IMARA INVESTING IN AFRICA - capital.bwcapital.bw/docs/IAS_SSA Cement Report_02 January 2014-1.pdf · Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9-million

SSA Cement Industry Report | January 2014

Let the games begin…

Asset Management | Corporate Finance | Securities | Trust Services

IMARA INVESTING IN AFRICA

Table of Contents Executive Summary……………………………………………..………………………………………..…………………………………… Valuation Metrics ……………………………………………….…………………………………………….……………………………….. Sector charts ………………………………………………………………………………………………..……………………………………. The Playing Field... (An Overview) ……………………….…………………………………….…………………………………….. SSA Regional Roundup (Setting the stage)….…………………………………………………………………………………….. The Players………………..………………………………………………………………………………….…………………………………….. Companies… Athi River Mining …………………………………………….………………………………………………………………………………….. Bamburi Cement ……………………………………………….……………………………………………………………………………….. EAPCC …………………………………………………………………………………………………………………………………………………. Ashaka …………………………………………………………………………………………………………………………………………….... CCNN ………………………………………………………………………………………………………………………………………………….. Dangote ……………………………………………………………………………………………………………………………………………… Lafarge Wapco …………………………………………………………………………………………………………………………………… Tanga …………………………………………………………………………………………………………………………………………………. Twiga …………………………………………………………………………………………………………………………………………………..

Lafarge Zambia …………………………………………………………………………………………………………………………………..

Lafarge Zimbabwe ……………………………………………………………………………………………………………………………….

Analysts:

Chenge Besa [email protected]

Dexter Mahachi [email protected] Loyiso Hoza [email protected]

Tonderai Maneswa [email protected]

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African Cement…let the games begin…

Executive summary

The Cement production process…

This month we review our SSA cement stocks universe where we find that global cement consumption has been growing at a CAGR of over 5.2% for the past ten years driven mostly by consumption from emerging markets such as China, India and Brazil.

The rise in consumption of cement is expected to result in cement consumption of around c4.5 billion metric tonnes per annum by the end of 2016.

In Sub Saharan Africa, cement consumption has been increasing at a rapid pace in line with the general rise in GDP.

In West Africa, we look at the Nigerian cement manufacturers which have been on an active expansion drive. This has been backed by the Nigerian government which has assisted by offering significant incentives for manufacturers to raise their output.

The result of this is that from an installed capacity of around 4 million metric tonnes in 2002, Nigeria now has a cement capacity in excess of 22.5 million metric tonnes. Key stocks to watch in Nigeria include Dangote Cement and Lafarge Wapco.

Average cement consumption in East Africa has been growing at double digit CAGR’s over the last decade with regional cement demand expected to reach 14.4 million metric tonnes by 2017.

As a result, local and international cement companies have embarked on ambitious investment and expansion drives in the East African cement markets.

In the markets we look at, Tanzania and Kenya, Dangote has been amongst the leading investors earmarking investments into new plants in both markets.

All in all, new and old players are currently jostling for a share of the booming cement market in East Africa using imports as well as expanding cement production capacities.

Companies to watch in East Africa include Lafarge Bamburi in Kenya and Tanga in Tanzania.

In Southern Africa we look at cement companies in Zambia and Zimbabwe where demand for cement continues to increase dramatically with cement manufacturers again striving to increase capacity by raising investments into the sector.

Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9-million tonnes in 2012 and is expected to be boosted by new cement manufacturing plants to 18.1-million tonnes by 2018.

Dangote Industries is also targeting the southern African region and is expected to enter South Africa through Sephaku Cement whilst building another plant in Zambia.

Central once again to the investment drive in Southern Africa is the demand for infrastructure and housing which are some of the principal drivers of cement consumption in both Zambia and Zimbabwe.

As a result, we are generally bullish on the medium terms prospects for cement companies in the SSA for the next few years.

Source: Lafarge Cement

Our Stock Universe…

Company Country Price Mkt Cap Revenue PER (x) PER P/BV (x) EV EBITDA EV / EV/ Tn ROA ROE Div Current

(USD) (USD m) (USD m) (T +1) USD m USD m Ebitda (USD) Yield Call

Ashaka Nigeria 0.13 269.0 135.41 14.99 22.50 0.90 202 36 5.6 272.8 5.9% 6.5% 0.0% SELL

Dangote Nigeria 1.36 23,151 1,852 23.50 16.80 8.90 23,923 970 24.7 2,304.7 24.9% 43.7% 1.6% HOLD

CCNN Nigeria 0.07 95.60 93.84 12.50 9.30 2.50 90.8 8 11.3 192.1 6.5% 19.3% 0.0% REDUCE

Wapco Nigeria 0.79 2,141.0 545.72 23.47 11.90 5.00 2,318 162 14.3 799.2 17.1% 23.6% 1.0% ACCUMULATE

Bamburi Kenya 2.25 591.0 415.56 13.50 8.50 3.20 527.3 107 4.9 196.5 23.8% 24.9% 4.6% ACCUMULATE

ARM Cement Kenya 1.02 503.0 132.03 34.90 28.20 6.20 671.8 30 22.6 662.5 9.0% 19.1% 0.6% REDUCE

EAPCC Kenya 0.89 80.00 106.68 3.90 20.60 1.00 89.1 10 8.6 114.1 3.0% 29.6% 1.0% REDUCE

Twiga Tanzania 1.67 300.4 156.38 7.78 8.40 1.60 266.4 64 4.2 237.9 33.9% 30.7% 7.1% SELL

Tanga Tanzania 1.27 80.74 161.91 3.66 4.40 0.80 81.4 39 2.1 77.9 31.6% 27.2% 5.0% HOLD

Lafarge Zam Zambia 2.85 570.8 179.77 12.70 12.40 3.30 466.6 82 5.7 424.6 32.5% 28.2% 3.7% BUY

Lafarge Zim. Zimbabwe 1.10 88.00 69.94 19.00 12.50 2.60 87.5 11 7.7 259.0 19.6% 16.0% n/a HOLD

Average 2,533.69 15.45 13.30 3.27 10.15 503.75 2.5%

PPC Cement RSA 3.01 1,424.00 798.00 15.84 16.35 14.33 1,830.90 229.00 8.0 14.8% 56.1% 5.0%

Lafarge S. A. France 74.99 21,547.80 20,890.60 32.89 15.78 6.86 39,387.70 4,206.00 9.4 3.6% 3.4% 2.0%

Holcim Switzerland 74.75 24,319.30 22,918.60 38.93 14.49 2.52 38,599.20 4,322.50 8.9 3.4% 3.3% 1.8%

Heilderberg Germany 76.03 14,255.30 19,221.30 16.18 13.81 7.50 26,640.30 3,109.70 8.6 2.9% 3.3% 0.9%

Cemex Mexico 11.83 13,491.70 14,819.70 -15.36 na 1.07 30,308.00 2,450.00 12.4 2.1% -6.9% na

Average 15,007.62 17.70 15.11 6.46 27,353.22 2,863.44 9.45 2.4%

Sources: IAS Estimates, Bloomberg, Capital IQ - 31 Dec 2013

Dangote remains the largest stock by market cap in our stock universe, worth over USD 20bn…

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EAPCC and Tanga are currently priced the most competitively on a PER basis…

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On an EV/EBITDA basis Twiga and Tanga are the best priced…

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Dangote is also the largest generator of revenues dwarfing the rest with over USD 2bn in revenues

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However on a P/BV basis Ashaka and Lafarge Zim are best placed…

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Tanga Cement and EAPCC are relatively the cheapest cement producers on an Ev/ Tonne basis…

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Stock Charts

The Playing Field… (An Overview)

Global outlook: Global cement consumption has been growing at a CAGR of over 5.2% for the past ten years driven mostly by consumption from emerging markets such as China, India and Brazil. On an individual country basis, China is the single largest consumer of cement. It is expected to be one of the main drivers for increased demand for cement between now and 2016 wherein it will be accounting for close to 50% of total cement consumption as shown below.

