plant in Uganda has installed capacity of 0.85 mtpa

bringing Bamburi’s total capacity to 3.1 mtpa. Despite

significant loss of its market share on increased supply and

lower pricing by competition in the last 2 years, Bamburi is

still the leader controlling 40% of the domestic market in


Anchor investor…

Bamburi is one of Lafarge’s acquisitions that it executed in

Africa before taking over Blue Circle. The company has been

in the group for a while now and has since been primed to

match the group’s ambitions in 2012 and beyond. For the five

years prior to 2012, the group’s action has been to “Make

Lafarge Ready for Today”. This entailed

Cost reduction, which commenced earlier than

competitors and is being accelerated

Completing significant geographic expansion. SSA has

been a recipient of huge investments from the group as

Lafarge’s operations generally pioneered expansion

across the region.

Reinforced and optimised its portfolio globally with the

SSA region together with other high growth regions like

MENA increasing their influence in the portfolio. Lafarge

developed organically 40mtpa capacity in emerging

markets, entered new markets in the developing world

and exited non-core positions while refocusing its

attention on cement and aggregates.

This was all in preparation for a period of significant

focus on sales growth, cash generation, and returns

A closer look at Lafarge’s operation in SSA shows how the

group has progressively moved to position itself according to

the above roadmap. Our expectations are that Bamburi will

from 2012 grow volumes and earn more from higher profit

margins on the back of improved efficiency in line with the

planning at group level.

We are generally positive on Lafarge’s operations that we

covered in this report because of the strategic direction from

the group.

FY 11 financial review…

FY 11 financials were weighed down by higher fuel and power

costs. Revenue went up 28% on improved volumes, as Hima

came on line, but profit margins lowered as costs soared.

Gross margins slipped form 34% to 28%, EBITDA margins from

29% to 26%, while net margins ended at 14% compared to 18%

previously. As a result, net income stood at KES 5.234bn, a

3.0% improvement on the previous year. We however expect

fortunes to turn as Hima reaches optimal production levels

and economies of scale drive profitability.


Outlook, Valuation and Recommendation

We expect a significant rise in volumes and hence

profitability and profit margins in 2012 as Hima’s utilisation

levels reach the optimal point. We believe that this will

tone down any negative impact emanating from intensifying

competition in Kenya. Factors critical in determining growth

in 2012 and beyond include;

Market leadership …

Notwithstanding the loss of significant market share to

new entrants and additional capacities, Bamburi still

boasts a 40% share of the market. This has been backed

by its strong brands and brand loyalty. The proximity to

the virgin Southern Sudan market through its Hima

plant, and the Lamu port will boosts its export


Lafarge parentage…

Lafarge parentage has been the key to early execution

of expansion projects for the company. Lafarge took a

decision almost a decade ago to seek exposure in high

growth regions with Africa and the MENA regions

receiving significant injections to execute plant

expansion. Lafarge generally enjoyed first mover

advantage across the region, and is set to continue

dominating in just the same way that it dominates


Higher transport costs due to distance from market

Bamburi’s flagship plant is in Mombasa, far from the

main markets in Nairobi and its environs as well as the

other parts of the country. Although it has established a

plant in Athi River, extra demand is fed from its

Mombasa plant. Cement is transported by road ensuring

an additional cost to bring cement to the Nairobi. With

the competition seeing improving efficiencies and

volumes, we expect this to place further strain on profit


Huge cash pile to make the group more agile

As at the end of 2011, Lafarge was sitting on a KES

7.13bn cash pile which we believe will help the group

move quickly to stay ahead of competition especially

given the tide for capital expenditure among cement

companies in SSA. This is in stark contrast with the

borrowed positions that its peers; EAPCC and ARM find

themselves in.

