East Africa Cement Sector - SiBsib.co.ke/media/docs/East-African-Cement-Sector-VU-(Jan 2016).pdf · Project summary Most recent Ongoing ... finance costs (d riven by KES ... since

East Africa Cement SectorValuation Update (12 January 2016)

East Africa Cement SectorValuation Update (12 January 2016)

Key East Africa brands

Standard Investment Bank Important disclosures on the last page

Contents

Sector snapshot Investment summary Summary forecasts adjustments Valuation summary Short-term sector outlook Industry news Industry analysis

Country analysis Market share & production estimates Performance ratios

Company analysis ARM Bamburi

Sector snapshot Investment summary Summary forecasts adjustments Valuation summary Short-term sector outlook Industry news Industry analysis

Country analysis Market share & production estimates Performance ratios

Company analysis ARM Bamburi


Sector snap shot

KenyaUganda

EthiopiaSudan

DRC

PlantsExisting plantsUpcoming plants


- 5 main countries – South Sudan and DRC keytrading partners

- Population of 140m spread across 1.8m km²- 16 cement companies – 5 listed- Consumption per capita - 83kg- Imported clinker stands at 1.0m tons per

annum- CET – 0% for raw materials, 10% for clinker

and 25% for cement- Average EBITDA margin – 20.8% in FY14

(listed companies)

Tanzania

Rwanda

Indi

an O

cean

Sector snap shot – installed capacities

Cement Clinker

29.8%31.5%

45.2%

4.2% 3.4%

80.0%

100.0%

120.0%

Kenya Uganda Tanzania Rwanda

16.67mtpa 20.81mtpa5.93mtpa

30.3%35.5%

1.5% 5.0%

80.0%

100.0%

120.0%

Kenya Uganda Tanzania Rwanda

3.30mtpa 6.58mtpa 9.05mtpa

Standard Investment Bank 1 Important disclosures on the last page

49.9% 48.1%38.5%

20.2%16.2%

13.0%

45.2%

0.0%

20.0%

40.0%

60.0%

2004 2015 2019

51.5% 46.4%33.7%

18.2%16.6%

12.0%

49.3%

0.0%

20.0%

40.0%

60.0%

2008 2015 2019

Sector snap shot – consumption

Consumption Growth Consumption Split

30.0%

40.0%

50.0%

60.0%

70.0%

Kenya Uganda Tanzania Rwanda Burundi

36.9% 35.2% 34.8%80.0%

100.0%

120.0%

Kenya Uganda Tanzania Rwanda Burundi

3.10mtpa 5.72mtpa 10.88mtpa


CAGR (2002 – 2014)Kenya 11.2%: Uganda 11.0%: Tanzania 10.5%: Rwanda 15.6%: Burundi 8.5%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 39.2% 38.5% 39.8%

18.9% 20.1% 18.9%

0.0%

20.0%

40.0%

60.0%

2002 2008 2014

…sector snapshot – listed companies

Bloombergcode

Mkt cap(USD m)

Strategic shareholder 2015 avg. dailyValue traded

(USD)

Price performance %

Company Name % Free float % Year end 2015 YTD

ARM ARML KN 194.2 Paunrana family 45.87 54.13 Dec 94,020 -51.5% -4.2%

Bamburi BMBC KN 605.0 Lafarge 58.6 26.69 Dec 95,260 25.9% -2.9%

EAPC EAPC KN 44.1 GOK* & Lafarge 94 6.0 June 861 -19.4% 7.0%

TPCC TWIGA TZ 248.1 Heidelberg 69.3 24.32 Dec N/A -25.0% 0.0%

Tanga SIMBA TZ 77.5 AfriSam 62.5 37.5 Dec N/A -40.7% -0.7%*Government of Kenya holds 25.3% directly & 27% through Social Security Fund; Lafarge 41.7%Source: Standard Investment Bank, Bloomberg

Sector summary


Project summary

Most recent Ongoing/newCompany Project type Project size Completion Project type Project size Completion

ARMGrinding 0.75mtpa 4Q12 Grinding - Tanzania 0.75mtpa 1H16Clinker 0.9mtpa 2Q15

BamburiKiln emissionreduction - ESPupgrade USD 6.5m 3Q12

EAPC Clinker 0.15mtpa Unknown

TPCC Grinding 0.70mtpa 4Q14

Tanga Kiln expansion 0.60 - 0.75mtpa 4Q15

Investment summary

We update our share recommendations for ARM and Bamburi ahead of FY15 resultsannouncements.In 2014, ARM’s revenue declined 4.1%y/y missing our forecasts by 14.6% (cement revenuewas 16% below forecasts). Bamburi on the other hand reversed its 2013 9.5%y/y drop togrow 6.2%y/y (2.5% above target). EBITDA margins shrunk 67bpy/y and 35bpy/y – ARMmissed our forecasts by 231bp but Bamburi beat our forecasts by 201bp. At 20.3%, ARM’sEBITDA margin remained above Bamburi’s for the fourth consecutive year. ARM’s EPS growth(+10.1%y/y) came in 9.2% below forecast, while Bamburi’s 2.6%y/y growth resulted in aboveforecast EPS (+9.0%).In 1H15, ARM posted 1.6%y/y revenue growth but 142%y/y decline in EPS. Even afterexcluding unrealized FOREX losses, PBT was down 24.3%y/y – owing to 183% jump infinance costs (driven by KES depreciation, higher rates on outstanding commercial paper andreduced interest capitalization). Cement revenue performance disappointed (-10.6%y/y)while low margin fertilizer sales grew 233%y/y. Over the same period, supported byincreased domestic sales of its high grade cement (mainly used for infrastructure projects)and exports into Inland Africa (high margin markets), Bamburi registered 11.7%y/y and77.4%y/y growth in revenue and EPS respectively.Key FY15 forecast adjustments. Guided by improved 1H15 revenues for the 5 listed cementcompanies (3 in Kenya and 2 in Tanzania) in a weak pricing environment, we have revisedour cement consumption estimates upwards (Kenya, Uganda and Tanzania) by 1.9% to11.39mtpa (+12.1%y/y growth). Owing to delay in commissioning of the Tanga grinding line(expected in 2H14, but now pushed out to 1H16) and increased competition in Tanzania, wehave cut ARM’s revenue forecast by 17.5%. For Bamburi, we have increased our FY15revenue forecasts by 9.1%. On EBITDA margins, we have increased Bamburi’s (+201bp) butcut ARM’s (-231bp).Our revised EPS estimates stand at KES 0.08 from KES 5.14 (ARM) and KES 14.95 from KES12.76 (Bamburi).Valuations and recommendations. In 2015, ARM’s share price declined 51.5% whileBamburi gained 25.9%. Against our updated fair values (ARM KES 35.47 from KES 69.78 andBamburi KES 201.27 from KES 202.67), we retain our SELL recommendation for ARM (11.4%downside) and BUY recommendation for Bamburi (+18.4% upside). Against our FY15forecasts, ARM is currently trading at 11.2x EV/EBITDA, against Bamburi’s 5.4x.

Sector average EV/EBITDA & EV/sales

-2.04.06.08.0

10.012.014.0

2009 2010 2011 2012 2013 2014

EV/EBITDA EV/sales

We update our share recommendations for ARM and Bamburi ahead of FY15 resultsannouncements.In 2014, ARM’s revenue declined 4.1%y/y missing our forecasts by 14.6% (cement revenuewas 16% below forecasts). Bamburi on the other hand reversed its 2013 9.5%y/y drop togrow 6.2%y/y (2.5% above target). EBITDA margins shrunk 67bpy/y and 35bpy/y – ARMmissed our forecasts by 231bp but Bamburi beat our forecasts by 201bp. At 20.3%, ARM’sEBITDA margin remained above Bamburi’s for the fourth consecutive year. ARM’s EPS growth(+10.1%y/y) came in 9.2% below forecast, while Bamburi’s 2.6%y/y growth resulted in aboveforecast EPS (+9.0%).In 1H15, ARM posted 1.6%y/y revenue growth but 142%y/y decline in EPS. Even afterexcluding unrealized FOREX losses, PBT was down 24.3%y/y – owing to 183% jump infinance costs (driven by KES depreciation, higher rates on outstanding commercial paper andreduced interest capitalization). Cement revenue performance disappointed (-10.6%y/y)while low margin fertilizer sales grew 233%y/y. Over the same period, supported byincreased domestic sales of its high grade cement (mainly used for infrastructure projects)and exports into Inland Africa (high margin markets), Bamburi registered 11.7%y/y and77.4%y/y growth in revenue and EPS respectively.Key FY15 forecast adjustments. Guided by improved 1H15 revenues for the 5 listed cementcompanies (3 in Kenya and 2 in Tanzania) in a weak pricing environment, we have revisedour cement consumption estimates upwards (Kenya, Uganda and Tanzania) by 1.9% to11.39mtpa (+12.1%y/y growth). Owing to delay in commissioning of the Tanga grinding line(expected in 2H14, but now pushed out to 1H16) and increased competition in Tanzania, wehave cut ARM’s revenue forecast by 17.5%. For Bamburi, we have increased our FY15revenue forecasts by 9.1%. On EBITDA margins, we have increased Bamburi’s (+201bp) butcut ARM’s (-231bp).Our revised EPS estimates stand at KES 0.08 from KES 5.14 (ARM) and KES 14.95 from KES12.76 (Bamburi).Valuations and recommendations. In 2015, ARM’s share price declined 51.5% whileBamburi gained 25.9%. Against our updated fair values (ARM KES 35.47 from KES 69.78 andBamburi KES 201.27 from KES 202.67), we retain our SELL recommendation for ARM (11.4%downside) and BUY recommendation for Bamburi (+18.4% upside). Against our FY15forecasts, ARM is currently trading at 11.2x EV/EBITDA, against Bamburi’s 5.4x.