…...China is also the global leader in the production of cement, mostly producing cement for its own domestic consumption as shown below…

The rise in consumption of cement has been fuelled principally by four critical factors and these factors are expected by the International Cement Review, to help increase cement consumption to c4.5 billion metric tonnes per annum by the end of 2016. These factors include the following:

Key drivers of global demand for Cement

Economic growth – mostly in developing / emerging markets (e.g. China, India, Brazil, Asia, etc.)

Rising global population. Global population growing just over 1% per annum and is projected to grow from the current 7.2 billion to 9.6 billion by 2050, up 33% (Source: UNPF)

Increased urbanisation rates & housing demand: In 1950, only 30% of the world population was urban. In 2000, 47% of the world population was urban. By 2030, it is expected that 60% of the world’s population will live in urban areas.

Rising infrastructure spend - as countries seek to provide goods and services to increasing numbers of their citizens.

In Sub Saharan Africa, cement consumption has been increasing at a rapid pace in line with the general rise in GDP. This has led to increasing infrastructure spend by SSA governments as they strove to close the gap which exists between infrastructure in SSA and in first world countries. In addition, thanks to the rapidly rising populations (& middle classes), demand for housing and associated infrastructure has soared, resulting in increased investment by private investors and development finance institutions as they identified opportunities to help close the supply-demand gap. ….Sub Saharan Africa Cement demand has also been driven by the same four fundamental drivers….

Source: International Cement Review.

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1. Economic growth: SSA projected by IMF

to be one of the fastest growing regions in the world…

IMF GDP annual growth rates… Economic growth drivers include: Commodities - Undoubtedly the rise in commodity prices has been important. Taking together agricultural commodities, timber, metals and minerals, and hydrocarbons, the AfDB estimates that natural resources have accounted for roughly a third of Africa’s growth since 2000. The remaining growth has come from other sectors, such as wholesale and retail, transportation, telecommunications, financial services and manufacturing. This has been due to rising disposable incomes, an increasing work force, and the fact that many economies are growing from a low base. Indeed, the AfDB notes that in the region, services sector growth exceeds that of resource sector growth, even in some long-standing resource rich economies. 2. Average SSA population growth rates in

Africa around 2.66% pa vs. global 1%. SSA’s population is expected by the UN to rise from 639m in 2000 to around 2.07bn by 2050. 3. Urbanisation: although Africa is

predominantly rural, with only 37.3 % living in urban areas in 1999, with a growth rate

of 4.87% in terms of urban population, Africa is the continent with the fastest rate of urbanisation. (Source: UN habitat) By 2030, Asia and Africa will both have higher numbers of urban dwellers than any other major region of the world. The UN projects that by 2050 over 60% of Africa’s population will be living in cities.

4. Infrastructure demand: According to AfDB,

Africa needs to spend USD 93bn per annum on infrastructure for the next 10 years to catch up with the developed World. Currently it is only spending USD 40bn…

Finance has been the main limiting factor in infrastructure development. As such, 59% of current SSA infrastructure projects are owned by governments, a further 17% of projects are owned by US and European investors and 36% of the funds are currently provided by developmental finance institutions. With the increasing urbanisation trend in SSA, the African Development bank estimates that close to USD 93bn needs to be spent per annum maintaining and upgrading infrastructure over the next ten years for Africa to close the gap with the more developed countries.

This is a gap that sees Africa with:

Less than 40% of its population having access to electricity

About a third of its rural population having access to roads.

Just c5% of agriculture being under irrigation

Only 34% of the population having access to improved sanitation

Access to clean water slightly better at about 65%

For all this to be accomplished, the continent will need a steady and reliable supply of cement for roads, power infrastructure, residential developments & dams. As a result, we are generally bullish on the prospects for cement companies across the region for the next few years.

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GDP Percentage Growth Rates

World Advanced economies European Union

Central and eastern Europe Developing Asia ASEAN-5

Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa

Source: IMF WEO Database

Setting the stage - (A Regional Round-Up)…

West Africa

In West Africa we look at the Nigerian cement manufacturers which have been on an active expansion drive. They have spent upwards of NGN 1.23tn on capacity increases with Dangote leading the drive.

This has mostly been as a result of the backward integration policy of the Nigerian government which has assisted the manufacturers by offering significant incentives for them to raise their output.

The end result of this is that from an installed capacity of around 4 million metric tonnes in 2002, Nigeria now has a cement capacity in excess of 22.5 million metric tonnes vs. a local demand estimated around c18.3 million metric tonnes p.a.

This has meant that the country has now achieved self-sufficiency in cement and as a result of this it has been able to significantly reduce imports. The various plant building projects including those implemented by Dangote are estimated to have cost almost USD 7.7bn in 7 years.

Dangote remains the single largest cement manufacturer in Nigeria with close to 19.25 million MT of capacity followed by Lafarge with 8.5 million metric tonnes of capacity across its various plants and subsidiaries.

Rapid growth in the population creates demand pressure towards ensuring basic shelter & utilities are available. In most of Nigeria’s urban centres, the problem of housing is not only restricted to quantity but also to the poor quality of available housing units.

The effect is manifested in overcrowding in houses. Nigeria is perhaps the fastest urbanising country on the African continent and one of the most important challenges facing the country is the provision of affordable housing. As more Nigerians make towns and cities their homes, greater demand is created for social & economic amenities and these challenges will need to be urgently addressed.

Nigerian cement sales reached c18.3 million metric tonnes in December 2012 having grown at a CAGR of 10.2% since 2004.

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Nigerian construction sector has averaged a growth rate around 6.45% for the past nine years…helping to drive the demand for cement and cement products… Dangote remains the most dominant producer of cement in Nigeria as seen below…

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Dangote LafargeWapco

UNICEM Ashaka CCNN Edo CementUkpilla

Purchem

Main manufacturers est. FY 12 Production Capacity

Source: Dangote.com

According to statistics from UN Habitat, the percentage of the population which is urbanised is set to rise above 65% by 2030, up from c47% as of the end 2003.

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East Africa

In 2012, cement demand in the East African market grew by an estimated 7% to 8.5 million tonnes compared to a 9% growth in 2011. On average over the past decade, East African cement consumption has been growing at a CAGR close to 14% and it is expected to continue growing in the near future at around 8% per annum.

As a result, regional and international cement companies have embarked on ambitious investment and expansion drives in East Africa with capacities expected to reach 14.4 m tonnes by 2017.

Kenya and Tanzania, the markets which we examine, are currently producing less than the market demand.

Dangote and Lafarge have been amongst the leading investors in additional capacity in East Africa with Lafarge expanding capacity within its subsidiaries in the region whilst Dangote has earmarked investments into new plants in both Tanzania and Kenya.

Imports from Asia e.g. Pakistan and China, have made a significant impact on the cement industry in East Africa and the Chinese have in addition invested into new cement companies such as Savannah in Kenya as they have been playing a central role in the development of infrastructure in East Africa.

All in all, new and old players are currently jostling for a share of the booming cement market in East Africa using imports as well as expansion of cement production capacities.

Demand for cement in Kenya and Tanzania, has risen to 3.94m metric tonnes and … respectively, up by over 90% over the past five years. Infrastructure and housing remain key drivers for continued high demand for cement in East Africa with Tanzania estimated to be facing a housing backlog of over 3 million houses due to a high urbanisation rate.

Kenyan construction sector has averaged a growth rate around 6.45% for the past nine years…

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…Giving rise to growth in demand for cement However, supply currently exceeds demand for cement in Kenya… As a result the excess is being exported to the EA region.

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Tanzanian Cement production has been growing at a CAGR of 10.3% for the last six years. On the back of high demand for cement

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Southern Africa

In Zambia and Zimbabwe, demand for cement continues to increase dramatically with cement manufacturers again striving to increase capacity by raising investments into the sector.

Rapid infrastructure development has been a key driver of the demand for cement with Frost and Sullivan estimating that up to USD 940m would be invested in the cement industries of the three main markets - South Africa, Zambia and Zimbabwe - between 2013 and 2018.

Domestic cement consumption in Zimbabwe is estimated to have risen by 10% in 2012 to 984,000 tonnes p.a. from an estimated 898,000 in 2011. In Zambia domestic cement consumption is estimated to be around 1.4 million tonnes per annum having risen by 13.2% in 2012.

Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9m tonnes in 2012 and is expected to be boosted by new cement manufacturing plants to 18.1m tonnes by 2018.