Using a DCF to estimate Bamburi’s fair value, we arrived at

KES 206 which is 15% above the current level. However,

given that the company is flirting with the share price highs

achieved in 2010, there are chances that there could be

resistance around the KES 190 level, which could make

buying shares at these levels risky. HOLD



East Africa Port




The 25% government ownership has always weighed

down EAPCC, especially as regards valuations. On 17

January 2012, the company’s shares were suspended,

and remained so for two months, as the board and

government were locked in a dispute. Government

wanted to dissolve the board citing an improper tender

process for clinker, a move that prompted Kenya's

Capital Markets Authority to suspended EAPCC from

trading in a bid to protect shareholders. The Kenyan

high court later ruled that government had no power

to order the board's dissolution, leading to the readmittance

of the shares on the bourse. As if

government interference is not doing enough to inhibit

performance, EAPCC remains hamstrung by a long

term Yen denominated loan which has been the main

driver of its poor performance for some time now. Our

opinion remains that the company can benefit if fully

privatised but for as long as the status quo remains,

we remain averse to encouraging investment in the

company. SELL.

EAPCC relies on clinker supplies from third parties,

a fact that has always negatively impacted its

profit margins. We also note the entrance of

newer and more efficient factories that are likely

to use pricing as a tool to promote sales, which

can only point to continued pressure on margins

going forward.

The KES 3.0bn loan is only 30% hedged leaving the

company vulnerable to fluctuations in the currency

markets. EAPCC is not strong in exports and thus

relies on KES denominated inflows to service the


On a positive note, EAPCC is switching to coal from

the more expensive LPFO. We expect this to

mitigate margin compression as competition heats


EAPCC is trading at half its January 2011 price, but

ratings still look demanding, indicating the

subdued earnings growth over the past twelve

months. We thus reiterate our call. SELL.


Nature of business

EAPCC’s history dates back to the 1930s, as it started off as a

trader in imported cement from England, a grinder of clinker

imported from India and the operator of a 0.12mtpa Athi

River cement plant in 1958. Capacity has since been upped to

1.3mtpa which makes it Kenya’s second largest producer.

The company produces the Blue Triangle Cement brand and

additionally, manufactures concrete pavers, kerbstones,

cement slabs, and cement fence posts. It also makes cement

tiles, culverts, panels, and tubes for the construction

industry. Its main plant is in Kitengela, less than 30km from


Anchor investor...

The government owns a majority stake (52%) in the firm (25%

directly and 27% through the National Social Security Fund,

NSSF). Lafarge has a 14.6% stake. Government generally

directs the strategic thrust which brings in both positives and

negatives. As regards the positive, EAPCC has access to

lucrative government infrastructure developments and has

previously accessed lines of credit on the back of government

backing. Government has served as a guarantor to the

aforementioned Yen denominated debt.

The cons, however, eclipse the pros. Firstly, EAPCC is subject

to stringent public procurement procedures that take away

any agility it might have in moving faster than the

competition. Secondly, as evidenced by its suspension,

government interference is often undesirable and

counterproductive. The counter is thus shunned by the

investing public largely because of these factors.

Financials Review (FY 12 profit warning)...

EAPCC issued a profit warning stating that earnings for

the year will be at least 25% lower than the previous

year. Management cited high production costs and

intensifying competition as the prime reasons. EAPCC had

posted a profit of KES 561m for FY 11

Loss before tax in H1 12 was KES 175.4 m compared to a

profit of KES 254.9 m for H1 11. A tax credit of KES

87.0m toned down the loss for the half year to KES 88m.

The company did not pay an interim dividend.

Management stated that to cope with the harsh outlook

it will launch a recovery strategy to restore long-term

growth and take advantage of demand for cement in the

country and the region which it said was strong. We

however do not share their optimism. EAPCC will always

be slow to the market compared to peers because of its

counterproductive tendering system. Furthermore, if the

company failed to capitalise on the more efficient coal

fired production system, there is limited room for it to

manoeuvre and bring cost down.

We note the boardroom wrangles that we believed to

have been disruptive and the prime reason behind the

losses. Additionally, a plant breakdown in November

2011 should have aggravated the situation.

The rising cost of electricity, packaging materials and the

unfavourable movements in the foreign currency

exchange rates also weighed in to dampen performance.

The company will remain vulnerable to a depreciating

KES because of its Yen denominated loan.


Outlook, Valuation and Recommendation

As stated earlier, we do not see EAPCC’s outlook changing for

as long as government interference remains apparent. We

note the mention of plans to fully privatise the company, but

we expect it to take a while and it may be executed in a

manner that is not value adding to minorities. We however

note the following factors that are likely to have an influence

on future performance at EAPCC.