Multiples based on year end prices for respective year

Price performance (2015)

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%ARM Bamburi EAPC

Summary forecasts adjustments

ARM Cement Limited Bamburi Cement Limited

Forecast review FY15F FY16F FY17F

Revenue (cement) -22.9% -32.2% -22.1%

EPS -98.4% -51.3% -36.0%

EBITDA Margin (basis points) -231 -288 -215

EBIT Margin (basis points) -265 -361 -235

CAPEX -34.6% 7.8% -26.0%

Volume sales (cement) -20.2% -28.1% -16.3%

Capacity Utilization (basis points) -864 -566 -1,467

Forecast review FY15F FY16F FY17F

Revenue (cement) 8.2% 2.0% 1.6%

EPS 17.1% 1.2% 3.2%

EBITDA Margin (basis points) 201 49 85

EBIT Margin (basis points) 201 27 63

CAPEX 0.4% -4.9% -5.1%

Volume sales (cement) 4.8% -0.3% -0.4%

Capacity Utilization (basis points) 419 -28 -33


In the case of ARM, our adjusted forecast numbers are mainly a factor of change in commissioning date of the Tanga grinding plant from 2H14 to1H16 and continued lower than expected sales from existing capacity. Our adjusted capacity utilization levels capture expectation of slow rump-up insales owing to increased competition from new integrated capacities in Tanzania (in 4Q15-1H16 - 3.0mtpa and 0.5mtpa by Dangote and Lake cementrespectively) and expansion (4Q15) of grinding and clinker capacities by Mbeya cement (+0.7mtpa to 1.1mtpa) and Tanga cement (+0.75mtpa to1.15mtpa). The drastic cut in FY15 EPS is as a result of an estimated KES 1.9bn unrealized FOREX loss on USD denominated borrowing (in the absenceof this loss, our FY15 adjusted EPS would have been 43.6% lower – mainly reflecting lower revenues and increased finance costs).

For Bamburi, our adjusted revenue and margins numbers are a function of improved sales mix – increased sales of higher margin 42.5 & 52.5 gradecement and exports into Inland Africa. Beyond 2015, we forecast slow down in infrastructure led demand for high grade cement, increasedcompetition in the 42.5 and 52.5 grade categories (nearly all competitors have now modified their plants to produce these grades) and heightenedcompetition in Inland Africa as new cement plants in DRC, Rwanda, Zambia and Tanzania are commissioned/ increase production.

Capacity Utilization (basis points) -864 -566 -1,467 Capacity Utilization (basis points) 419 -28 -33

Valuation summary

Slight change in valuation approach: in place of using trailing EV/EBITDA,EBITDA margin & ROIC we have shifted to using multi-year averages. Webelieve multi-year averages are a better reflection of different economic &business cycles and associated investor valuations.

Our universe of comparable companies is based on current and futuregeographical reach (i.e. companies which are currently, or will in the nearfuture, compete in the same market)

To derive individual company exit EV/EBITDA multiple, we adjust theaverage sector EV/EBITDA with individual company forecast terminal yearEBITDA margin and ROIC. In our view, this approach allows us to fullycapture medium-term value drivers (margin differential) but also reflectlong-term value creation (in our view, since cement industry is highlycapital intensive, and going by continued fragmentation of capacityownership, ROIC stands out as a good measure when filtering throughinvestment options)

Using 6 years (2009-2014) averages, our average comparable companies’EV/EBITDA is down slightly to 8.9x from 9.2x – used in our last report andcomputed based on 2013 numbers only. Average comparable companies’EBITDA margin and ROIC have also changed to 30% & 20.7% from 27% &18% respectively

Using our comparable companies’ revised averages and given our FY19EBITDA & ROIC estimates, ARM’s exit EV/EBITDA multiple now stands at5.94x down from 8.32x. For Bamburi, computed exit multiple is 8.08x downfrom 8.75x.

Exit EV/EBITDA computationCompany name EV/EBITDA EBITDA Margin ROIC

ARM 15.9 23.8% 6.4%Bamburi 6.9 24.5% 20.5%EAPC 12.4 10.3% 2.8%TPCC 5.0 38.9% 27.3%Tanga 2.9 25.9% 24.4%Dangote Cement 17.8 55.0% 19.3%Lafarge Zambia 4.5 41.8% 34.3%PPC 9.9 31.2% 22.9%

Slight change in valuation approach: in place of using trailing EV/EBITDA,EBITDA margin & ROIC we have shifted to using multi-year averages. Webelieve multi-year averages are a better reflection of different economic &business cycles and associated investor valuations.

Our universe of comparable companies is based on current and futuregeographical reach (i.e. companies which are currently, or will in the nearfuture, compete in the same market)

To derive individual company exit EV/EBITDA multiple, we adjust theaverage sector EV/EBITDA with individual company forecast terminal yearEBITDA margin and ROIC. In our view, this approach allows us to fullycapture medium-term value drivers (margin differential) but also reflectlong-term value creation (in our view, since cement industry is highlycapital intensive, and going by continued fragmentation of capacityownership, ROIC stands out as a good measure when filtering throughinvestment options)

Using 6 years (2009-2014) averages, our average comparable companies’EV/EBITDA is down slightly to 8.9x from 9.2x – used in our last report andcomputed based on 2013 numbers only. Average comparable companies’EBITDA margin and ROIC have also changed to 30% & 20.7% from 27% &18% respectively

Using our comparable companies’ revised averages and given our FY19EBITDA & ROIC estimates, ARM’s exit EV/EBITDA multiple now stands at5.94x down from 8.32x. For Bamburi, computed exit multiple is 8.08x downfrom 8.75x.


* In deriving ARM’s & Bamburi’s exit EV/EBITDA both EBITDA margin & ROICratios are based on FY19 estimates as our last forecast year

Average 9.4 31.4% 19.7%Median 8.4 28.5% 21.7%AVERAGE 8.9 30.0% 20.7%

ARM 29.7% 14.0%Exit EV/EBITDA 5.94Bamburi 23.3% 24.2%

Exit EV/EBITDA 8.08

Valuation multiples

EV/EBITDA 2009 2010 2011 2012 2013 2014 Average

ARM 12.6 15.6 11.9 13.0 20.0 22.6 15.9

Bamburi 6.2 7.3 4.2 7.2 10.1 6.1 6.9

EAPC 5.4 19.7 7.3 (259.9) 9.8 19.7 12.4

TPCC 3.6 3.5 4.0 4.2 7.0 7.5 5.0

Tanga 2.1 2.3 3.1 1.8 1.8 6.3 2.9

Dangote Cement 29.7 17.0 14.2 13.2 16.2 16.2 17.8

Lafarge Zambia 4.10 3.69 3.33 2.27 5.54 8.19 4.5

PPC (SA) 9.82 9.85 9.28 10.94 9.79 9.56 9.9

Average 9.2 9.9 7.2 7.5 10.0 12.0


Average 9.2 9.9 7.2 7.5 10.0 12.0

EV/sales 2009 2010 2011 2012 2013 2014 Average

ARM 3.0 4.3 3.2 3.0 4.2 4.6 3.7

Bamburi 1.8 2.3 1.1 1.6 2.0 1.2 1.7

EAPC 1.1 1.0 0.8 0.9 1.0 0.9 1.0

TPCC 1.6 1.5 1.5 1.7 2.0 2.8 1.9

Tanga 0.8 0.6 0.6 0.4 0.4 1.4 0.7

Dangote Cement 12.4 9.9 7.9 7.7 9.6 9.2 9.5

Lafarge Zambia 1.7 1.3 1.3 1.0 2.5 3.6 1.9

PPC (SA) 3.6 3.6 2.9 3.3 2.7 2.5 3.1Average 3.2 3.1 2.4 2.5 3.1 3.3

Valuation multiples

EBITDA Margin 2009 2010 2011 2012 2013 2014 Average

ARM 23.8% 27.6% 26.6% 23.3% 21.0% 20.3% 23.8%Bamburi 29.3% 30.9% 26.0% 21.8% 19.8% 19.4% 24.5%EAPC 20.3% 5.2% 11.0% -0.3% 10.3% 4.8% 10.3%TPCC 44.4% 43.0% 38.3% 41.4% 29.1% 37.3% 38.9%Tanga 39.7% 26.6% 19.3% 24.2% 22.9% 22.3% 25.9%Dangote Cement 41.6% 58.1% 55.5% 58.3% 59.5% 57.0% 55.0%Lafarge Zambia 41.8% 34.6% 39.7% 45.6% 44.7% 44.4% 41.8%PPC (SA) 36.2% 36.3% 31.3% 30.0% 27.6% 25.7% 31.2%