Dangote Cement also intends to enter the the Southern African cement market. In South Africa it intends to enter the market through Sephaku Cement, an associate company of JSE-listed Sephaku Holdings and a 64%-owned subsidiary of Nigeria's Dangote Cement.

Sephaku is currently nearing completion of a 1.2-million tonne per annum cement plant in South Africa's North West province. This is expected to come on-line in the first half of 2014 and will be the first new entrant to the South African cement production market to open a new plant since 1934.

In Zambia, Dangote is estimated to have spent close to USD 400m to build a 1.5Mt/yr. cement plant in Ndola, Zambia. Cement production is expected to start at the plant in mid-2014.

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Source: USGS Zambia

Major cement companies Location of main facilities Est. Annual capacity

Lafarge Cement Zambia plc Chilanga II plant, about 15 km 830,000.

south of Lusaka

Ndola plant 450,000.

Chilanga I plant, about 15 km 200,000.

south of Lusaka

Scirocco Enterprises Ltd. About 18 kilometers southwest of Lusaka 100,000.

Zambezi Portland Cement Ltd. Ndola 330,000.

Source: USGS

Zimbabwe

Major cement companies Location of main facilities Est. Annual capacity

Pretoria Portland Cement Colleen Bawn, about 115 km 1 000 000

southeast of Bulawayo

Lafarge Cement Zimbabwe Ltd. Harare 450 000

Pretoria Portland Cement Bulawayo 800 000

Sino-Zimbabwe Cement Gweru 300 000

Source: USGS

The Players…

Lafarge Cement…The main man…

Lafarge Cement is the global leader in the production of cement, generating revenues of over USD 14bn as at the end of 2012.

Lafarge is located in 58 countries globally with over 161 production sites for cement. Background & Operational Summary

Lafarge has a significant presence in Africa with over 25 years of experience. As of December 2012 Africa and the Middle East supplied close to a third of group cement revenues.

It currently operates 24 production sites spread over 10 countries which include: Benin, Nigeria, Cameroun, Uganda, Kenya, Tanzania, Malawi, Zambia, Zimbabwe and South Africa which are strategically located with facilities for exports to other African countries

Dangote Cement… A burgeoning African titan…

Dangote is one of Africa’s leading cement manufacturers generating revenues of over USD 2.2bn as of the end of FY 12.

It currently has a market share of over 60% of the Nigerian cement market and it is currently in the process of expanding aggressively across the African continent and establishing manufacturing bases in most of the SADC countries including South Africa.

Background & Operational Summary

As of FY 12, Nigeria provided over 90% of Dangote’s revenues and profits. Management however, expect this to change by 2015 with the rest of Africa expected to provide up to 25% of all revenues despite Nigeria continuing to be the main market.

In total Dangote is expecting to spend around USD 4.7bn over the next few years in order to establish operations in 14 countries. Strong revenue growth is expected once the new plants come online.

LAFARGE: AFRICA OPERATIONS

Source: www.lafarge.com

Dangote: Africa Operations & projects

Source: Dangote Cement FY 12 Presentation

http://www.lafarge.com/

Holcim Cement… Holding steady…

The Group operates in around 70 countries globally and employs approximately 78,000 people

As of FY 2012 it had revenues of over USD 22.9bn, sold close to 143 million tonnes of cement worldwide and owned 147 cement and grinding plants.


Founded in Switzerland in 1912, Holcim is one of the world's leading suppliers of cement and aggregates (crushed stone, sand and gravel).

As of FY 12, Africa & the Middle East provided up to 4.3% of Holcim’s total revenues with Asia and Europe providing the bulk of its sales.

Holcim’s current capacity is around 10.7m metric tonnes of cement scattered across Africa, Middle East and the Indian Ocean region. It expects cement demand to hold steady across its African portfolio.

Heidelberg Cement… A hidden gem

Heidelberg is one of the world’s largest manufacturers of building materials.

As of FY 2012, group revenue amounted to USD 14.67bn and it produced up to 89m tonnes of cement globally. Heidelberg currently owns 103 cement and grinding plants with the capacity to produce up to 122m tonnes of cement per annum.. Background & Operational Summary

Heidelberg was formed in Germany in 1873 and it has been in Africa since the 1960s. It currently operates 4 cement plants and 9 grinding mills in Central & West Africa.

In FY 12, Heidelberg sold 9.2m tonnes of cement in Africa, which comprised 8% of total group revenues.

Heidelberg is expanding in Africa due to

the high cement demand with most of its plants being close to full capacity.

Markets with expansion plans include Liberia, Ghana, Togo, Burkina Faso, the DRC and Tanzania.

HOLCIM: AFRICA OPERATIONS

Source: HOLCIM H1 2013 presentation

Heidelberg Cement: Africa Operations

Source: www.Heidelberg.com

http://www.heidelberg.com/

PPC …Ramping up production.

Pretoria Portland Cement is one of South Africa’s leading cement manufacturers generating revenues of around USD 800m.

It currently has a market share of over 35% of the South African cement market and it supplies slightly over 60% of the cement consumed in Southern Africa through its manufacturing bases in South Africa and other SADC countries.


PPC was formed in Pretoria in 1888 and has grown to become the leading cement producer in South Africa.

As of FY 13, cement comprised 86% of PPC’s total revenues with SSA ex SA? supplying up to 24% of PPC’s total revenues.

PPC is currently in the process of investing in its production capacity across various countries in SSA which include DRC, Zimbabwe, Mozambique, and Ethiopia.

PPC’s intentions are for it to earn up to 40% of its total revenues from SSA ex-SA by 2016...

Source: www.ppc.co.za

Other potential Pan African players…

Afrisam

AfriSam is one of the most widely spread cement, aggregate and ready-mix groups in the Southern African region, with operations in South Africa, Botswana, Lesotho, Swaziland and Tanzania.

Founded in 1934, AfriSam has an annual cement production capacity of 5.8m tonnes produced from seven production facilities and distributed to customers through strategically located cement depots.

AfriSam currently has a 62.5% interest in Tanzania-based and listed Tanga Cement Company Limited.

ARM Cement

Formerly Athi River Mining of Kenya. It manufactures cement on sites in Tanzania, Kenya and Rwanda. In addition to this is also produces Sodium Silicates at plant in Kenya and in South Africa, with Kenya being capable of manufacturing up to 75000 tonnes, whilst South Africa can produce up to 30000 tonnes of silicates.

Cement is currently the highest contributor to group revenues with Kenya being the major market for the group.

ARM is in the process of deepening its foothold in East Africa and is intent on expanding its production capacity to more than 5m metric tonnes of cement by the end of 2015

PPC: AFRICA OPERATIONS

In summary…

High GDP growth rates and a rapidly expanding construction sector has led to double digit growth rates cement consumption across the markets we cover over the past five years.

Population growth and urbanisation rates have also been significant drivers of demand as mentioned earlier. UN habitat estimates that the average SSA country will experience a growth rate of approx. 25% in its urban population between now and 2030 which will need to a huge increase in demand for cement for housing and infrastructure.

Per Capita consumption rates of cement in SSA remain significantly below the global average of 513kgs per capita leaving room for future expansion and growth.

3 key sector wide risks include:

Power & energy supply: Power and energy supply are a critical issue facing most of the cement producers we cover. Energy comprises up to 30% of the cost of manufacturing cement and in East Africa, rising energy tariffs have been eroding the competitive advantage of producers, whilst weak and erratic supplies have been the bane of cement producers in West and Southern Africa.

Rising competition: The rapid growth rate in cement consumption across SSA has attracted regional and international players to invest and increase distribution of cement into SSA countries. In the case of Asian producers, the low cost of transporting cement & clinker across the seas has made them an enduring threat to producers from South Africa to Kenya & Tanzania where imports have captured close to 10% of the cement markets.

Over capacity: The advent of increased levels of competition within the SSA cement markets has brought with it added risks for potential over-capacity. This is especially the case in Kenya, Tanzania and Zambia where Dangote intends to build cement plants, which has induced a response from incumbent producers who have also decided to increase their production capacities. In our view however, any potential over supply situation should not be expected to last long due to the rapid growth in cement demand across the markets we cover and the low per capita consumption rates. As a result, we do not foresee a need for companies to moth-ball plants in the medium to long term despite the rising capacity and competition.