Undervalued EAPCC land

EAPCC has 12,000 hectares of land with a book value of

KES 166m. Land in comparable areas currently fetches

KES 1.0m per hectare compared to KES 0.01m carried in

the books. This value will eventually be unlocked either

under the current setting with the company selling it to

private developers or if EAPCC is privatised and new

management seeks to unlock value from the land.

Coal as a primary source of fuel

The introduction of coal as a primary source of fuel is

likely to see pressure on profit margins ease off and if

this happens on the back of exchange rate stability, we

expect the company to grow its earning significantly.

Proximity to the market...

Kenya’s largest producer, Bamburi, has its prime

operations closer to the coastal city of Mombasa. EAPCC

is closer to Nairobi which is the largest cement market in

the country.















Source: IAS/company reports



We however remain unconvinced that the company can

recover from its current doldrums, especially as the

suspension all but acted to cement investor scepticism. We

expect earnings and earnings growth to remain subdued

which, when applied to our DCF model, points to full

valuation at current levels. We advise selling firstly because

there are clearly better opportunities in the cement sector,

and secondly, to avoid a company ridden with government

interference and lastly on the basis of its full valuation. SELL







Tanga has announced plans to invest USD 165m to

upgrade its plant with the aim of boosting output for

exports. The company, which upped its grinding

capacity to 1.2mtpa in 2010, is looking at upgrading

clinker capacity to 1.1mtpa. Tanga has also invested in

establishing a presence in both Rwanda and Burundi

and management’s plan is to increase output so as to

be capable of serving these markets. Cement

consumption in East Africa has historically grown at a

faster pace compared to other regions in SSA, and as

such we expect Tanga’s enhanced capacity, which is

scheduled to come on line in 2015, to come into a

market with significant cement appetite. We see

Tanga registering significant improvement in profit

margins coming out of this investment. Own produced

clinker tends to be cheaper, while increased volumes

generally bring efficiency owing to economies of scale.

We thus maintain our constructive call on Tanga. BUY.

Tanga relied on the more expensive clinker

imports to fulfil grinding requirement while its

plant was shut down for an upgrade. This was

aggravated by unreliable power supplies, rising

fuel prices and a weak TZS which all acted to

negatively impact earnings generation in 2011.

Most of these bear factors have however since

reversed and we thus expect Tanga to register

solid growth for FY 12.

Exports into inland nations such as Rwanda and

Burundi often generate wider margins than

domestic sales. We expect the increased focus on

exports to buttress profitability especially on the

back of increased clinkering capacity in 2015.

Competition from cheaper imports, however,

remains problematic. Authorities are yet to reenact

the import duty barrier as promised. We,

however, still expect cement producers to

generate decent profits given that cement margins

in the region are among the highest world over.


Nature of business…

Tanga Cement, which trades as Simba Cement is 62.5% owned

by AfriSam Mauritius, an investment company. In Tanzania, it

has the second largest cement plant with 1.25mtpa grinding

capacity which accounts for 42% of installed capacity. Market

share stands at 34% and the company has made inroads in

exporting into the region, starting with Rwanda and Burundi.

FY 11 financials review…

Sales went up 8% driven largely by the release of

government funding for infrastructure projects. Exports

to Rwanda and Burundi also improved and we expect the

trend to be carried forward into 2012.

Profit margins, however, declined significantly. Gross

margins slipped to 27.3% against 33.9% in 2012 driven in

the main by clinker imports whose landed cost is

significantly higher than clinker produced by the


EBITDA margins, likewise, declined from 23.6% to 17.00%

with higher energy costs (electricity and fuel) driving

operating costs. Additionally, the depreciation of the TZS

pushed the cost of imported raw materials up. Of note

was the use of diesel, whose price has also risen

significantly, to fuel backup generators during power

outages. EBIT consequently went down 16% to TZS


A higher tax rate of 40% compared to 29% in 2010 saw

attributable income ending the period 33% lower than for

the previous year. Tanga paid a dividend of TZS 86.20 pe

share, lowering the payout ratio to 24.6% compared to

48% for the previous period. The dividend yield works out

to 3.62% at the current trading price.