31.2%

Average 34.6% 32.8% 31.0% 30.5% 29.4% 28.9%

ROIC 2009 2010 2011 2012 2013 2014 Average

ARM 6.9% 6.6% 6.7% 7.1% 6.4% 4.6% 6.4%

Bamburi 26.3% 26.6% 25.7% 17.5% 12.6% 14.1% 20.5%

EAPC 8.3% 0.6% 3.9% -3.5% 1.8% -0.5% 2.8%

TPCC 28.7% 31.8% 30.5% 33.2% 16.3% 23.4% 27.3%

Tanga 33.2% 27.1% 22.5% 31.6% 20.9% 11.1% 24.4%

Dangote Cement 20.9% 21.4% 19.5% 18.9% 20.0% 15.1% 19.3%

Lafarge Zambia 27.3% 21.3% 34.4% 49.4% 46.1% 27.3% 34.3%

PPC (SA) 32.1% 29.8% 22.7% 21.6% 17.9% 13.1% 22.9%

Average 23.0% 20.7% 20.7% 22.0% 17.8% 13.5%

Short-term sector outlook

Regional consumption 2.3% above forecast in 2014; we forecast consumption to hit 17.5mtpa in 2019:Going by data from East Africa Community Secretariat & our estimates based on reported company revenues, 2014’s regional consumption (Kenya,Uganda and Tanzania) stood at 10.16mtpa against our forecast 9.93mtpa. Improved economic activity and accelerated implementation of infrastructure,were the key drivers of the 13%y/y growth in consumption (significant improvement from the decade low growth of 2.3%y/y posted in 2013). Givenstable prices and increased volume sales, in 1H15, listed companies posted improved revenues. However, reminiscent of 2013, 2H15 witnessed notableregion wide deterioration in economic drivers owing to depreciating currencies and spike in borrowing rates. Working with a weaker 2H15, in 2015 weforecast reduced growth in consumption (+12.1%y/y) with further deterioration in 2016 (+9.7%y/y). 2015-19 we forecast CAGR of 11.3% to 17.5mtpa(11.1%, 10.8% and 11.8% in Kenya, Uganda and Tanzania). While we expect the private sector to continue driving consumption, realization of forecastgrowth remains heavily dependent on timely execution of Government led infrastructure projects. We also assume key economic drivers will notdeteriorate further.Competition to intensify with new capacities & shrinking export markets:2014-2017, new grinding capacity totaling 5.2mtpa will be commissioned across Kenya, Uganda and Tanzania. Tanzania will account for all the newcapacity pushing its total installed capacity to 9.4mtpa (for the first time ever, higher than Kenya’s which stands at 8.1mtpa). By 2017, 53.2% ofTanzania’s total installed grinding capacity will be controlled by new entrants (Lake Cement 5.3%, Dangote 31.9% & ARM 16%). For the first time in adecade, Mbeya cement (controlled by Lafarge-Holcim) is expected to commission 0.7mtpa of new capacity (4Q15).In 2014, we estimate 18.4% (2.01mt) of cement produced in Kenya, Uganda and Tanzania was consumed outside the producing country. Increasedcapacities (mainly by South & West African cement giants) in key inland Africa exports markets (Uganda, Rwanda, DRC & Zambia) are bound to cutexport volumes from Kenya, Uganda & Tanzania. With thinning export volumes, we expect competition in Tanzania market to intensify the most - owingto jump in production capacity and continued entry of low priced imports (estimated at 23.7% of consumption in 2014).Margins to remain shaky, excreting pressure on highly geared balance sheets:Taking a break from 5 consecutive years of contraction, in FY14, 3 out of the 5 listed players posted improved gross profit margins, but only TPCCregistered improved EBITDA margin. Excluding TPCC and EAPC, average EBITDA margin slipped to 20.7% from 21.2% in FY13. Outlook for marginsremains poor especially given; ongoing capacity ownership fragmentation, sector’s continued dependence on imported clinker, fragile domestic &regional economies and downward elasticity of demand due to continued dominance of individual home builders. With top line growth not expected toadjust fully to compensate for margin erosion, highly geared balance sheets will come under severe strain (of the listed companies ARM is geared upthe most at over 200% - we suspect majority of the unlisted players are also highly geared).


Regional consumption 2.3% above forecast in 2014; we forecast consumption to hit 17.5mtpa in 2019:Going by data from East Africa Community Secretariat & our estimates based on reported company revenues, 2014’s regional consumption (Kenya,Uganda and Tanzania) stood at 10.16mtpa against our forecast 9.93mtpa. Improved economic activity and accelerated implementation of infrastructure,were the key drivers of the 13%y/y growth in consumption (significant improvement from the decade low growth of 2.3%y/y posted in 2013). Givenstable prices and increased volume sales, in 1H15, listed companies posted improved revenues. However, reminiscent of 2013, 2H15 witnessed notableregion wide deterioration in economic drivers owing to depreciating currencies and spike in borrowing rates. Working with a weaker 2H15, in 2015 weforecast reduced growth in consumption (+12.1%y/y) with further deterioration in 2016 (+9.7%y/y). 2015-19 we forecast CAGR of 11.3% to 17.5mtpa(11.1%, 10.8% and 11.8% in Kenya, Uganda and Tanzania). While we expect the private sector to continue driving consumption, realization of forecastgrowth remains heavily dependent on timely execution of Government led infrastructure projects. We also assume key economic drivers will notdeteriorate further.Competition to intensify with new capacities & shrinking export markets:2014-2017, new grinding capacity totaling 5.2mtpa will be commissioned across Kenya, Uganda and Tanzania. Tanzania will account for all the newcapacity pushing its total installed capacity to 9.4mtpa (for the first time ever, higher than Kenya’s which stands at 8.1mtpa). By 2017, 53.2% ofTanzania’s total installed grinding capacity will be controlled by new entrants (Lake Cement 5.3%, Dangote 31.9% & ARM 16%). For the first time in adecade, Mbeya cement (controlled by Lafarge-Holcim) is expected to commission 0.7mtpa of new capacity (4Q15).In 2014, we estimate 18.4% (2.01mt) of cement produced in Kenya, Uganda and Tanzania was consumed outside the producing country. Increasedcapacities (mainly by South & West African cement giants) in key inland Africa exports markets (Uganda, Rwanda, DRC & Zambia) are bound to cutexport volumes from Kenya, Uganda & Tanzania. With thinning export volumes, we expect competition in Tanzania market to intensify the most - owingto jump in production capacity and continued entry of low priced imports (estimated at 23.7% of consumption in 2014).Margins to remain shaky, excreting pressure on highly geared balance sheets:Taking a break from 5 consecutive years of contraction, in FY14, 3 out of the 5 listed players posted improved gross profit margins, but only TPCCregistered improved EBITDA margin. Excluding TPCC and EAPC, average EBITDA margin slipped to 20.7% from 21.2% in FY13. Outlook for marginsremains poor especially given; ongoing capacity ownership fragmentation, sector’s continued dependence on imported clinker, fragile domestic &regional economies and downward elasticity of demand due to continued dominance of individual home builders. With top line growth not expected toadjust fully to compensate for margin erosion, highly geared balance sheets will come under severe strain (of the listed companies ARM is geared upthe most at over 200% - we suspect majority of the unlisted players are also highly geared).

Industry news

Below we highlight key sector developments since our last report

ARM: in April 2015, commissioned 1.2mtpa Tanga clinker line. In November 2015, rolled out debt private placement to raise USD 90m. Inlate December 2015, management disclosed plans of raising USD 125m through convertible preference shares

National Cement: in addition to 2014’s USD 70m funding from IFC to fund grinding capacity expansion and to set up clinker line in Kenya,in April 2015, the company announced it had secured USD 195m loan from IFC & local banks to set up grinding plant in Uganda

Dangote & Lake Cement: announced the commissioning of 3.0mtpa and 0.5mtpa grinding lines, respectively in Tanzania. Both haveundisclosed clinker capacity

Kenya Cement players: after approval by the Quality Standards Body, Kenya cement players started production of 22.5 grade cementmainly used as hydraulic road binder. Use of 32.5 grade cement in road construction was deemed expensive and hence need to develop& produce lower grade 22.5

Cimerwa Cement (PPC majority shareholder): in August 2015, announced the commissioning of its expanded grinding capacity inRwanda – 0.6mtpa from 0.1mtpa

Below we highlight key sector developments since our last report

ARM: in April 2015, commissioned 1.2mtpa Tanga clinker line. In November 2015, rolled out debt private placement to raise USD 90m. Inlate December 2015, management disclosed plans of raising USD 125m through convertible preference shares

National Cement: in addition to 2014’s USD 70m funding from IFC to fund grinding capacity expansion and to set up clinker line in Kenya,in April 2015, the company announced it had secured USD 195m loan from IFC & local banks to set up grinding plant in Uganda

Dangote & Lake Cement: announced the commissioning of 3.0mtpa and 0.5mtpa grinding lines, respectively in Tanzania. Both haveundisclosed clinker capacity

Kenya Cement players: after approval by the Quality Standards Body, Kenya cement players started production of 22.5 grade cementmainly used as hydraulic road binder. Use of 32.5 grade cement in road construction was deemed expensive and hence need to develop& produce lower grade 22.5

Cimerwa Cement (PPC majority shareholder): in August 2015, announced the commissioning of its expanded grinding capacity inRwanda – 0.6mtpa from 0.1mtpa


Industry analysisIndustry analysis


Market outlook – country analysis

Country analysis

Consumption (000) 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Kenya 3,477 3,682 3,830 4,328 4,804 5,236 5,812 6,568 7,290Uganda 1,696 1,630 1,752 2,056 2,303 2,487 2,761 3,119 3,494Tanzania 2,959 3,450 3,410 3,780 4,284 4,770 5,406 6,046 6,671Production (000)

Kenya 4,478 4,694 5,059 5,883 6,123 6,364 6,764 7,165 7,725Uganda 1,666 1,765 1,885 2,069 2,221 2,317 2,414 2,505 2,621Tanzania 2,409 2,581 2,696 3,011 3,628 5,310 6,392 6,768 7,144Capacity (000)

Kenya 5,860 6,010 7,510 8,010 8,010 8,010 8,010 8,010 8,010Uganda 2,500 2,500 2,700 2,700 2,700 2,700 2,700 2,700 2,700Tanzania 3,000 3,200 3,750 4,125 5,258 8,850 9,400 9,400 9,400

We have revised upwards our 2015 consumption estimates by 1.9%, but cut our 2016 forecasts by 1%. Our 2017 consumption estimatesremain unchanged at 13.97mtpaWe have cut our 2015 production estimates 1.1% mainly due to delay in ARM’s 0.75mtpa Tanga grinding line. We have increased 2016 &2017’s production estimates (5.1% and 9.8%) capturing new capacity investments in Tanzania (Dangote, Lake Cement and Mbeya Cement) Tanzania’s installed grinding capacity will surpass Kenya’s in 2016. By 2017, we expect Tanzania’s cement exports to surpass Kenya’s(1.2mtpa vs. 0.87mtpa) Given new capacities, we expect Tanzania’s capacity utilization to average 69% over our forecast period. At 69% utilization, we forecastdecline in imports (less than 1% of market share by 2018, from 23.7% in 2014) and exports averaging 12% of total production