UN projects that by 2030, an average of over 53% of people in SSA will be staying in urbanised environments, creating demand for the provision of housing etc. and ensuring sustainable demand for cement…

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Per capita consumption of cement across SSA remains lower than the global average leaving room for future growth

Source: IAS Estimates, Dangote, ARM, PPC

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Athi River Mining (Kenya) Ltd, now known as ARM Ltd, was established in 1974 and listed on the NSE in 1997. Its focus is in the manufacturing and sale of cement, mining and processing of industrial minerals and chemicals, as well as trading in other building products and the sale of fertilizers. ARM currently operates in four countries in SSA with its main divisions located in Kenya.

Regional diversification enables the company to take advantage of the growing demand for cement in East Africa…

ARM currently produces cement in Kenya, Tanzania and Rwanda, all of which have high demand for cement with low per capita consumption rates leaving room for possible expansion in consumption. Whilst the Kenyan market is currently in surplus, ARM has the ability to export part of its production regionally benefitting from the high economic growth rates in East Africa.

Rising capacity allows ARM ability to take advantage of growing market…

The Tanzanian and Kenyan cement markets in which ARM currently operates have five year CAGR’s in excess of 13% per annum. In order to maintain its current market share and position as one of the largest cement companies in EA, ARM is in the process of expanding production capacity. Capacity at its Tanzanian operations is expected to rise to 1.95m t per annum whilst the Kenyan operation will be able to produce up to 5m t per annum by 2015.

Valuation ARM currently trades on a TTM PER of 28.0x, P/BV of 6.2x and DY of 0.6%. Using a DCF valuation we arrive at a target price of KES 76.8, representing downside of 12.2% from the current share price. Whilst margins will improve going forward due to increased efficiency and reduced use of clinker imports, we see ARM’s price as being currently overpriced and therefore place a REDUCE recommendation on the stock.

Equity Research Kenya January 2014 Cement

Recommendation REDUCE

Bloomberg ARM KN Equity

Current Price (KES) 87.5

Current Price (USc) 101.6

Target Price (KES) 76.8

Target Price (USc) 89.2

Upside (%) (12.2)

Liquidity

Market Cap (KES m) 43 337

Market Cap (USD m) 503

Shares (m) 495

Free Float (%) 64.7%

Ave. daily vol ('000) 1 339

Price Performance

Price, 12 months ago 44.4

Change (%) 97.1


Change (%) 38.2

Financials (KES m) 31 Dec FY 2012 2013F 2014F

Turnover 11 401 14 809 19 029

EBITDA 2 568 3 113 3 793

Net Finance Income (428) (527) (568)

Attributable Earnings 1 538 1 943 2 788

EPS (KES) 2.51 3.10 3.92

DPS (KES) 0.50 0.62 0.79

NAV/Share (KES) 14.16 16.78 20.09

Ratios

RoaA (%) 9.0 9.6 11.3

RoaE (%) 19.1 20.1 21.3

EBITDA Margin (%) 22.5 21.0 19.9

Valuation Ratios FY 2012 2013F 2014F

Earnings Yield (%)* 3.6 3.5 4.5

Dividend Yield (%) 0.6 0.7 0.9

PE (x)* 28.0 28.2 22.3

PBV (x) 6.2 5.2 4.4

EV/EBITDA (x) 22.6 18.6 15.3

NB: ** TTM

STRENGTHS WEAKNESSES

Well advanced in terms of EA regional Expansion is aggressive and some capacity

expansion assumptions may turnout otherwise

Diversified earnings stabilise growth Pan African expansion may shrowd

management focus

High debt levels + potential capital raise

OPPORTUNITIES THREATS

High growth rate in existing EA markets Rising competition amy result in

Capacity expansion will allow it to excess capacity, ultimately harming margins

compete effectively in EA

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ARM Kenya vs. STEIAFDP INDEX

ARML KN Equity STEIAFDP Index

14

During FY 12 ARM Cement posted results in which revenue rose by 39.35% y-o-y to KES 11.4bn, with cement sales rising by 64% as market share increased in Kenya and Rwanda, and 3 months contribution came from the Dar-es-Salaam plant as it became operational in October 2012. PBT leapt by 31.36% y-o-y to KES 1.79bn, while an effective tax rate of 30.42% from 15.52% in FY 11 caused PAT to rise at a slower 8.27% to KES 1.25bn. PBT margins declined slightly to 15.70% (FY 11: 16.67%), while the net profit margin came in at 10.93% (vs. 14.06% in FY 11). On the balance sheet, net working capital improved to KES 1.43bn from a negative value of KES 696.8m as at the end of FY 11. The current ratio also improved to 1.22x in FY 12 vs. 0.84x in FY 11. Net cash inflows from operations of KES 216.52m were well below the FY 11 figure of KES 1.87bn due mainly to an outflow of KES 1.37bn for working capital changes in contrast to an inflow of KES 385.26m in the previous financial year. Net cash used in investing activities fell by 32.34% to KES 2.77bn whilst net cash from financing activities more than quadrupled to KES 4.53bn due to convertible debt issued to the Africa Finance Corporation (AFC) to complete funding requirements for the clinker plant in Tanga. Consequently, at the end of the period, cash & cash equivalents stood at KES 770.73m (vs. FY 11: -KES 1.20bn). ARM Cement posted turnover of KES 10.2bn, (up 3.18% y-o-y from KES 7.7bn) for the first nine months of 2013 as new capacity in Tanzania came online and sales volumes increased. EBITDA margins fell by 155 basis points to 22.52% in 9M 13 (vs. 24.06% in 9M 12), largely as a result of higher operating costs. EBITDA thus grew by only 23.68% y-o-y to KES 2.3bn from KES 1.2bn in the previous year. An unrealised exchange rate gain of KES 18.1m in 9M 13 (vs. a loss of -KES 42.8m in 9M 12), led to a 27.51% y-o-y increase in PBT to KES 1.5bn despite a 55 basis point decline in the PBT margin to 14.92%. The tax rate for the period was relatively unchanged at 30.72% (vs.30.79% in 9M 12) resulting in a tax charge of KES 469.4m. This led to an attributable profit of KES 1.1bn, up 27.92% y-o-y from KES 826.5m. Net working capital for the nine months was down by 40.67% y-o-y to KES 850.5m from KES 1.4bn in the previous year, whilst net cash fell by 30.18% y-o-y to KES 2.2bn.

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Earnings

Revenues EBITDA Profit After Tax

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2007 2008 2009 2010 2011 2012

Margins

EBIT margin% Net Income Margin % Gross Margin

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Profitability

Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE

Source: Company Reports

FY 12 & 9M 13 Financial & Operational Review

Cash from operating activities grew by 126.94% to KES 2.4bn whilst cash used in investments increased from KES 1.6bn in 9M 12 to KES 2.6bn in 9M 13 (+58.08%). A cash outflow of –KES 253.2m in 9M 13 (vs. an inflow of KES 3.3bn in 9M 12), led to a decline in cash and cash equivalents to KES 2.2bn for 9M 13 vs. closing cash and equivalents of KES 3.1bn in 9M 12.

