East and West Africa Cement Companies Report November 2011

Nature of business
EAPCC’s history dates back to the 1930s, where it started off as a
trader in imported cement from England, a grinder of clinker
imported from India and as the operator of a 0.12mtpa Athi River
cement plant in 1958. Capacity has since been upped to 1.3mtpa
and for 70 years now the company has availed to the market its
flagship Blue Triangle Cement brand. The company also
manufactures concrete pavers, kerbstones, cement slabs, and
cement fence posts. It also makes cement tiles, culverts, panels,
and tubes for the construction industry.
Review of results for the year ended June 2011
The highlight was the turning around from a loss position last year
to a profit courtesy of a KES 680m tax credit as the company booked
income from its deferred tax assets. Operating efficiencies saw
enhanced operating profitability while exchange losses continued to
weigh down performance.
� Revenue grew by a moderate 8.1% to KES 10.2bn while an
improvement in gross margins from 21.6% to 23.3% saw gross
profit grow by 16.5%. Benefits from the changeover to coal were
only enjoyed in the second half of the year and hence we
expect the current financial year to better the 2011 outturn.
� Operating expenses declined by 3.1%, driven by administration
expenses which shed 12.1%. Operating income consequently
leapt 7.1x to KES 653m.
� The depreciation of the KES saw the company book an
additional KES 783m loss despite erecting a hedge to cover
possible losses on 25% of the YEN denominated loan.
� Interest bearing loans stood at KES 3.7bn, the majority of which
relate to the YEN denominated loan. The loan amounted to KES
3.0bn when it was acquired and it continues to grow despite the
company making regular payments over the years.
Valuations and recommendation
We value EAPCC at KES 62.12, which translates to a 13.0% premium
over the current price. The share lost half its value over the past 12
months and is trading with relative weakness to both its peers and
the market (NSE 20).
We expect efficiency enhancement moves effected in the second
half of 2011 to drive operating profitability during the current year.
Additionally, the intervention of the Kenyan authorities to stabilise
the shilling is expected to be largely successful. As such, we do not
expect exchange losses to provide a significant drag to earnings in
Q4 2011. Risk of earnings however will remain for as long as the
debt position is not fully hedged.
However, the low free float of 6% and government ownership are
the biggest bear factors for EAPCC. The EV/tonne of USD 66.4
compared to a peer average of USD 200 represent the potential
upside that can be unlocked especially if the company is privatised.
On the other hand, the EV/EBIDTA of 9.6x is a premium to the peer
average of 7.1x. We therefore maintain our SELL call on the stock.
30
Top shareholders % age
NSFF 27.0%
GoK 25.3%
Cementia (Lafarge) 14.6%
BCI 14.6%
Bamburi (Nominees) 12.5%
Others 6.0%
mtpa
East Africa: Clinker capacity vs. Grinding capacity
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Kenya Tanzania Uganda Rwanda
and
Burundi
Clinker capacity Cement capacity
9% 9%
Source: ARM presentation/ AIS
Per capita consumption vs. 10 tear CAGR in consumption
140
120
100
80
60
40
20
0
8%
10%
Nigeria Uganda Kenya Tanzania
Consumption (KG) per capita 5 year CAGR
100.0%
Source: IAS/ Cemnet
12%
10%
8%
6%
4%
2%
0%