Tanzania 3,000 3,200 3,750 4,125 5,258 8,850 9,400 9,400 9,400Utilisation rates

Kenya 76.4% 78.1% 67.4% 73.4% 76.4% 79.4% 84.4% 89.4% 96.4%Uganda 66.6% 70.6% 69.8% 76.6% 82.2% 85.8% 89.4% 92.8% 97.1%Tanzania 80.3% 80.7% 71.9% 73.0% 69.0% 60.0% 68.0% 72.0% 76.0%

Market share & production estimates

Domestic Market share estimates Volume sales estimates

Kenya 2013E 2014E 2015F 2016F

Bamburi 1,743 1,824 2,046 2,048

EAPC 793 804 741 860

ARM 717 731 727 787

Mombasa Cement 688 1,027 1,111 1,119

National Cement 552 717 689 712

Savanahh Cement 465 662 687 710Uganda 2013E 2014E 2015F 2016F

Kenya 2013E 2014E 2015F 2016FBamburi 37.0% 34.5% 35.5% 32.5%EAPC 19.5% 18.1% 15.0% 16.0%ARM 18.0% 16.4% 15.0% 15.0%Mombasa Cement 12.0% 13.0% 15.0% 15.0%National Cement 7.0% 9.0% 10.0% 11.0%Savanahh Cement 6.5% 9.0% 9.5% 10.5%Uganda 2013E 2014E 2015F 2016FHima 15.7% 18.0% 13.8% 11.8%Tororo 65.9% 62.7% 60.8% 61.0%


Uganda 2013E 2014E 2015F 2016F

Hima 730 780 820 800

Tororo 1,155 1,289 1,401 1,517Tanzania 2013E 2014E 2015F 2016F

TPCC 1,041 1,195 1,418 1,486

Tanga 967 1,038 1,141 1,093

Mbeya 296 314 345 531

ARM 392 378 482 575

Lake Cement - 86 173 266

Dangote Cement - - 69 1,360

Imports 1,096 896 824 412

Tororo 65.9% 62.7% 60.8% 61.0%Bamburi* 14.5% 14.0% 14.0% 14.0%EAPC* 1.8% 0.0% 1.2% 1.2%Mombasa Cement* 2.0% 4.0% 8.0% 8.0%Other imports 0.1% 1.3% 2.2% 4.0%Tanzania 2013E 2014E 2015F 2016FTPCC 28.8% 31.3% 32.7% 30.1%Tanga 24.4% 27.5% 25.8% 21.9%Mbeya 6.4% 7.6% 7.3% 9.1%ARM 8.1% 7.6% 9.3% 10.0%Lake Cement 0.0% 2.3% 4.0% 4.6%Dangote Cement 0.0% 0.0% 1.6% 15.5%Imports 32.1% 23.7% 19.2% 8.6%* Imports from Kenya

Performance ratios

Growth

* Cement sales only for volume & revenue growth

Volume (%) Revenue (%) EPS (%) Total assets (%)

Company FY11E FY12E FY13E FY14E FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14

ARM* 70.1 61.8 31.8 0.0 73.4 64.0 33.4 -4.1 6.5 7.7 9.2 10.1 24.1 31.2 10.2 24.3

Bamburi 22.1 2.4 -6.6 5.3 27.8 4.5 -9.5 6.2 3.0 -15.8 -21.5 2.6 0.6 28.5 -0.1 -4.7

EAPC 8.1 -17.4 7.5 1.5 8.1 -16.4 8.3 -1.7 -101% loss profit loss 4.2 -3.7 7.5 1.8

TPCC 5.9 4.8 -11.4 14.8 8.8 14.7 -14.2 13.8 0.8 21.7 -38.9 47.3 16.3 10.0 6.1 6.3

Tanga 6.2 5.8 -4.7 7.4 17.3 10.3 -9.6 -0.4 -32.9 66.1 -9.6 -11.1 8.2 16.6 7.9 51.4


Margins and returns

* Cement sales only for volume & revenue growth

GP Margin (%) EBITDA Margin (%) Net Profit Margin (%) ROaA (%) ROaE (%)

Company FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14

ARM 32.2 28.3 24.3 27.1 26.6 23.3 21.0 20.3 14.1 10.9 9.5 10.9 7.3 7.5 7.1 6.1 21.1 19.1 17.9 17.0

Bamburi 38.2 35.4 35.5 37.3 26.0 21.8 19.8 19.4 16.3 13.0 10.8 10.8 25.3 18.8 12.8 13.8 24.9 17.5 12.1 12.8

EAPC 27.0 13.1 25.3 26.4 11.0 -0.3 10.3 4.8 0.0 -11.4 11.3 -4.3 -0.9 -7.5 4.6 -2.3 0.0 -18.9 17.9 -5.6

TPCC 46.1 49.1 35.3 44.3 38.3 41.4 29.1 37.3 23.3 24.7 17.6 22.8 31.0 34.8 17.6 26.2 28.5 30.9 17.3 24.5

Tanga 27.3 30.8 30.8 30.4 19.3 24.2 22.9 22.3 9.5 14.4 13.8 12.2 23.2 31.1 23.0 16.6 19.8 28.1 20.3 15.8

Performance ratios

Efficiency and investments

Cash cost per ton (USD)* CAPEX (USD m) Gearing (%)

Company FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14

ARM* 178.2 129.8 122.9 117.3 112.3 45.7 45.3 32.2 50.2 78.0 176.3 177.1 213.7 200.2 221.6

Bamburi 107.9 120.8 130.3 129.5 126.8 40.3 15.5 13.9 10.3 8.9 13.7 5.8 2.8 2.0 -

EAPC 136.2 114.0 136.9 121.0 122.0 7.4 6.9 4.5 1.9 7.2 59.7 64.6 85.4 49.9 52.0

TPCC 62.2 69.3 71.9 84.3 77.3 4.0 14.1 8.5 21.9 17.9 0.3 0.2 0.2 0.2 0.1

Tanga* 77.4 79.2 86.9 84.3 84.6 13.0 5.6 5.5 22.2 60.8 7.7 2.9 0.6 0.0 30.5


* Cash cost per ton based on estimated sales volumes*high cash cost per ton because of non-cement operations+ Tanga’s cash cost per ton based on company numbers

Tanga* 77.4 79.2 86.9 84.3 84.6 13.0 5.6 5.5 22.2 60.8 7.7 2.9 0.6 0.0 30.5

Company analysisCompany analysis


ARM Cement Limited

We retain our SELL recommendation. Given continued revenue & margin underperformance,further delays in commissioning of Tanga grinding plant and uncertainty around fundingrequirements, we have cut our FV to KES 35.44 from KES 69.78.Though our KES 35.44 fair value qualifies for a HOLD rating (11.4% downside compared to our -15% threshold) uncertainty around funding requirements - outcome of USD 75m debt privateplacement (Nov 2015) still unknown and announcement of planned USD 125m private convertiblepreference share issue (Dec 2015), profoundly magnifies risk for equity investors.Despite having lost 51.5% over the last 12 months, at current level of KES 40.00, against FY15 &FY16 forecasts, ARM’s EV/EBITDA is still at a premium (25.1% & 5.0% respectively). While FY16’s5.0% premium may seem modest, it is not the case since ARM’s forecast ROIC of 7.6% will still befar behind the sectors’ 6 year average of 20.7%.

A preserve for the “bulls”. Since early 2000’s, ARM’s shareholders have been rewarded extremelywell since there has been no dilutive corporate actions. However, with ARM’s already above sectormultiples expanding further (EV/EBITDA up from 12.6x in 2009 to 22.6x in 2014), stock returnshave been driven by investors being bullish on; timely completion of capacities and quick rump-upin utilization both from increased market share & broader expanded cement consumption. In thelong-run, growth stocks’ multiples should moderate downwards as forecast earnings growthmaterialize – this however has not been the case with ARM since the stock price has failed to fullyadjust for delays in capacity commissioning and below forecast growth from newly installedcapacity.Also, it is now more apparent there exists a mismatch between forecast above sector earningsgrowth, driven by new capacity, and the full funding required to deliver that capacity – thismismatch decimates equity value.Lastly, change in market dynamics, lackluster growth in consumption but strong growth in newcapacities, significantly impairs forecast utilization rates & free cash flow – more so for Tangagrinding capacity that has been delayed close to 2 years – in our 2013 report, by 2016, weexpected ARM to control 17% of regional installed capacity, this has however now changed to 10%(due to delay in Tanga plant and new 4.2mtpa from other players).

Recommendation: SELLFair Value: KES 35.47Upside/(downside): -11.4%

Operating performance 2013A 2014A 2015FEPS (KES) 2.74 3.01 0.14

% chg 9.2% 10.1% -95.3%DPS 0.60 0.60 -

Payout % 21.9% 19.9% 0.0%


We retain our SELL recommendation. Given continued revenue & margin underperformance,further delays in commissioning of Tanga grinding plant and uncertainty around fundingrequirements, we have cut our FV to KES 35.44 from KES 69.78.Though our KES 35.44 fair value qualifies for a HOLD rating (11.4% downside compared to our -15% threshold) uncertainty around funding requirements - outcome of USD 75m debt privateplacement (Nov 2015) still unknown and announcement of planned USD 125m private convertiblepreference share issue (Dec 2015), profoundly magnifies risk for equity investors.Despite having lost 51.5% over the last 12 months, at current level of KES 40.00, against FY15 &FY16 forecasts, ARM’s EV/EBITDA is still at a premium (25.1% & 5.0% respectively). While FY16’s5.0% premium may seem modest, it is not the case since ARM’s forecast ROIC of 7.6% will still befar behind the sectors’ 6 year average of 20.7%.