15

Outlook

Rising revenues and increased efficiencies expected to make a positive impact on profitability over the long run… ARM has seen its gross revenues rise at a CAGR of 24.04% for the past six years with EBITDA and PAT also rising at rates above 20% over the same period. Operating margins have fallen slightly over the past two years due to high levels of competition which have reduced pricing power. However, we expect that increased efficiencies and the reduced use of imported clinker in Tanzania as the new cement plant in Tanga comes on-line will impact the company’s financial results positively in the medium to long term. Capacity expansion to continue in lieu of the high cement demand in operating markets… According to ARM management, the company intends to continue expanding its production capabilities in Kenya and Tanzania on the back of continued high demand for cement. In Tanzania, ARM intends to complete a new 1.2Mt/year plant in Tanga by Q1 14 to add to the 0.75Mt/year plant it recently commissioned in the country. This will take the company’s total production capacity in Tanzania to 1.95Mt/yr. placing it in a better position to compete with Twiga, Tanga and other new entrants such as Dangote. Management is targeting a December 2014 market share of the Tanzanian cement market of 25%, up by 8 percentage points from the current 17%. In Kenya, ARM hopes to embark on the construction of a USD 250m clinker factory in order to try and expand its production capacity to 5Mt/p.a. This will double the company’s cement production in Kenya from the current 2.5Mt/p.a. by the end of 2015. This additional production capacity will enhance ARM’s ability to compete for market share as demand for cement increases in the economy should demand for cement in Kenya continue to growing at the current five year historic CAGR of 13.16%. Competition however, remains very high despite rising demand sparking worries of over capacity… Kenya remains ARM's main cement market supplying over 90% of its total revenues as of the end of 2012. Despite the high growth of the market, Kenya remains in surplus with production & supply exceeding demand. Cement prices in Kenya have thus been stable and low, around KES 700 per tonne. The entrance of new competitors such as Dangote and National Cement will add to the existing over supply and as a result, we foresee pricing remaining weak in the medium term with most producers being forced to continue to export excess supply regionally.

(1 000)

(500)

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500

1 000

1 500

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

2007 2008 2009 2010 2011 2012

KES m

illi

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Liquidity

Working capital Current ratio Quick Ratio

AS of December 2012, Kenya supplied the bulk of ARM’s revenues followed by Tanzania as seen in graph below…

Kenya

Tanzania

Rwanda

South Africa

0 2 000 4 000 6 000 8 000 10 000 12 000

KES millions

Revenues

Source: Annual Financial Reports

Valuation and Recommendation

ARM currently trades on a TTM PER of 28.0x, P/BV of 6.2x and div. yield of 0.6%. Using a DCF valuation we arrive at a target price of KES 76.8, representing a downside of 12.2% from the current share price. Whilst increased efficiency and reduced use of clinker imports are likely to impact positively on the business, we expect margins to remain weaken slightly going forward due to the impact of the highly competitive environment in Kenya and Tanzania where some of its plants are located in coastal regions and vulnerable to competition from imports. As a result we see ARM as being currently overpriced and therefore place a REDUCE recommendation on the stock.

ARM East African Production Sites

Source: ARM Annual reports In addition to the above, ARM also produces Sodium Silicate at a 30,000 p.a. plant in South Africa.

16

Financial Summary

KES Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 3 882 4 619 5 145 5 965 8 181 11 401 14 809 19 029

Y-o-Y % NA 19.0% 11.4% 15.9% 37.1% 39.4% 29.9% 28.5%

Gross Profit 1 403 1 675 1 855 2 099 2 631 3 229 4 146 5 328

Y-o-Y % NA 19.4% 10.7% 13.2% 25.3% 22.8% 28.4% 28.5%

EBITDA 972 1 158 1 223 1 536 2 085 2 568 3 113 3 793

Y-o-Y % NA 19.1% 5.7% 25.6% 35.7% 23.2% 21.2% 21.8%

EBIT/Operating Profit, exlc exceptionals 764 952 997 1 216 1 668 2 141 2 660 3 293

Y-o-Y % NA 24.6% 4.7% 22.0% 37.2% 28.3% 24.3% 23.8%

Attributable Net Income/Profit After Tax 423 503 646 1 081 1 152 1 242 1 538 1 943

Y-o-Y % NA 19.0% 28.4% 67.3% 6.6% 7.7% 23.8% 26.4%

Per Share data

Attributable Diluted EPS 0.85 1.02 1.30 2.18 2.33 2.51 3.10 3.92

Y-o-Y % NA 19.0% 28.4% 67.3% 6.6% 7.7% 23.8% 26.4%

Dividend Per share (DPS) 0.25 0.25 0.30 0.35 0.40 0.50 0.62 0.79

Y-o-Y % NA 0.0% 19.8% 16.7% 14.2% 25.0% 24.6% 26.4%

NAV/Basic Share 3.5 4.3 8.3 10.0 12.1 14.2 16.8 20.1

Y-o-Y % 31.0% 22.6% 94.1% 19.7% 21.3% 16.9% 18.5% 19.7%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 36.1% 36.3% 36.1% 35.2% 32.2% 28.3% 28.0% 28.0%

EBITDA margin % 25.0% 25.1% 23.8% 25.8% 25.5% 22.5% 21.0% 19.9%

EBIT margin% 19.7% 20.6% 19.4% 20.4% 20.4% 18.8% 18.0% 17.3%

Net Income Margin % 10.9% 10.9% 12.6% 18.1% 14.1% 10.9% 10.4% 10.2%

Ratios

ROaA 19.8% 17.5% 10.8% 8.5% 9.0% 9.0% 9.6% 11.3%

ROaE 27.6% 26.1% 20.7% 23.8% 21.1% 19.1% 20.1% 21.3%

Earning yield on current price 1.0% 1.2% 1.5% 2.5% 2.7% 2.9% 3.5% 4.5%

Dividend yield current price 0.3% 0.3% 0.3% 0.4% 0.5% 0.6% 0.7% 0.9%

Cashflow

Cash Flow from Operating Activities 92 38 273 503 160 2 039 415 2 276

Net Cash in Investing Activities 20 (358) (1 291) (2 454) (3 941) (4 093) (2 769) (197)

Net Cash in Financing Activities (3) 1 785 856 3 897 3 241 785 4 328 (529)

Cash at the end of the period 109 1 575 1 412 2 046 1 506 (1 204) 770 2 321

17

Bamburi Cement Limited (BMBC), was founded in 1951 and in 2001, Lafarge, the world’s largest cement company, became the company’s biggest shareholder. BMBC’s first plant started production in Mombasa in 1954 with a capacity of 140,000 tonnes of cement and today the company has the capacity to produce up to 2.5m tonnes at its two Kenyan plants as well as 850,000 tonnes at its Hima subsidiary in Uganda.

Leading cement manufacturer in Kenya… BMBC’s production capacity of 3.35m metric tonnes of cement makes it the largest cement company in Kenya and East Africa. It currently exports part of its production to other East African countries such as DRC, Reunion, Rwanda and South Sudan. BMBC currently has a c40% share of the Kenyan cement market and benefits from strong technical support from its parent company Lafarge.

Rising Capacity levels to cope with competition… During FY 12 and H1 13, BMBC faced an increased level of competition from local and international cement manufacturers. The high growth rate in the Kenyan cement market, (CAGR of 13.16% over the past five years), has increasingly attracted local and international companies to increase capacity, whilst others have looked to establish green-field operations, (e.g. Dangote). Whilst competition levels are expected to remain high, Kenya and East Africa are a growing cement market and the current economic growth rate will allow the market to accommodate more players.

Valuation Using a DCF valuation, we value BMBC at KES 215.1 indicating an upside of 10.3%. It currently trades on a TTM PER of 13.9x, PBV of 3.2x and DY of 4.6%. We believe the company remains well positioned in an attractive market despite the increased competition. Consequently we have an ACCUMULATE rating on the stock.

Equity Research Kenya January 2014 Cement


The most dominant in Kenya with c40% market share Prime asset located away from the

Ability to push it products at premium Nairobi market

prices Has been losing market share to

Increased cement capacity at Hima competition

which has access to inland markets


Cash generation capacity places it ahead Prices can be undercut by competition

of international competition Susceptible to fuel price hikes

High growth in cement market, c13% CAGR in Kenya Significant capacity addition in East

Newer and more efficient plants Africa as a region.