Outlook, Valuation and Recommendation

Our optimism as regards Tanga’s performance is hinged not

only on the reversal of 2011’s negatives, but a host of factors

that we believe can enhance the company’s ability to grow

earnings. Like its peers in East Africa, the company is exposed

to fast growing consumption, low per capita consumption

rates and comparatively lucrative prices, unmatched by any

other region in the world. Key drivers peculiar to Tanga


New clinker capacity that will make the company 100%

reliant on its own production. This will have a significant

and durable positive impact to profit margins. Twiga,

which relies on its own clinker, has fared better over the

past years than Tanga on profit margins, a fact that

reflects the potential benefits to Tanga.

Tanga took the initiative to push sales in the region. The

East African community is making solid progress towards

integrating and it will not be long before trade barriers

along political boundaries are broken and cement

companies will have an opportunity to market to the

region’s 133m residents. We believe Tanga’s move will be

value adding as it can entrench its position ahead of the


In establishing Tanga’s intrinsic value, we used the DCF

method. Key considerations included our expectations that

the moderate growth on revenues will stay intact, but profit

margins will improve significantly. We have thus maintained

our rating on the company. BUY






Twiga was due to commission its upgraded clinker kiln

(no. 3) in May 2012 that would bring Tanzania’s current

largest producer’s integrated capacity to 1.4mtpa.

Volumes have already been improving, spurred mainly by

improved plant availability as the company’s investment

in alternative power sources started bearing fruits. Profit

margins were, however, negatively impacted by a higher

energy bill that was aggravated by a sliding shilling.

Growth in 2011 was thus curtailed, but we believe

conditions have since changed and the company is poised

to post strong growth in 2012 and beyond, underpinned

largely by volume growth and robust demand in Tanzania.

Twiga remains one of our favourite cement stocks owing

to compelling valuations, notwithstanding prohibitive

restrictions for foreign participation on the DSE. Our Buy

call thus remains intact.

Kiln 3 was brought on line in May 2012 and we expect

the impact of the ramp up in production to be

significantly felt in Q4 12. Apart from the expected

increase in output volumes, the upgraded kiln will

make Twiga 100% reliant on own clinker which should

have a profound impact on profit margins.

Own power generation capability and the expected

completion of gas infrastructure, notably the Songo-

Songo extension and the Mnazi Bay pipeline, will all

act to dampen the impact of energy costs going

forward. When this is added to efficiency

improvements on the back of the capacity upgrade,

we see Twiga’s profit margins improving significantly.

Tanzania remains vulnerable to imports, especially

from Asian nations - principally Pakistan, as the

import duty that previously protected East African

producers is yet to be reinstated.

Our call thus indicates our confidence in the ability of

the company to grow its volumes while exploiting the

positive changes in the Tanzania energy sector. We

see 39.6% upside on current valuations. BUY


Nature of business

Twiga has a strong hold on Tanzania’s foremost cement

market of Dar-es-Salaam. Management estimates the

company’s market share at 46%. Twiga now has 1.4mtpa of

integrated capacity following the commissioning of a

refurbished clinkering line, which added 0.25mtpa. Its share

of cement capacity stands at 47% and is due to decline with

the completion of ARM’s investment as well as DCP’s planned

foray into East Africa. The company manufactures the Twiga

Ordinary and Twiga Extra brands which are formidable brands

that are marketed via an extensive distribution network.

Anchor entrepreneur

The company is 69.25% owned by Heidelberg Cement, a

multinational Norwegian cement company that has several

operations in SSA. The parent’s history in Africa dates back as

far as the mid 1960s, when its operations were then run by

Scancem International which eventually became part of

Heidelberg Cement in 1999. Today the company has sizable

operations, especially in West Africa, with a total of 13

production sites, 4 clinkering plants and 9 grinding factories.

In Tanzania, it owns Twiga and has been instrumental in

funding and implementing the 0.25mtps expansion

programme at the company.

Heidelberg, however, owns 69.25%, which is above the 60%

foreign ownership threshold. This acts largely as a value trap

as holders of the shares are allowed only to sell to locals, thus

dampening valuations.