A preserve for the “bulls”. Since early 2000’s, ARM’s shareholders have been rewarded extremelywell since there has been no dilutive corporate actions. However, with ARM’s already above sectormultiples expanding further (EV/EBITDA up from 12.6x in 2009 to 22.6x in 2014), stock returnshave been driven by investors being bullish on; timely completion of capacities and quick rump-upin utilization both from increased market share & broader expanded cement consumption. In thelong-run, growth stocks’ multiples should moderate downwards as forecast earnings growthmaterialize – this however has not been the case with ARM since the stock price has failed to fullyadjust for delays in capacity commissioning and below forecast growth from newly installedcapacity.Also, it is now more apparent there exists a mismatch between forecast above sector earningsgrowth, driven by new capacity, and the full funding required to deliver that capacity – thismismatch decimates equity value.Lastly, change in market dynamics, lackluster growth in consumption but strong growth in newcapacities, significantly impairs forecast utilization rates & free cash flow – more so for Tangagrinding capacity that has been delayed close to 2 years – in our 2013 report, by 2016, weexpected ARM to control 17% of regional installed capacity, this has however now changed to 10%(due to delay in Tanga plant and new 4.2mtpa from other players).

Payout % 21.9% 19.9% 0.0%NAV (KES) 16.40 19.02 18.56PE (x) 14.61 13.27 285.01PB (X) 2.44 2.10 2.16EV/EBITDA (x) 11.64 14.44 11.12

Trading dataCurrent price (KES) 402015 chg (%) -51.5Market-cap KES (m) 19,811

USD (m) 194.2Daily value traded KES (k) 9,590(2015) USD (k) 94.02Bloomberg ARML KNFree float 54.13%Foreign investor flows (2015) USD (m) -5,317

Cement revenue forecast model

Based on reported revenue numbers, we estimate totalFY14 group volume sales of 1.11mtpa (flat y/y; but 14.1%below forecast). For FY15, we forecast total cementvolumes sales of 1.21mtpa (+9%y/y; but 20.2% cut inforecast, in line with weak 1H15 – 10.6%y/y decline incement revenue, and further delay in commissioning Tangagrinding line – expected in 1H16 from 3Q15).

In Kenya, for FY15, we forecast ARM to have 15% marketshare, down from 16.4% in FY14. Barring new capacityexpansion projects, we expect utilization rate to closelytrack sector average.

For FY15, we forecast selling prices to have remained flatcompared to an estimated 3.2%y/y decline in FY14. Weexpect prices to remain flat in FY16.

Looking at Tanzania, we estimate FY14 market share of7.6% down from 8.1% in FY13. We forecast market sharesof 9.3% and 10% in FY15 and FY16. FY14 through to 3Q15,sales from Tanzania have continued to disappoint.

Factoring in new capacities (Dangote, Lake & MbeyaCement) and delays in commissioning Tanga grinding line,we have cut ARM’s Tanzania capacity utilization rates to64.3%, 60.5% & 65.5% from 73.7%, 70% & 86% in FY15,FY16 & FY17 respectively.

Cement revenue 2012E 2013E 2014E 2015F 2016F 2017FVolume sales (000 tpa)Kenyan sales 740 717 731 727 787 871growth 42.3% -3.1% 2.0% -0.6% 8.3% 10.6%Tanzania sales 102 392 378 482 575 983growth 285.6% -3.7% 27.6% 19.2% 71.0%Total 842 1,109 1,109 1,210 1,362 1,853growth 61.8% 31.8% 0.0% 9.0% 12.6% 36.1%

Average price (USD/ton)Kenya 128 126 119 106 106 108Tanzania 137 133 123 107 107 107

Based on reported revenue numbers, we estimate totalFY14 group volume sales of 1.11mtpa (flat y/y; but 14.1%below forecast). For FY15, we forecast total cementvolumes sales of 1.21mtpa (+9%y/y; but 20.2% cut inforecast, in line with weak 1H15 – 10.6%y/y decline incement revenue, and further delay in commissioning Tangagrinding line – expected in 1H16 from 3Q15).

In Kenya, for FY15, we forecast ARM to have 15% marketshare, down from 16.4% in FY14. Barring new capacityexpansion projects, we expect utilization rate to closelytrack sector average.

For FY15, we forecast selling prices to have remained flatcompared to an estimated 3.2%y/y decline in FY14. Weexpect prices to remain flat in FY16.

Looking at Tanzania, we estimate FY14 market share of7.6% down from 8.1% in FY13. We forecast market sharesof 9.3% and 10% in FY15 and FY16. FY14 through to 3Q15,sales from Tanzania have continued to disappoint.

Factoring in new capacities (Dangote, Lake & MbeyaCement) and delays in commissioning Tanga grinding line,we have cut ARM’s Tanzania capacity utilization rates to64.3%, 60.5% & 65.5% from 73.7%, 70% & 86% in FY15,FY16 & FY17 respectively.


Tanzania 137 133 123 107 107 107

Capacity (000 tpa)Kenya 960 960 960 960 960 960Tanzania 200 750 750 750 950 1,500Total 1,160 1,710 1,710 1,710 1,910 2,460

Capacity Utilisation (%)Kenya 77.1 74.7 76.2 75.8 82.0 90.7Tanzania 50.9 52.3 50.4 64.3 60.5 65.5Average group 72.6 64.9 64.9 70.7 71.3 75.3

Valuation and recommendation

Our fair value is derived using DCF model based on a 4 year holding period. Using the approach, we discount forecast free cash flow usingWACC. In the case of ARM, we assume a CoE of 16.2% (risk free rate of 9%, risk premium of 6% & beta of 1.2x). Our terminal value is based on acomputed exit EV/EBITDA of 5.94x.DCF valuation FY16 FY17 FY18 FY19Operating profit 3,653 5,472 6,318 6,844add: depreciation and Amortization 700 713 726 739less: working capital -214 -354 -291 -216less: Capex -752 -579 -613 -638less: cash tax -654 -917 -1,131 -1,285

Free cash flow 2,734 4,334 5,008 5,444 45,072Gearing 65.6% 55.9% 43.9% 29.7% 20%Weighted cost of capital 10.6% 11.5% 12.5% 13.7% 13.5%Discount period 1.0 2.0 3.0 4.0 4.0Discount factor @ WACC 0.91 0.81 0.70 0.60 0.60


Sensitivity (exit EV/EBITDA versus CoE)

Discount period 1.0 2.0 3.0 4.0 4.0Discount factor @ WACC 0.91 0.81 0.70 0.60 0.60Present value of free cash flow 2,476 3,497 3,528 3,268 27,188Discounted cash flows 12,769PV terminal value 27,188Total value 39,957add: net cash -22,388

Equity value 17,568Shares (m) 495

Fair value (KES) 35.47Current price (KES) 40.0Upside/(downside) -11.3%

2.94 3.94 4.94 5.94 7.94 9.94 11.9410.2% 9.95 19.19 28.42 37.66 56.13 74.60 93.0712.2% 9.19 18.42 27.66 36.89 55.36 73.83 92.3014.2% 8.46 17.70 26.93 36.17 54.64 73.11 91.5816.2% 7.77 17.00 26.24 35.47 53.94 72.41 90.8818.2% 7.10 16.34 25.57 34.81 53.28 71.75 90.2220.2% 6.47 15.71 24.94 34.18 52.65 71.12 89.5922.2% 5.87 15.10 24.34 33.57 52.04 70.51 88.9824.2% 5.29 14.52 23.76 32.99 51.46 69.93 88.40

……valuation multiples

Valuation ratios 2010A 2011A 2012A 2013A 2014A 2015F 2016F 2017F

ROaE (%) 23.8 21.1 19.1 17.9 17.0 0.7 18.1 25.6

ROaA (%) 7.8 7.3 7.5 7.1 6.1 0.3 7.0 12.0

ROIC (%) 6.6% 6.7% 7.1% 6.4% 4.6% 6.5% 7.6% 11.3%

EPS (KES) 2.18 2.33 2.51 2.74 3.01 0.14 3.69 6.48

growth 67.5% 6.5% 7.7% 9.2% 10.1% -95.3% 2532.5% 75.3%

DPS 0.35 0.40 0.50 0.60 0.60 - 0.41 0.74

payout 16.0% 17.2% 19.9% 21.9% 19.9% 0.0% 11.2% 11.5%

NAV (KES) 9.99 12.11 14.16 16.40 19.02 18.56 22.25 28.32


NAV (KES) 9.99 12.11 14.16 16.40 19.02 18.56 22.25 28.32

growth 19.8% 21.3% 16.9% 15.8% 15.9% -2.4% 19.9% 27.3%

PE (x) 18.31 17.19 15.96 14.61 13.27 285.01 10.83 6.17

PB (X) 4.01 3.30 2.82 2.44 2.10 2.16 1.80 1.41

Dividend yield 0.9% 1.0% 1.3% 1.5% 1.5% 0.0% 1.0% 1.9%

EV/sales (x) 4.58 3.68 2.83 2.44 2.93 2.70 2.32 1.61

EV/EBITDA (x) 16.58 13.81 12.12 11.64 14.44 11.12 9.33 6.04

Income statement

FY15-FY19, we forecast CAGR in group revenue of 13.1%(14.3% cement & 7.5% non-cement).

Over our forecast period we expect cement revenue toremain steady at 85% of total group revenue. This is adownward revision from 90% owing to; disappointing salesfrom Dar es Salaam grinding plant (commissioned in 4Q12),delays in commissioning Tanga grinding line and increase infertilizer sales – in 1H15 following roll-out of a subsidyprogram by the Kenyan Government, ARM’s fertilizer salesaccounted for 14.5% of group revenue (vs. historical avg. of6%).

By 2019, we forecast Tanzania cement sales to account for53% & 45% of total cement & group revenue, respectively– up from 35% & 30% in FY14.

Following commissioning of the Tanga clinker line (April2015), we expect to see gradual improvement in margins.We forecast EBITDA margin of 24.3% in FY15 up from 21%in FY14. We expect EBITDA margin to reach 29.7% by FY19.