Recommendation ACCUMULATE

Bloomberg Code BMBC KN Equity

Current Price (KES) 195.0


Target Price (KES) 215.1


Upside (%) 10.3

Liquidity



Shares (m) 263



Price Performance


Change (%) 410.1


Change (%) 223.5

Financials (KES m) 31 Dec F2012 2013F 2014F

Turnover 35 884 36 602 37 517

EBITDA 9 205 9 583 9 897

Net Finance Income (374) (94) 6


EPS (KES) 14.44 15.63 16.79

DPS (KES) 9.00 9.74 10.46

NAV/Share (KES) 60.68 68.47 76.65

Ratios

RoaA (%) 23.8 24.9 25.7

RoaE (%) 24.9 24.2 23.1

EBITDA Margin (%) 25.7 26.2 26.4

Valuation Ratios Current 2013F 2014F



PE (x)* 13.9 9.0 8.4

PBV (x) 3.2 2.8 2.5

EV/EBITDA (x) 4.9 4.8 4.6

*NB: TTM

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Bamburi vs. S&P Africa Frontier Index (Rebased)

BMBC STEIAFDP Index

18

Bamburi Cement released its FY 12 results in which revenue rose by 4.48% y-o-y to KES 37.5bn (FY 11 revenue KES 35.9bn). Coupled with a faster rise in operating costs of 9.74% to KES 30.7bn, operating profit fell by 13.99% to KES 6.8bn. Operating profit margin thus shrank to 18.25% from 22.17% in FY 11. The company attributes the tepid turnover growth to a decline in growth of export sales into inland African markets in H2 12 due to political instability. However, despite the lack of a geographical breakdown for the top-line revenue growth, we believe that intensifying competition also affected its sales in its key Kenyan market. The increase in operating costs was driven by higher inflation in both Kenya & Uganda and the removal of power subsidies in Uganda that led to a 70% power cost increase as well as Uganda’s higher than budgeted for reliance on clinker imports from Kenya. Finance costs shrank by 32.89% to KES 251m with PBT closing 15.24% lower at KES 7.2bn. PAT dropped by 16.68% y-o-y to KES 4.9bn. EPS was KES 12.17 compared to KES 14.44 in FY 11. A final dividend per share of KES 8.50 was declared resulting in a total dividend per share of KES 10.50 for FY 12. On the balance sheet, Shareholder’s equity was up 28.86% y-o-y to KES 30.9bn. Current assets rose by 23.26% to KES 16.5bn whilst non-current liabilities rose to KES 25.6bn, up 31.92% y-o-y from KES 20.2bn in FY 11. This led to an improvement in working capital to KES 9.5bn, up 14.43% y-o-y. In terms of cash flow, net cash generated from operations improved by 31.36% y-o-y to KES 7.5bn while net cash used in investing activities didn’t change much y-o-y, at KES 1.42bn (FY 11: KES 1.32bn). Net cash used in financing activities was slightly lower at KES 4.4bn in comparison to KES 4.8bn in the previous financial year. Consequently, cash & cash equivalents were higher at KES 8.8bn as at the end of FY 12 (vs. KES 7.1bn at FY 11). During H1 13, turnover fell by 17.50% y-o-y to KES 15.8bn as a result of a general market slow-down in the first quarter as election uncertainty afflicted the market and infrastructure projects were delayed. The operating margin was up 77 basis points y-o-y resulting in an operating profit of KES 3.1bn, down 14.06%. Lower finance costs of KES 74m (vs. KES 153m in H1 11), coupled with lower investment income of KES 267m, (down 38.19% y-o-y) led to a PBT of KES 3.3bn (-11.91% y-o-y). The PBT margin however remained slightly unchanged, (up a marginal 131 basis points to 20.64%). Attributable profit for period of KES 2.3bn the half year was lower by 10.24% from that achieved in H1 12 of KES 2.6bn.

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ROaA ROaE


FY 12 & H1 13 Financial & Operational Review

Total assets fell slightly to KES 35.1bn, (-2.51% over six months), with working capital also falling to KES 8.6bn, down 8.76% from KES 9.5bn at FY 12 Shareholder’s equity also declined slightly to KES

27.9bn from KES 28.4bn in FY 12.

19

On the cash flow statement, net cash generated from operating activities at KES 2.5bn was down 45.2% from H1 12. Net cash used in investing activities also fell to KES 336m at H1 13 from KES 550m at H1 12. Cash used in financing remained relatively unchanged y-o-y resulting in a net cash outflow of KES 1.2bn, (vs. a cash inflow of KES 529m in H1 12). As a result cash at the end of H1 13 of KES 7.5bn was lower by 182 basis points from that achieved at the end of H1 12.

Outlook

Demand for cement set to continue due to infrastructure & housing deficit… We believe that the infrastructure and housing deficit in East Africa is set to ensure that demand for cement is sustainable going forward. At present, consumption of cement over the past eight years has been rising at a CAGR of 13.61% per annum with the current average economic growth rate of over 5% per annum proving one of the main drivers. Kenya and Uganda are expected to continue to witness high rates of cement consumption and Bamburi should be expected to be one of the main beneficiaries of this rising demand. However, rising competitive forces have been affecting profit growth… The increased competition in Kenya is likely to continue to put cement prices under pressure and hence to some extent hold back Bamburi’s top-line growth. Consequently, Bamburi needs to continue trying to reduce and control its operating expenditure, (i.e. use cost leadership as a strategy). An example of this is reducing the use of imported clinker in its operations by improving capacity utilisation and lowering of its energy costs through increased use of alternatives such as biogas and coal for its furnaces. Inflation in both Kenya and Uganda has also come down and this should help lower operating costs further. Bamburi expected to retain leadership position in Kenya’s cement sector… Despite the higher competition we believe that Bamburi’s regional export strategy coupled with its market leadership position in Kenya, provide it with a solid base from which to compete effectively. With high cash flows and a strong balance sheet, the company should be able to withstand the current market volatility. As a result of the continued regional economic expansion, and robust demand for cement we maintain a positive outlook for Bamburi in Kenya

and Uganda.

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Shareholder's Equity Retained Earnings

Source: Company financial Reports


BMBC currently trades on a TTM PER of 13.9x, PBV of 3.2x and div. yield of 4.6%. Using a DCF valuation, we value BMBC at KES 215.1 indicating upside of 10.3% to the current share price. We believe that the company remains well positioned in an attractive market. With its strength and experience in management coupled with the influence of the main shareholder Lafarge, Bamburi should be able to withstand the higher competition from Asian producers and new investors. This should see the company manage to maintain or slightly improve its margins in the medium term as cement demand increases in Kenya its main market. As a result, we have an ACCUMULATE rating on the stock.

20

Financial Summary

KES Millions 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 22 111 27 467 29 994 28 075 35 884 36 602 37 517

Y-o-Y % NA 24.2% 9.2% -6.4% 27.8% 2.0% 2.5%

Gross Profit 10 343 12 552 10 815 9 618 9 964 10 248 10 692

Y-o-Y % NA 21.4% -13.8% -11.1% 3.6% 2.9% 4.3%

EBITDA 5 629 6 646 8 568 8 294 9 205 9 583 9 897

Y-o-Y % NA 18.1% 28.9% -3.2% 11.0% 4.1% 3.3%

EBIT/Operating Profit, exlc exceptionals 4 974 5 961 7 732 7 282 7 954 8 382 8 779

Y-o-Y % NA 19.8% 29.7% -5.8% 9.2% 5.4% 4.7%

Attributable Net Income/Profit After Tax 3 596 3 187 6 649 5 089 5 243 5 676 6 093

Y-o-Y % NA -11.4% 108.6% -23.5% 3.0% 8.2% 7.4%

Per Share data

Attributable Diluted EPS 9.91 8.78 18.32 14.02 14.44 15.63 16.79

Y-o-Y % NA -11.4% 108.6% -23.5% 3.0% 8.2% 7.4%

Dividend Per share (DPS) 6.00 0.00 0.00 11.00 9.00 9.74 10.46

Y-o-Y % NA -100.0% NA NA -18.2% 8.2% 7.4%

NAV/Basic Share 39.2 42.7 53.7 55.6 60.7 68.5 76.7

Y-o-Y % NA 8.9% 25.8% 3.4% 9.2% 12.8% 12.0%

Margin Performance

2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 46.8% 45.7% 36.1% 34.3% 27.8% 28.0% 28.5%

EBITDA margin % 25.5% 24.2% 28.6% 29.5% 25.7% 26.2% 26.4%

EBIT margin% 22.5% 21.7% 25.8% 25.9% 22.2% 22.9% 23.4%

Net Income Margin % 16.3% 11.6% 22.2% 18.1% 14.6% 15.5% 16.2%

Ratios

ROaA 47.2% 24.4% 25.6% 22.3% 23.8% 24.9% 25.7%

ROaE 50.5% 21.4% 38.0% 25.7% 24.9% 24.2% 23.1%

Earning yield on current price 5.1% 4.5% 9.4% 7.2% 7.4% 8.0% 8.6%

Dividend yield current price 3.1% 0.0% 0.0% 5.6% 4.6% 5.0% 5.4%

Cash Flow

Cash Flow from Operating Activities 4 146 9 008 8 735 5 680 7 461 6 722 5 789

Net Cash in Investing Activities (5 840) (1 912) (3 409) (1 373) (1 385) 262 (79)