FY 11 Financials review

FY 11 sales volumes grew by a moderate 2% y-o-y, while

turnover added 8.8%, indicating benefits from exploiting

pricing opportunities in 2011. Volumes were impacted

negatively by slower activity in the construction industry and

management notes this was driven primarily by power

shortages which affected the whole economy. Price

adjustments were largely to pass on cost of production to

customers as costs rose in line with the depreciating

currency. Alternative energy sources are paid for in hard

currency and a weaker shilling impacted the cost line


Gross profit suffered further as the company imported

relatively more clinker than in 2010 to enable refurbishment

at its clinkering plant. Erratic power supply additionally

forced more work stoppages which were aggravated by

breakdowns that were also related to power outages. The

result was a surge in production costs with gross profits

declining 1.7% to TZS 100.0bn and gross margins sliding from

51% to 46%. Attributable income, nonetheless, closed flat at

TZS 50.6bn, with Twiga converting 23% of its revenue to the


Cash generation improved, with cash from operations closing

at TZS 75.57bn compared to TZS 42.67bn previously. Cash and

cash equivalent at the end of the period consequently went

up by TZS 19.0bn to TZS 46.24bn. The total dividend payment

of TZS 180 per share was therefore easily affordable and

worked out to a pay-out ratio of 64% and a dividend yield of



Outlook, Valuation and Recommendation

We have been constructive on Twiga and its peer Tanga,

because of the relatively lower valuations and the strong

consumption growth in East Africa. We believe those factors

still remain in play and make Tanzania cement companies in

general very attractive. For Twiga, we can, however, add the

following, which are peculiar to the company:

Increased production capacity

Twiga now has 1.4mtpa integrated capacity which places

it in a good position to benefit from the aforementioned

fast paced growth of cement consumption in East Africa.

Now 100% reliant on own produced clinker

Performance in 2011 showed the importance of owning an

integrated plant. Twiga now has the capacity to produce

100% throughput to its grinders and we expect this to be

hugely positive for profit margins going forward.

Possible improvement in power supply

East Africa is gaining prominence as a gas and oil hub and

we expect this to positively impact power generation. For

Tanzania projects such as the Songo-Songo gas to

electricity project will reduce electricity costs, while

providing industrial users of gas such as cement producers

a cheaper source of fuel for their kilns.

Cheap valuations

Our DCF model yields a target price of TZS 3,405, which is

39.6% higher than the current price. We applied a WACC

of 16.27% and expect 6% perpetual growth for Twiga. The

biggest risk to our valuation remains the lifting of

restrictions on foreign participation on the DSE. If that

happens, we believe there will be further potential

upside on the share price. We were positive on the

counter in our last update and are maintaining that

stance. Buy


Lafarge (Zimbabwe)





Lafarge Zimbabwe has been on a recovery path since

Zimbabwe dollarised. The use of hard currency brought a

lot of positives to the company. On the one side, the

company can now undertake significant capex which was

not possible during the hyperinflationary environment,

while on the other hand, purchasing capabilities of its

customers has been enhanced by dollarisation.

Refurbishments have allowed higher plant utilisation levels

which brought about efficiency and significant profitability

improvements. A recovery in the retail market has also

ensured all cement produced finds takers at factory gate

prices of cUSD 185/tonne, which is close to the top end in

SSA. Our bullish view on the stock is thus hinged on the

opportunity that Lafarge has to increase both volumes and

efficiency without significant capex, while maintaining its

lucrative pricing. Buy.

Current capacity utilisation stands at 67% due to

operational constraints such as inconsistent power

supply. The company’s clinkering capacity of 0.35mtpa

has the potential to support a 0.56mtpa plant. Lafarge

exports excess clinker to Malawi.

Zimbabwe’s cement capacity stands at 1.9mtpa from

the three main players, Lafarge Zimbabwe (0.45mtpa),

Sino Zimbabwe (0.25mtpa) and PPC (1.2mtpa).

However, due to limited capacity utilisation, cement is

not being produced at optimum capacity making the

product scarce and often subject to price manipulation.

Per capita consumption currently stands at 60kg, which

falls below the regional average of 92kg. Demand is

driven largely by retail buyers, but we envisage

significant construction projects taking off especially in

the post elections period. The mining sector in

particular is likely to be a key driver in providing

projects for the construction industry. We see this as a

particularly significant area of growth going forward.