Given weak FY15 performance and uncertainty aroundfunding requirements, we forecast zero dividend payout forFY15. Over our forecast period, as management focuses onpaying down debt, we expect payout to remain low (10%-15% range).

Income Statement 2012A 2013A 2014A 2015F 2016F 2017F

Cement sales 9,176 12,240 11,742 12,700 14,302 19,651Non-cement sales 2,225 1,939 2,001 2,901 3,191 3,511Total turnover 11,401 14,179 13,743 15,601 17,493 23,162Cost of sales -8,171 -10,732 -10,018 -10,593 -11,702 -15,263Gross profit 3,229 3,447 3,725 5,008 5,791 7,899Total distribution costs -127 -122 -291 -480 -528 -511Other costs -445 -354 -645 -732 -909 -1,203EBITDA 2,657 2,971 2,788 3,796 4,354 6,185Depreciation -438 -672 -658 -682 -700 -713Operating profit 2,219 2,299 2,130 3,114 3,653 5,472


FY15-FY19, we forecast CAGR in group revenue of 13.1%(14.3% cement & 7.5% non-cement).

Over our forecast period we expect cement revenue toremain steady at 85% of total group revenue. This is adownward revision from 90% owing to; disappointing salesfrom Dar es Salaam grinding plant (commissioned in 4Q12),delays in commissioning Tanga grinding line and increase infertilizer sales – in 1H15 following roll-out of a subsidyprogram by the Kenyan Government, ARM’s fertilizer salesaccounted for 14.5% of group revenue (vs. historical avg. of6%).

By 2019, we forecast Tanzania cement sales to account for53% & 45% of total cement & group revenue, respectively– up from 35% & 30% in FY14.

Following commissioning of the Tanga clinker line (April2015), we expect to see gradual improvement in margins.We forecast EBITDA margin of 24.3% in FY15 up from 21%in FY14. We expect EBITDA margin to reach 29.7% by FY19.

Given weak FY15 performance and uncertainty aroundfunding requirements, we forecast zero dividend payout forFY15. Over our forecast period, as management focuses onpaying down debt, we expect payout to remain low (10%-15% range).

Operating profit 2,219 2,299 2,130 3,114 3,653 5,472Net interest -428 -299 -112 -3,014 -1,039 -888Profit before tax 1,768 1,950 2,304 2,000 2,615 4,584Taxation -545 -651 -525 -30 -784 -1,375Profit after tax 1,224 1,299 1,779 1,970 1,830 3,209Minorities -4 8 -1 -1 -1 -1

Attributable income 1,242 1,356 1,493 70 1,830 3,208- - - - - -

Weighted shares in issue (m) 495 495 495 495 495 495Year end shares in issue (m) 495 495 495 495 495 495Basic EPS (KES) 2.51 2.74 3.01 0.14 3.69 6.48Dividend per share (KES) 0.50 0.60 0.60 - 0.41 0.74

Balance sheet

Going by 3Q15’s CAPEX figure of USD 8.8m down from USD50.9m we have cut our FY15 CAPEX figure to USD 10.6mfrom USD 23.2m.

We forecast continued improvement in working capitallevels as amount of imported clinker declines and asongoing projects are completed.

Despite a cut in our CAPEX number, factoring in reducedcash flow from operations, we have increased our FY15 netdebt figure by 37.8% to USD 220m. With net debt toEBITDA peaking in FY14 at 7.34x we only see managementattaining the target net debt/EBITDA ratio of 2.5x in FY18 atthe earliest.

Though we forecast gradual decline in debt levels, it stillremains unclear if the ongoing Tanga project is now fullyfunded – as highlighted earlier, in Dec-2015 managementdisclosed plans of raising USD 125m through a preferenceshare issue.

Balance Sheet 2011A 2012A 2013A 2014A 2015F 2016F 2017FFixed assets 16,443 18,623 22,442 28,257 28,775 28,943 28,809Other non-current assets 350 394 414 449 449 449 449Current assets (excl. cash) 3,419 5,345 5,342 7,799 7,409 8,087 9,260Cash & cash equivalents 337 2,591 1,507 407 115 175 192Total assets 20,549 26,953 29,705 36,913 36,748 37,654 38,710Short-term borrowing 2,497 3,917 4,267 13,216 4,501 5,246 7,103Other current liabilities 1,956 2,586 2,980 4,274 3,256 3,721 4,539Long-term borrowing 8,129 11,074 12,001 7,656 18,003 15,737 10,655Other-non current liabilities 1,865 2,255 2,234 2,345 1,795 1,926 2,385Shareholders equity 5,999 7,014 8,125 9,419 9,191 11,021 14,025


Going by 3Q15’s CAPEX figure of USD 8.8m down from USD50.9m we have cut our FY15 CAPEX figure to USD 10.6mfrom USD 23.2m.

We forecast continued improvement in working capitallevels as amount of imported clinker declines and asongoing projects are completed.

Despite a cut in our CAPEX number, factoring in reducedcash flow from operations, we have increased our FY15 netdebt figure by 37.8% to USD 220m. With net debt toEBITDA peaking in FY14 at 7.34x we only see managementattaining the target net debt/EBITDA ratio of 2.5x in FY18 atthe earliest.

Though we forecast gradual decline in debt levels, it stillremains unclear if the ongoing Tanga project is now fullyfunded – as highlighted earlier, in Dec-2015 managementdisclosed plans of raising USD 125m through a preferenceshare issue.

Shareholders equity 5,999 7,014 8,125 9,419 9,191 11,021 14,025Minorities 104 107 100 2 3 4 4Total equity and liabilities 20,549 26,953 29,705 36,913 36,748 37,654 38,710

Net debt 10,288 12,400 14,761 20,465 22,388 20,808 17,567

Ratio & analysis

Growth (% y/y) Margins (%)

Efficiency and Gearing

Growth (%) 2012A 2013A 2014A 2015F 2016F 2017F

Cement sales 64.0 33.4 -4.1 8.2 12.6 37.4Non-cement sales -14.0 -12.9 3.2 45.0 10.0 10.0

Cost of sales 47.2 31.3 -6.7 5.7 10.5 30.4

Total distribution costs -43.9 -4.0 138.9 64.9 10.0 -3.3

EBITDA 21.9 11.8 -6.2 36.1 14.7 42.1

EBIT 26.5 3.6 -7.3 46.2 17.3 49.8

PBT 31.4 11.7 0.9 -95.0 2,514 75.3

PAT 8.3 8.3 10.7 -95.3 2,514 75.3

Minority interest -316.8 -285.3 -106.8 - - -

Margin & Ratios (%) 2012A 2013A 2014A 2015F 2016F 2017F

Gross profit margin 28.3 24.3 27.1 32.1 33.1 34.1

EBITDA margin 23.3 21.0 20.3 24.3 24.9 26.7

EBIT margin 19.5 16.2 15.5 20.0 20.9 23.6

Tax rate 30.4 32.6 26.0 30.0 30.0 30.0

Profit margin 10.9 9.5 10.9 0.4 10.5 13.9


Efficiency and GearingMinority interest -316.8 -285.3 -106.8 - - -

Attributable profit 7.7 9.2 10.1 -95.3 2,532 75.3

EPS 7.7 9.2 10.1 -95.3 2,532 75.3

DPS 25.0 20.0 - -100.0 - 80.0

NAV 16.9 15.8 15.9 -2.4 19.9 27.3

Total assets 31.2 10.2 24.3 -0.4 2.5 2.8

Efficiency 2012A 2013A 2014A 2015F 2016F 2017F

Fixed asset turnover (x) 0.6 0.6 0.5 0.5 0.6 0.8

Inventory days 105.8 99.4 119.6 119.6 114.6 104.6

Receivables days 61.4 61.3 86.7 91.7 91.7 76.7

Payables days 99.6 84.3 115.3 100.3 105.3 100.3Gearing (%) 2012A 2013A 2014A 2015F 2016F 2017F

Total debt to equity (%) 210.5 197.8 221.5 244.8 190.3 126.6

Debt to total assets (%) 55.6 54.8 56.5 61.2 55.7 45.9

Net debt to EBITDA (x) 4.67 4.97 7.34 5.90 4.78 2.84

Bamburi Cement Limited(Bamburi)

We retain our BUY recommendation. Our FV remains little changed at KES 201.97compared to our earlier KES 202.67. In 2015, the stock gained 25.9% - the bestperforming large-cap.The counter is currently trading 5.6% below its 12 month price high. Against our FY15forecasts, Bamburi is trading at 5.4x EV/EBITDA, 39.2% discount against the sector’s 6year average.

Impressive revenue & margin improvement in 1H15, but will it last. In 1H15, Bamburiposted its largest y/y revenue growth (+11.7%) and operating profit margin (20.9%) sinceFY11. Management attributed improved business performance to increased export salesinto Inland Africa and higher volume sales of 42.5 & 52.5 grade cement (mainly sold toinfrastructure and large scale projects that require high strength cement).As highlighted in previous reports, while new capacities have eroded Bamburi’s marketdominance, the company still has a commendable lead in product diversity – high gradecement, ready-mix and concrete blocks. Up take of these products, previously viewed asniche products, has been on the rise (5.9% of group revenue in FY14) as cementconsumption mix shifts from individual home builders to infrastructure projects andlarge-scale contractors.While we expect Bamburi’s product diversity to sustain growth over our forecast period(7.2% of group sales in FY19 to be from special products), competition will be intense asmost players have now started/intend to start selling similar products. Inland Africacement sales will also come under pressure as new capacities commence production inDRC, Rwanda, Tanzania and Zambia – Bamburi will however retain its edge on mostKenyan cement producers due to its Hima plant in Uganda.

Our BUY rating is therefore primarily based on; normalization of margins (forecast avg.23.6% vs. historical avg. 24.7% & 19.4% in FY14) and continued positive free cash flowgeneration (USD 112m in cash, equivalent to KES 31.50 per share in 1H15).