Net Cash in Financing Activities 3 169 (2 426) (4 155) (4 830) (4 404) (4 289) (4 285)

Cash at the end of the period 1 758 6 427 7 616 7 136 8 749 2 695 1 425

21

Equity Research Kenya January 2014

Cement


Bloomberg EAPC KN EQUITY

Current price (KES) 76.5

Current price (USc) 88.9

Target price (KES) 66.3

Target price (USc) 77.0

Upside (%) (13.3)

Liquidity


Shares (m) 90



Price Performance


Change (%) 96.2


Change (%) 31.9

Financials (KES m) 31 Dec F2013 2014F 2015F

Turnover 9 211 10 040 10 969

EBITDA 895 960 1 012


Attributable Earnings 1 775 324 377

EPS (KES) 19.67 3.59 4.19

DPS (KES) 0.75 0.36 0.42

NAV/Share (KES) 78.78 82.60 86.43

Ratios

RoaA (%) 3.0 3.3 3.7

RoaE (%) 29.6 4.5 5.0

EBITDA Margin (%) 9.7 9.6 9.2


Earnings Yield (%) 25.8 4.7 5.5


PE (x) 3.9 21.2 18.2

PBV (x) 1.0 0.9 0.9

EV/EBITDA (x) 8.6 8.0 7.6


Well positioned within Kenyan market A weak strategy may prevent the

with market share of c24% company from maximising regional

Rising margins owing to tighter cost opportunities.

controls

Strong shareholding structure


Public sector stake offers Rising competition from Dangote

opportunity to maintain gvt patronage. and other international manufacturers.

High growth in region offers export Imports from Asian exporters may

opportunities withing East Africa continue to under cut pricing.

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EAPCC vs. S & P Africa Frontier Index (Rebased)

EAPCC KN Equity STEIAFDP Index

East African Portland Cement Co. Ltd., EAPCC, is a Kenya-based company engaged in the manufacturing and selling of cement. It sells its products under the brand name Blue Triangle. Blue Triangle is used for cementing, mortar and concrete building applications. The company also manufactures custom-made cement products for use in construction, as well as pre-cast concrete items, such as paving blocks, tiles, building blocks, and pre-stressed concrete components. East African Portland Cement's concrete pavers are used in the construction of roads, hydraulic and marine structures, walkways, parking areas, petrol stations and go-down floors.

Recovery of profitability and margins… EAPCC has managed to recover in terms of profitability and margins after implementing strict cost cutting measures and rationalising operations. This cost cutting exercise was also backed up by a sustained marketing campaign which resulted in improved profitability with gross profit margins rising back to 25% in FY 13 from 13% in FY 12.

Increasing competition despite rising macro-economic activity

Cement consumption in Kenya has been rising at a CAGR of 13.61% for the past eight years and this is set to accelerate as the Kenyan government has pledged to increase infrastructure spend. This coupled with continued economic growth has proved attractive to local and international cement manufacturers resulting in new investments and increased competition for market share in Kenya. Valuation EAPCC currently trades on a PER of 3.9x, PBV of 1.0x and dividend yield of 1.0%. Assuming normalised earnings and using a DCF valuation we arrive at a target price of KES 66.3 representing a downside of 13.3% to the current price. With competition set to remain high and without a respite in terms of cheap imports, we foresee EAPCC being forced to maintain low pricing to remain competitive. As a result, we see better performance coming from other cement stocks. REDUCE.

22

During the year ended 30 June 2013, EAPCC managed to increase its gross revenues by 8.27% y-o-y to KES 9.2bn due to an effective marketing and advertising campaign and an improved supply of cement to the market. The cost of sales fell by 6.94% to KES 6.8bn following stringent cost management and rationalisation of operational activities. This lead to a y-o-y increase in the gross profit margin to 25% (FY 12: 13%) with gross profit rising to KES 2.3bn from KES 1.1bn in FY 12. Administrative costs increased marginally by 2.67% to KES 2.1bn due to inflationary pressure, which lead to an operating profit of KES 340.9m from a previous loss of KES 793.7m. Net finance costs increased by 38.38% to –KES 245.6m largely as a result of lower interest earnings as interest rates declined during the course of the year. The strengthening of the Kenya shilling and the improved performance of the company’s hedge led to a foreign exchange gain of KES 594.1m, while the revaluation of investment property resulted in a gain of KES 730m. Thus the profit before tax rose to KES 1.4bn in FY 13 from a loss of KES 1.0bn in FY 12, with the effective tax credit of KES 355.9m (i.e. 25% of earnings), leading to a net income of KES 1.7bn in FY 13 from a net loss of KES 972.7m in the previous year. (*NB: Normalised earnings for the year would have come in KES 161.9m after excluding the revaluation & tax credit) On the balance sheet, total non-current assets rose by 8.77% y-o-y to KES 12.5bn. This was mostly attributable to a 7.5% increase in PPE to KES 8.1bn and a 48.8% y-o-y increase in investment property to KES 2.2bn. Current assets grew by 46.7% y-o-y to KES 3.6bn driven higher by increased inventories (+27.03% y-o-y to KES 2.2bn), trade receivables (+54.64% to KES 1bn), and cash and equivalents (+408.87% to KES 402.6m). Share capital and share premium remained flat at KES 450m and KES 648m, respectively, whilst retained earnings went up by 78.4% y-o-y to KES 4.1bn leading to an increase in total equity of 54.09% to KES 7.1bn. Long-term loans decreased by 25.94% to KES 2.4bn whilst trade and other payables rose 51.6% y-o-y to KES 3.0bn resulting in total liabilities of KES 9.0bn, down 3.54% y-o-y from KES 9.4bn in FY 12. Cash flow from operating activities recorded a net inflow of KES 485.5m in FY 13 from a net outflow of KES 332.7m in FY 12 largely due to an increase in operating profits. Net cash flow used in investing activities decreased for the year from KES 372.6m to KES 161.9m. Net cash outflows for financing activities rose y-o-y to KES 407.2bn from KES 228.7m. This led to an overall increase in net cash outflows of –KES 83.6bn resulting in a closing cash balance as at FY 13 of a negative KES 450.6bn, up 22.3% from –KES 368.5bn in FY 12.

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FY 13 Financial & Operational Review

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23

Outlook Rising cement consumption in Kenya has attracted competitors & imports… The Kenyan cement market is marked by rising competition and over-supply of cement which continues to have a depressing effect on prices. Cement consumption in the market has been rising at a CAGR of 13.61% for the past eight years. Furthermore, regional economic growth has averaged above 5% for the past five years and this coupled with an accelerated effort by the Kenyan government to increase infrastructure spending has provided a positive outlook for cement demand in Kenya and its neighbouring countries. This has proved attractive for new and existing cement manufacturers who have increased their investments into the market and beefed up their production facilities resulting in excess capacity. (E.g. Lafarge & Dangote). Cement Consumption in Kenya

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Kenyan Cement Consumption

Source: Kenya National Statistics bureau

…In response EAPCC is also planning to increase its capacity to defend market share… EAPCC currently has a market share of around 24% in Kenya through its distinctively recognisable Blue Triangle brand, which is distributed throughout Kenya and Uganda through a subsidiary. The company’s management has indicated that it intends to continue investing in additional capacity in terms of clinker and cement along with diversifying into new product lines as a priority in order to defend market share. In addition, the company is currently installing a new packing line with plans for a precast plant still being developed.

Profitability has improved but… From the look of the FY 13 results, EAPCC has managed to stabilise from its recent internal problems that resulted in prolonged production stoppages that impacted negatively on its earnings. Things seem to be on the road to recovery in spite of the improvement in margins which appears to have been partially driven by a tax credit and the

revaluation of investment property.