Our DCF model led us to a target price of USD 1.45,

which points to significant upside. Buy.


Nature of business

Lafarge Cement Zimbabwe Limited, formerly Circle Cement

Limited, is a Zimbabwe-based manufacturer and distributor of

cement and allied products. Its plant is the second largest in

the country and the closest to Zimbabwe’s capital Harare,

which affords it control of a lion’s share of the nation’s

foremost cement market. Clinkering capacity stands at

0.35mtpa while grinding capacity is at 0.45mtpa. The company

has excess clinkering capacity and often exports clinker to

Malawi where Lafarge’s plant there sits on an exhausted

limestone deposit mine.

Anchor shareholder…

The Company is majority-owned by the Lafarge Group, which

controls 76% of its issued share capital. Lafarge in 2011

expressed its interest in increasing cement capacity to 1.0mtpa

and placed a five year time frame on the program. We,

however, believe that Zimbabwe’s indigenisation laws may

impact that commitment negatively as the 76% control is in

excess of the 49% foreign ownership stipulation.

Nonetheless, like its major competitor PPC, the company has a

ZSE listing which places it on a better footing as shares held by

the public broadly qualify as indigenous. Our opinion is that,

while full compliance will obviously hurt Lafarge, it will start at

a much better position than many other foreign owned

companies in Zimbabwe.

Q1 2012 Results overview…

Volumes driven revenue growth…

Revenue for Q1 2012 grew by 35.2% to USD 21.9m as capacity

utilisation improved to 67% owing to better plant availability.

Refurbishments in 2011 and improved electricity supply were

the major drivers. We expect continued improvements in

utilisation which should also act positively on profit margins as

economies of scale kick in.

Domestic demand growing…

There is no concrete estimate of the size of the Zimbabwean

market, but what is clear is that everything being produced is

currently being consumed. Management estimates that the

domestic market grew 28% in Q1 12 (q-o-q) with the retail

section remaining the most dominant, while the construction

sector maintained its 18% contribution.

Improving efficiencies supporting margins growth

The operating profit margin increased to 14% despite the

annual kiln shutdown that was undertaken in the quarter - prior

period operating margin was 10%. Kiln utilisation stands at a

high of 90% up from 84% for the prior period.

Minimal borrowings guaranteed by the Lafarge group

The group is set on on increasing its market share from last

year, while also focusing more on the local market with excess

product being exported to Malawi. Consequently, export

volumes for Q1 2012 were 26% below last year, as more cement

was supplied to the more profitable domestic market. The

company is finalising the re-organisation and rightsizing of its

business. Current local and offshore borrowings amounted to

USD 3.2m and are guaranteed by the Lafarge group.



FY 2012 targets revised upwards

Management revised upwards its FY 2012 revenue target to

USD 62.0m (initial target USD 60.0m), up from USD 50.0m

for FY 2011, while the operating profit margin is expected to

improve to 20% compared to 11% for 2011 as efficiencies

continue to improve. The 2012 capex budget of USD 4.0m is

expected to result in better plant reliability and improved

efficiencies. Cash flow generation is also expected to

improve in line with improved operating margins.

Lafarge group continues to lend support, despite

indigenisation threats

The company continues to receive technical and financial

support from the Lafarge Group. An indigenisation plan was

submitted and management is confident that all

stakeholders’ expectations will be met.

Plans to increase capacity and distribution network

The company also has plans to increase its production

capacity to 1.0m tonnes, and to increase its distribution to

cover the more inaccessible areas within the country. Mr

F.F.O Essan, who was recently appointed the Chief

Executive Officer for Lafarge South East Africa, expressed

confidence in the Zimbabwe operation, and reiterated that

besides growing cement sales it is also looking at improving

sales for speciality products and aggregates.

The aggregates that are sold by Lafarge Cement Zimbabwe


• 20 mm or 3/4 stones

• 6 mm

• Washed sand

• Quarry dust / unwashed sand for prefabricated

units, perimeter walls and brick moulding

• Crusher run, and

• Iron stone for road surfacing

Valuation and recommendation

Using a DCF valuation we derive a target price of USD 1.45.