Recommendation: BUYFair Value: KES 201.27Upside/(downside): +18.4%

Operating performance FY13A FY14A FY15FEPS (KES) 9.55 9.80 14.93

% chg -21.5% 2.6% 52.3%DPS 11.00 12.00 12.50

Payout % 115.1% 122.4% 83.7%


We retain our BUY recommendation. Our FV remains little changed at KES 201.97compared to our earlier KES 202.67. In 2015, the stock gained 25.9% - the bestperforming large-cap.The counter is currently trading 5.6% below its 12 month price high. Against our FY15forecasts, Bamburi is trading at 5.4x EV/EBITDA, 39.2% discount against the sector’s 6year average.

Impressive revenue & margin improvement in 1H15, but will it last. In 1H15, Bamburiposted its largest y/y revenue growth (+11.7%) and operating profit margin (20.9%) sinceFY11. Management attributed improved business performance to increased export salesinto Inland Africa and higher volume sales of 42.5 & 52.5 grade cement (mainly sold toinfrastructure and large scale projects that require high strength cement).As highlighted in previous reports, while new capacities have eroded Bamburi’s marketdominance, the company still has a commendable lead in product diversity – high gradecement, ready-mix and concrete blocks. Up take of these products, previously viewed asniche products, has been on the rise (5.9% of group revenue in FY14) as cementconsumption mix shifts from individual home builders to infrastructure projects andlarge-scale contractors.While we expect Bamburi’s product diversity to sustain growth over our forecast period(7.2% of group sales in FY19 to be from special products), competition will be intense asmost players have now started/intend to start selling similar products. Inland Africacement sales will also come under pressure as new capacities commence production inDRC, Rwanda, Tanzania and Zambia – Bamburi will however retain its edge on mostKenyan cement producers due to its Hima plant in Uganda.

Our BUY rating is therefore primarily based on; normalization of margins (forecast avg.23.6% vs. historical avg. 24.7% & 19.4% in FY14) and continued positive free cash flowgeneration (USD 112m in cash, equivalent to KES 31.50 per share in 1H15).

Payout % 115.1% 122.4% 83.7%NAV (KES) 79.69 73.63 76.31PE (x) 17.8 17.3 11.4PB (X) 2.1 2.3 2.2EV/EBITDA (x) 8.0 7.7 5.4

Trading dataCurrent price (KES) 1702015 chg (%) 25.9Market-cap KES (m) 61,710

USD (m) 605.00Daily value traded KES (k) 9,717(2015) USD (k) 95.26Bloomberg BMBC KNFree float 26.69%Foreign net flows (2015) USD (m) -352

Cement revenue forecast model

Guided by 1H15 performance (+11.7%y/y in revenue) andassuming stable selling prices, we have increased FY15’sforecast cement volume sales 4.8% to 2.87mtpa (+10.1 %y/y).

Our forecast volume growth in Kenya is tied to; Bamburi’swillingness to realize lower ex-factory prices due to discountsoffered to large distributors and active participation ininfrastructure projects.

We forecast (Kenya) market share of 35.5% in FY15 from anestimated 34.5% in FY14. We expect Kenya market share todecline to 33.5% in FY16 Bamburi as utilization creeps up toabove 91%. Jointly (including exports from Kenya) we estimateBamburi’s Ugandan market share of 28% in FY15 from 32% inFY14.

In FY15, we forecast 23%y/y increase in Hima’s export volumesales to 0.5mtpa. By 2019, we forecast Hima’s export sales todrop below 0.1mtpa – as Bamburi nears full capacity utilizationand capacities in key export markets increase.

Despite Bamburi operating at above 90% capacity utilization,competition will continue undermining price increases.

FY12A FY13F FY14F FY15F FY16F FY17FVolume (000 tpa)Kenyan sales 1,574 1,489 1,536 1,723 1,700 1,761growth 6.6% -5.4% 3.2% 12.2% -1.4% 3.6%Uganda sales 1,073 984 1,068 1,142 1,148 1,151growth -3.2% -8.3% 8.5% 7.0% 0.5% 0.3%Total 2,646 2,473 2,604 2,866 2,848 2,912growth 2.4% -6.6% 5.3% 10.1% -0.6% 2.2%

Price (USD/ton)Kenya 142 138 131 117 117 119Uganda 188 171 173 154 154 154


Guided by 1H15 performance (+11.7%y/y in revenue) andassuming stable selling prices, we have increased FY15’sforecast cement volume sales 4.8% to 2.87mtpa (+10.1 %y/y).

Our forecast volume growth in Kenya is tied to; Bamburi’swillingness to realize lower ex-factory prices due to discountsoffered to large distributors and active participation ininfrastructure projects.

We forecast (Kenya) market share of 35.5% in FY15 from anestimated 34.5% in FY14. We expect Kenya market share todecline to 33.5% in FY16 Bamburi as utilization creeps up toabove 91%. Jointly (including exports from Kenya) we estimateBamburi’s Ugandan market share of 28% in FY15 from 32% inFY14.

In FY15, we forecast 23%y/y increase in Hima’s export volumesales to 0.5mtpa. By 2019, we forecast Hima’s export sales todrop below 0.1mtpa – as Bamburi nears full capacity utilizationand capacities in key export markets increase.

Despite Bamburi operating at above 90% capacity utilization,competition will continue undermining price increases.

Uganda 188 171 173 154 154 154

Capacity (000 tpa)Kenya 2,250 2,250 2,250 2,250 2,250 2,250Uganda 900 900 900 900 900 900Total 3,150 3,150 3,150 3,150 3,150 3,150

Utilisation (%)Kenya 84.4 77.5 81.0 90.9 91.0 93.0Uganda 83.0 81.1 86.7 91.1 88.9 91.1Total 84.0 78.5 82.7 91.0 90.4 92.4

Valuation and recommendation

Our fair value is derived using DCF model based on a 4 year holding period. Using the approach, we discount forecast free cash flow usingWACC. In the case of Bamburi, we assume a CoE of 15.0% (risk free rate of 9%, risk premium of 6% & beta of 1x). Our terminal value is based ona computed exit EV/EBITDA of 8.08x.

DCF valuation FY16 FY17 FY18 FY19Operating profit 7,661 8,002 8,199 8,442add: depreciation and amortisation 1,561 1,592 1,624 1,658less: working capital -672 -77 -67 -73less: capex -909 -940 -967 -996less: cash tax -2,425 -2,544 -2,624 -2,718

Free cash flow 5,215 6,033 6,166 6,313 81,570WACC 15.0% 15.0% 15.0% 15.0% 15.0%Discount period 1.0 2.0 3.0 4.0 4.0Discount factor 0.87 0.76 0.66 0.57 0.57


Sensitivity (exit EV/EBITDA versus WACC)

Discount factor 0.87 0.76 0.66 0.57 0.57Present value of free cash flow 4,547 4,574 4,065 3,619 46,763Value of operations 63,568add: net cash 9,493

Equity value 73,062Shares (m) 363

Fair value (KES) 201.27Current share price 170Upside/(downside) 18.4%

5.08 6.08 7.08 8.08 10.08 12.08 14.0812.0% 165.44 183.16 200.88 218.60 254.04 289.48 324.9213.0% 161.26 178.37 195.47 212.58 246.78 280.99 315.2014.0% 157.26 173.78 190.29 206.80 239.83 272.86 305.8915.0% 153.42 169.37 185.32 201.27 233.17 265.07 296.9716.0% 149.73 165.14 180.55 195.96 226.78 257.60 288.4217.0% 146.19 161.09 175.98 190.87 220.66 250.44 280.2218.0% 142.79 157.19 171.59 185.98 214.77 243.57 272.36

……valuation multiples

Valuation ratios FY10A FY11A FY12A FY13F FY14F FY15F FY16F FY17F

ROaE (%) 25.7 24.9 17.5 12.1 12.8 19.9 18.5 19.1

ROaA (%) 23.1 25.3 18.8 12.8 13.8 20.2 19.0 19.6

ROIC (%) 26.6% 25.7% 17.5% 12.6% 14.1% 21.5% 20.5% 21.9%

EPS (KES) 14.02 14.44 12.17 9.55 9.80 14.93 14.28 15.04

growth -23.5 3.0 -15.8 -21.5 2.6 52.3 -4.4 5.3

DPS 8.50 10.00 10.50 11.00 12.00 12.50 12.99 13.97

payout 60.6% 69.2% 86.3% 115.1% 122.4% 83.7% 91.0% 92.9%

NAV (KES) 55.55 60.68 78.20 79.69 73.63 76.31 77.84 79.40


NAV (KES) 55.55 60.68 78.20 79.69 73.63 76.31 77.84 79.40

growth 3.4% 9.2% 28.9% 1.9% -7.6% 3.6% 2.0% 2.0%

PE (x) 12.1 11.8 14.0 17.8 17.3 11.4 11.9 11.3

PB (X) 3.1 2.8 2.2 2.1 2.3 2.2 2.2 2.1

Dividend yield 5.0% 5.9% 6.2% 6.5% 7.1% 7.4% 7.6% 8.2%

EV/sales (x) 2.0 1.6 1.4 1.6 1.5 1.3 1.3 1.2

EV/EBITDA (x) 6.6 6.0 6.6 8.0 7.7 5.4 5.6 5.2

Income statement

In FY15 we forecast group revenue growth of 9.8% (+12.2%,+10.6% & +7.0%y/y Kenya cement sales, special products andHima sales, respectively). We forecast Hima’s average sellingprices to remain steady after increasing an estimated 3.1% inFY14 (estimated 7% decline in FY13).

Though optimistic of future performance, management expectsincreased competition and price pressure in precast and readymix market. In FY14, special products division revenue grew28.4%y/y (+4.6%y/y in FY13). By FY19, we forecast specialproducts revenue contribution to stand at 7.2% (5.9% in FY14).