The counter is tightly held limiting downside. At an

undemanding forward PER of 6.6x, and also considering the

prospects of improving activity in the construction industry

by government, private players and the mining sector, we

rate the counter a BUY.


Lafarge (Zimbabwe)





On the back of broader macroeconomic growth, which saw

the Zambian cement industry grow by 20% in 2011, FY 2011

was an exceptionally strong year for Lafarge Cement

Zambia (“LCZ”). Following its successful expansion efforts,

which saw the commissioning of the Chilanga II cement mill

and packaging plant in November 2008, the company

increased its production capacity from 0.65 to 1.23 mtpa.

Over the past 5 years, cement produced has increased from

0.5 mtpa to 0.9 mtpa in FY 2011, with exports emerging

from zero to 0.30m tonnes, representing 31% of total

production. Revenues have grown at a 5-year CAGR of

22.1% whilst net profits have grown at a 5-year CAGR of

29%, representing a 6 percentage point increase in net

margins from 19.5% to 25.8%.

The company reached record levels of production,

revenue and profitability. Total production reached

0.99 (representing 80% capacity utilisation), total

revenue was ZMK 879bn (USD 172m), and a net profit

after tax of ZMK 227bn (USD 45m) was achieved.

The company remains the dominant cement producer

in the Zambian market, with a production capacity of

1.23mtpa and a market share of over 80%. In FY 2011,

303,000 tonnes of cement or 30% of its total production

was exported, which combined with 57,000 tonnes of

clinker exports, accounted for 32% of total revenue.

In July 2011, the company introduced a new cement

product dubbed “SupaSet” Cement targeted at

Zambian concrete and block consumers.

LCZ is currently trading at a PER of 7.06x, which is

lower than our sample average PER of 7.26x. Using a

DCF valuation, we arrive at a target price of ZMK 9,229

per share representing 15% upside. BUY.


Background and Nature of Business

Formed in 1949 by the Northern Rhodesian Government and the

Colonial Development Corporation, now the Commonwealth

Development Corporation (CDC), Chilanga Cement Zambia

commenced cement production in 1951, installed two kilns in

1956 and 1967, commissioned the Ndola Plant kiln in 1969, and

added a second kiln in 1974. The company was later privatised

under the government privatisation programme, becoming the

first company to list on the Lusaka Stock Exchange (LuSE), with

CDC being the majority shareholder.

Top Shareholders

Pan African Cement Limited 50.10%

Financiere Lafarge 33.95%

LuSE Central Share Depository 11.92%

Lafarge Share Certificate Holders 4.03%


In 2001, CDC rearranged its operations in Southern Africa,

forming Pan African Cement which owned shares in Chilanga,

Mbeya Cement in Tanzania and Portland Cement in Malawi. In

May 2001, Lafarge France acquired PAC from CDC and an

additional 34% stake in Chilanga Cement through a compulsory

offer to minorities, bringing its total shareholding to 84%. In

2007 Chilanga Cement changed its name to Lafarge Cement

Zambia. In November 2008, the then President of the Republic

of Zambia commissioned LCZ’s newly installed “Chilanga II”

cement mill and packing plant, which saw its cement

production capacity increase by 89% from 0.65 mtpa to its

current production capacity of 1.23mtpa. The principal business

of the company is the manufacture and sale of cement and

cement aggregates.

FY 2011 Results Overview

Top Line and Demand

LCZ’s revenue for FY 2011 increased by 19.8% y-o-y from ZMK

734.0 bn to ZMK 879.0 bn, driven by sales in H2 2011 which

accounted for 59% of total revenue. Volumes grew 25.4% y-o-y

from 0.79 mtpa to 0.99 mtpa, with the company resuming

production at its Ndola Kiln and operating at full capacity in H2

2011. Demand was driven by both domestic and export markets,

with domestic revenue growing by 38% y-o-y versus a 7% decline

in export revenue y-o-y. Key export markets remained the DRC

(61%), Burundi (22%) and Malawi (9%) for cement, and Malawi

(100%) for clinker. Revenue per tonne (RPT) sold stood at ZMK

871,902 per tonne for domestic sales and ZMK 933,271 per

tonne. Gross margins improved by 2.9 percentage points y-o-y

from 56.1% to 59.0% in FY 2011 owing to a better product-mix.

ZMK Millions

ZMK Millions

















Domestic Revenue

Export Revenue

2009 2010 2011 2012 E 2013 E

EBITDA Operating Profit Including Exceptionals Operating Margin %

2009 2010 2011 2012 E 2013 E











Operations and Cashflow

Owing to significant demand in H2 2011, operations resumed at

the Ndola Kiln, which had been offline from June 2010 owing to

slower demand at the time. Commensurately, distribution and

administrative expenses increased by 3% y-o-y to ZMK 82.0bn

and 7% y-o-y to ZMK 113bn respectively. Employee

remuneration accounted for 44% of overall operating expenses

and increased by 12% y-o-y, whilst the average number of

employees reduced by 9.6% y-o-y from 654 employees to 591

employees in FY 2011. Marketing spend increased sharply by

85% to ZMK 11bn, in part driven by advertising and brand

awareness of its SupaSet Cement product released in mid-2011.

As revenue growth outpaced opex growth, the resultant effect

was an increase in the operating margin from 30.1% to 35.6% in

FY 2011. Following the full repayment of borrowings related to

the USD 120m Chilanga II expansion project in 2010, finance

costs declined by 96% from ZMK 27bn to ZMK 0.95bn.











2009 2010 2011 2012 E 2013 E


The effective tax rate increased marginally by 2 percentage

points to 30% in FY 2011, which netted against lower finance

costs, resulted in attributable net profit growth of 60% from

ZMK 119bn to ZMK 191bn in FY 2011. Net margins improved

from 16.2% to 21.7%; EBITDA margin increased from 35% to

39%; and ROaE increased from 18.9% to 25.5%.

Lafarge Cement Zambia Product Portfolio

Operating cashflows where strong, and grew by 65% from

ZMK 198bn to ZMK 327bn. Modest CAPEX of ZMK 25bn was

offset by investment inflows of ZMK 7bn from the 14% stake

in Mbeya Cement (Tanzania) and interest income. With no

debt on its books, and sufficient operating cashflows to

finance its working capital and CAPEX, LCZ paid out record

dividends of ZMK 115bn, the only financing activity in the

year. Despite the significant dividend disbursement, net

cash and cash equivalents (CCE) increased by ZMK 194bn,

propelling CCE by 118% from ZMK 164bn to ZMK 358bn. As at

31 st December 2011, the company had no debt on its balance




In mid-2011, LCZ introduced a new Portland Composite

Cement formulation called “SuperSet”, which is targeted at

block-making and concrete. Developed in Zambia, SuperSet

is a fast-setting and efficient cement product, particularly

for the block-maker. It sets in approximately half the time

standard cement sets, and uses less water. The development

of SuperSet in-part is an attempt to set Lafarge apart from

current (and prospective - think Dangote) competition by

developing homegrown solutions for the local consumer,

whilst leveraging the group’s R&D capabilities. We expect it

to be a key performer.

New Product Lines

Following completion of the significant capacity expansion

completed in 2009, and the subsequent move to eliminate

all debt owed by the company, Lafarge management has

focused on product depth. In FY 2011, the CAPEX bill was

largely an investment in Aggregates Crusher equipment,

which will enable the company to foray into the aggregates

and concrete business.


• Flagship product designed for retail users

• General purpose cement for building and

structural use


• Designed for contractors

• For use in the pre-cast market, and

specialised building applications


• Newest product line, developed in Zambia

• Targeted at block-makers and for concrete

• Fast setting, and reduced water


Current Capacity and Export Markets

Although further expansion plans are on-hold, with excess

capacity exported, LCZ saw operations reach full capacity

and the Ndola Kiln reinstated in H2 2011 following strong

domestic and regional demand. We expect current capacity

to remain sufficiently large for the Zambian market.

However, export markets in the DRC and Burundi, which

have commanded a premium to domestic sales in terms of

average RPT sold, are expected to remain strong but will

generate less average RPT owing to recent trends in the ZMK

/ USD rate.

Valuation and recommendation

Using DCF valuation, by applying a discount rate of 21% and

constant growth rate of 5.0%, we derive a target price of

USD 9,229. This represents 15% upside potential, and we

expect that dividend payout will remain significant. BUY.





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