In FY14, gross profit margins increased 180bp y/y mainlysupported by 5.7% drop in energy cost. Outlook for energy costsremains positive following replacement of HFO with coal inHima.

Poor visibility of other operating costs – a large proportion istechnical fees paid to Lafarge.

At above 85%, we expect payout to remain above sectoraverage - at current price, FY15 dividend yield is attractive at7.4%.

Income Statement (KES m) FY12A FY13A FY14F FY15F FY16F FY17FTurnover 37,491 33,928 36,029 39,544 39,538 40,881Energy cost -8,148 -7,458 -7,035 -7,480 -7,804 -8,220Imported clinker -3,446 -1,604 -2,120 -3,332 -3,338 -3,744Other costs -12,608 -12,815 -13,437 -13,698 -13,470 -13,325Cost of sales -24,202 -21,877 -22,592 -24,510 -24,611 -25,288Gross profit 13,289 12,051 13,437 15,034 14,926 15,592Operating gains/(losses) 27 -123 83 91 91 94Distribution costs -115 -73 -223 -245 -245 -253Staff costs -2,354 -2,337 -2,425 -2,480 -2,586 -2,774Other operating costs -2,657 -2,815 -3,879 -2,768 -2,965 -3,066EBITDA 8,190 6,703 6,993 9,632 9,222 9,594Depreciation & amortization -1,322 -1,584 -1,635 -1,576 -1,561 -1,592


In FY15 we forecast group revenue growth of 9.8% (+12.2%,+10.6% & +7.0%y/y Kenya cement sales, special products andHima sales, respectively). We forecast Hima’s average sellingprices to remain steady after increasing an estimated 3.1% inFY14 (estimated 7% decline in FY13).

Though optimistic of future performance, management expectsincreased competition and price pressure in precast and readymix market. In FY14, special products division revenue grew28.4%y/y (+4.6%y/y in FY13). By FY19, we forecast specialproducts revenue contribution to stand at 7.2% (5.9% in FY14).

In FY14, gross profit margins increased 180bp y/y mainlysupported by 5.7% drop in energy cost. Outlook for energy costsremains positive following replacement of HFO with coal inHima.

Poor visibility of other operating costs – a large proportion istechnical fees paid to Lafarge.

At above 85%, we expect payout to remain above sectoraverage - at current price, FY15 dividend yield is attractive at7.4%.

Depreciation & amortization -1,322 -1,584 -1,635 -1,576 -1,561 -1,592Operating profit 6,868 5,119 5,358 8,056 7,661 8,002Net interest income/(expense) 406 352 273 362 422 478Net foreign exchangegain/(loss) -98 45 170 0 0 0

Profit before tax 7,176 5,516 5,801 8,418 8,083 8,480Taxation -2,294 -1,843 -1,898 -2,525 -2,425 -2,544Profit after tax 4,882 3,673 3,903 5,892 5,658 5,936Minority interest -466 -205 -345 -473 -476 -477Attributable income 4,416 3,468 3,558 5,419 5,183 5,459

Weighted shares in issue (m) 363 363 363 363 363 363Year end shares in issue (m) 363 363 363 363 363 363

Reported EPS (KES) 12.17 9.55 9.80 14.93 14.28 15.04Normalised EPS (KES) 12.17 9.55 9.80 14.93 14.28 15.04Dividend per share (KES) 10.50 11.00 12.00 12.50 12.99 13.97Payout ratio (%) 86.3% 115.1% 122.4% 83.7% 91.0% 92.9%

Balance sheet

Though we expect continued investments to enhanceproduction efficiencies, we expect Bamburi to have one of thelowest CAPEX rates in the sector.

We expect Bamburi to remain more effective when it comes toworking capital management (shorter inventory and debtordays than ARM).

We expect Bamburi to remain cash rich (cash holdings KES31.50 per share in FY15).

In the absence of large new projects, we expect gearing levelsto remain low (management remains guarded on capacityexpansion plans).

Balance Sheet (KES m) FY12A FY13F FY14F FY15F FY16F FY17F

Fixed assets 25,572 25,651 24,263 23,596 22,945 22,293Other non-current assets 1,004 1,328 1,183 1,183 1,183 1,183Current assets (excl. cash) 7,693 7,161 7,901 8,071 8,095 8,328Cash & cash equivalents 8,769 8,876 7,644 9,493 10,505 12,122Total assets 43,038 43,016 40,991 42,343 42,728 43,926Short-term borrowings 288 309 - - - -Other current liabilities 6,723 5,682 6,768 6,673 6,025 6,181Long-term borrowings 577 309 - - - -Other non-current liabilities 4,589 5,206 5,104 5,104 5,104 5,104Shareholders equity 28,386 28,929 26,727 27,700 28,257 28,822


Though we expect continued investments to enhanceproduction efficiencies, we expect Bamburi to have one of thelowest CAPEX rates in the sector.

We expect Bamburi to remain more effective when it comes toworking capital management (shorter inventory and debtordays than ARM).

We expect Bamburi to remain cash rich (cash holdings KES31.50 per share in FY15).

In the absence of large new projects, we expect gearing levelsto remain low (management remains guarded on capacityexpansion plans). Shareholders equity 28,386 28,929 26,727 27,700 28,257 28,822

Minority interest 2,475 2,580 2,391 2,864 3,340 3,817Total equity and liabilities 43,038 43,015 40,990 42,342 42,727 43,925

Net debt -7,904 -8,258 -7,644 -9,493 -10,505 -12,122

Ratio & analysis

FY12A FY13A FY14A FY15F FY16F FY17FTurnover 4.5 -9.5 6.2 9.8 0.0 3.4Energy cost 0.5 -8.5 -5.7 6.3 4.3 5.3Imported clinker 128.8 -53.5 32.2 57.2 0.2 12.2Total Cost of sales 9.1 -9.6 3.3 8.5 0.4 2.7Distribution costs -46.0 -36.5 205.5 9.8 0.0 3.4EBITDA -12.3 -18.2 4.3 37.7 -4.3 4.0EBIT -15.0 -25.5 4.7 50.4 -4.9 4.5PBT -15.2 -23.1 5.2 45.1 -4.0 4.9PAT -16.7 -24.8 6.3 51.0 -4.0 4.9Minority interest -24.4 -56.0 68.1 37.2 0.5 0.3

Growth (% y/y)FY12A FY13A FY14A FY15F FY16F FY17F

Gross profit margin 35.4 35.5 37.3 38.0 37.8 38.1EBITDA margin 21.8 19.8 19.4 24.4 23.3 23.5EBIT margin 18.3 15.1 14.9 20.4 19.4 19.6Tax rate 32.0 33.4 32.7 30.0 30.0 30.0Profit margin 13.0 10.8 10.8 14.9 14.3 14.5

Margins

FY12A FY13A FY14A FY15F FY16F FY17F


Efficiency and Gearing


Minority interest -24.4 -56.0 68.1 37.2 0.5 0.3Attributable profit -15.8 -21.5 2.6 52.3 -4.4 5.3

EPS -15.8 -21.5 2.6 52.3 -4.4 5.3DPS 5.0 4.8 9.1 4.1 4.0 7.5NAV 28.9 1.9 -7.6 3.6 2.0 2.0


Inventory days 74.7 91.5 88.4 88.4 88.4 88.4

Receivables days 15.5 17.2 18.7 18.7 18.7 18.7

Payables days 77.5 95.4 94.1 94.1 84.1 84.1

Total debt to equity (%) 2.8 2.0 0.0 0.0 0.0 0.0

Debt to total assets (%) 2.0 1.4 0.0 0.0 0.0 0.0

Key Contacts

ResearchFrancis Mwangi, [email protected]

Eric [email protected]

Faith [email protected]

Stella [email protected]

Head of TradingTony [email protected]

Equity and Foreign SalesEric [email protected]

ResearchFrancis Mwangi, [email protected]

Eric [email protected]

Faith [email protected]

Stella [email protected]


• Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed andattributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or othersubject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or viewscontained in this research report.

• Global Disclaimer: Standard Investment Bank (SIB) and/or its affiliates makes no representation or warranty of any kind, express, implied or statutory regarding thisdocument or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does notconstitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does itconstitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration.The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. Thecontents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation ofany particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding theappropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statementsregarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained inthis document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The valueand income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject tofluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Pastperformance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour toupdate on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediatelyfollowing its publication. SIB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be soughtfor any queries relating to the legal or tax implications of any investment. SIB and/or its affiliates may have a position in any of the securities, instruments orcurrencies mentioned in this document. SIB has in place policies and procedures and physical information walls between its Research Department and differingbusiness functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rulesof its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SIB makes no representation or warranty asto the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice ofyour professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging orinvestment decision. SIB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential,punitive or exemplary damages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, anydefect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or anypart thereof or any contents or associated services. This material is for the use of intended recipients only and, in any jurisdiction in which distribution toprivate/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely fordistribution to professional and institutional investors.

Standard Investment Bank

• Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed andattributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or othersubject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or viewscontained in this research report.

• Global Disclaimer: Standard Investment Bank (SIB) and/or its affiliates makes no representation or warranty of any kind, express, implied or statutory regarding thisdocument or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does notconstitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does itconstitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration.The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. Thecontents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation ofany particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding theappropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statementsregarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained inthis document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The valueand income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject tofluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Pastperformance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour toupdate on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediatelyfollowing its publication. SIB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be soughtfor any queries relating to the legal or tax implications of any investment. SIB and/or its affiliates may have a position in any of the securities, instruments orcurrencies mentioned in this document. SIB has in place policies and procedures and physical information walls between its Research Department and differingbusiness functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rulesof its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SIB makes no representation or warranty asto the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice ofyour professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging orinvestment decision. SIB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential,punitive or exemplary damages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, anydefect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or anypart thereof or any contents or associated services. This material is for the use of intended recipients only and, in any jurisdiction in which distribution toprivate/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely fordistribution to professional and institutional investors.

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