Source: Company annual reports

In the absence of these factors, the profitability of the company is only starting to improve marginally, taking an upward trend for the first time in two years, with the gross margin rising to 25%. EBIT margins are positive whilst returns on assets and equity have also turned the tide from low negative levels. However, with the market’s production capacity running ahead of current consumption levels by close to 20%, some of the producers are being forced to operate at less than 100% capacity resulting in reduced efficiency and lower economies of scale. Without a proper strategy in place this situation coupled with cheap imports, escalating fuel and higher energy costs could result in EAPCC’s margins returning to 2011-2012 levels.


EAPCC currently trades on a PER of 3.9x, PBV of 1.0x and dividend yield of 1.0%. Assuming normalised earnings and using a DCF valuation we arrive at a target price of KES 66.3 representing a downside of 13.3% to the current price. With competition set to remain high and without a respite in terms of cheap imports, we foresee EAPCC being forced to maintain low pricing to remain competitive. As a result, we see better performance coming from the other cement stocks. REDUCE.

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24

Financial Summary

c

KES Millions 2008 2009 2010 2011 2012 2013 2014 E 2015 E

Revenues 7 204 8 101 9 408 10 172 8 508 9 211 10 040 10 969

Y-o-Y % 12.5% 16.1% 8.1% -16.4% 8.3% 9.0% 9.3%

Gross Profit 2 371 2 538 2 032 2 369 1 117 2 333 2 711 2 852

Y-o-Y % 7.0% -19.9% 16.6% -52.8% 108.9% 16.2% 5.2%

EBITDA 1 303 1 443 460 813 -530 895 960 1 012

Y-o-Y % 10.7% -68.1% 77% -165% -269% 7.3% 5.4%

EBIT/Operating Profit, exlc exceptionals 897 1 086 82 478.9 (914.4) 460.9 502 548

Y-o-Y % 21.1% -92.5% 486% -291% -150% 8.9% 9.3%

Attributable Net Income/Profit After Tax 537 1 834 -284 2 -973 1 775 324 377

Y-o-Y % 241.5% -115.5% -101% -56752% -282.5% -81.8% 16.5%

Per Share data

Attributable Diluted EPS 5.97 20.37 -3.15 0.02 -10.78 19.67 3.59 4.19

Y-o-Y % 241.5% -115.5% -100.6% -56670% -282.5% -81.7% 16.7%


Y-o-Y % NA -100.0% NA -100.0% NA -52.0% 16.5%

NAV/Basic Share 44.7 66.6 63.3 63.4 54.6 78.8 82.6 86.4

Y-o-Y % 49.0% -4.9% 0.0% -13.8% 44.2% 4.8% 4.6%

Margin Performance

2008 2009 2010 2011 2012 2013 2014 E 2015 E

Gross Margin 32.9% 31.3% 21.6% 23.3% 13.1% 25.3% 27.0% 26.0%

EBITDA margin % 18.1% 17.8% 4.9% 8.0% -6.2% 9.7% 9.6% 9.2%

EBIT margin% 12.4% 13.4% 0.9% 4.7% -10.7% 5.0% 5.0% 5.0%

Net Income Margin % 7.5% 22.6% -3.0% 0.0% -11.4% 19.3% 3.2% 3.4%

Ratios

ROaA 9.9% 10.3% 0.7% 3.7% -6.6% 3.0% 3.3% 3.7%

ROaE 13.3% 36.6% -4.8% 0.0% -18.3% 29.6% 4.5% 5.0%

Earning yield on current price 7.8% 26.6% -4.1% 0.0% -14.1% 25.7% 4.7% 5.5%


CashFlow

Cash Flow from Operating Activities 216 1 881 445 604 (333) 486 1 054 310

Net Cash in Investing Activities (1 041) (1 084) (580) (617) (373) (162) (764) (605)

Net Cash in Financing Activities (365) (274) (425) (376) (229) (407) 1 193 (341)

Cash at the end of the period 989 1 512 952 (289) (369) (451) 1 032 396

25

Ashaka Cement Plc. is engaged in the manufacturing and marketing of cement and was incorporated on 7th August, 1974, and started operations in September 1979. Its principal offices are located in Gombe State, Nigeria. Ashaka also has depots in twelve locations and offices in Abuja, Kano and Lagos. Since 2002, Lafarge has been Ashaka’s controlling shareholder and currently owns 58.61% of its share capital, held through Lafarge Nigeria (UK) Limited.

New energy sources set to reduce production costs…

Ashaka Cement has completed its coal mine near Maiganga which will supply lignite to the cement factory’s kiln. The coal is expected to impact positively on the cement factory by reducing the unit cost of production which will ultimately lead to higher margins and improved returns for shareholders. Ashaka is currently the only cement manufacturer in Nigeria utilising coal as its primary energy source in its operations instead of petroleum products which will help protect it from volatility in fuel prices. .

Drive to increase capacity to over 3 million metric tonnes of cement in order to cope with rising demand and increased competition levels…

Consumption of cement in Nigeria has been rising at a CAGR of over 10.2% for the past six years. As a result, Ashaka’s competitors such as Dangote have rapidly expanded their production capacity in order to capture more of the growing market. In response, Ashaka has announced that it is undertaking feasibility studies to establish if it can expand its plant production capacity from 1m to around 3m metric tonnes per annum.

Valuation Ashaka is currently trading on a TTM PER of 49.4x and a P/BV of 0.9x. Using a DCF valuation, we obtain a value of NGN 15.6 per share, indicating potential downside of 25.6% from the current share price of NGN 20.99. Ashaka cement currently also has weaker operating margins coupled with a relatively lower market share of the high growth cement market when compared to counters such as Lafarge Wapco and Dangote. As a result, we see value elsewhere and assign a SELL recommendation on the stock.

Equity Research Nigeria January 2014 Cement

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Ashaka vs. S & P Africa Frontier Index (Rebased)

ASHAKA STEIAFDP Index

Recommendation SELL

Bloomberg ASHAKACE NL EQUITY

Currrent Price (NGN) 21.0

Currrent Price (USc) 13.0

Target Price (NGN) 15.6


Upside (%) (25.6)

Liquidity

Market Cap (NGN m) 43 344


Shares (m) 2 240



Price Performance


Change (%) 146.9


Change (%) 133.2

Financials (NGN m) 31 Dec F2012 2013F 2014F

Turnover 21 826 22 263 23 042

EBITDA 5 824 4 191 5 317

Net Finance Income 605 - -


EPS (NGN) 1.40 0.86 1.21

DPS (NGN) - - -

NAV/Share (NGN) 22.10 22.96 24.17

Ratios

RoaA (%) 5.9 3.0 4.6

RoaE (%) 6.5 3.8 5.1

EBITDA Margin (%) 26.7 18.8 23.1



Dividend Yield (%) - - -

PE (x)* 49.4 22.5 16.0

PBV (x) 0.9 0.8 0.8

EV/EBITDA (x) 5.6 7.8 6.1

*NB: TTM


Dominant in its north eastern corner of Small plant size compared to peers

Nigeria Slow to substitute LPFO with coal,

Access to own coal mine hence still has a high percentage of

Strong parent company in Lafarge Work stoppages due to power cuts

which provides technical support


Room to improve efficiency Competition from bigger and more

North eastern Nigeria has very low efficient producers like DCP

consumption rates Still vulnerable to fuel price fluctuation

26

In 9M 13, revenues were up a marginal 2.48% y-o-y to NGN 16.8bn (from NGN 16.5bn in 9M 12). Cost of sales rose by 29.30% y-o-y to NGN 13.8bn from NGN 10.7bn in 9M 12 as production costs escalated led by higher energy and distribution costs. Consequently, gross profit fell by 47% y-o-y to NGN 3.0bn from NGN 5.8bn in 9M 12 with the gross profit margin weakening to 18.1% from 35.2% in 9M 12. Operating expenses were lower by 27.07% at NGN 1.8bn (vs. NGN 2.4bn in 9M 12) with other income of NGN 914.6m(down 52.66% y-o-y from NGN 1.9bn), leading to a profit before tax of NGN 2.2bn, (down 58.87% y-o-y from NGN 5.3bn in 9M 12). Taxation for 9M 13 was lower y-o-y by 58.87% to NGN 650.9m vs. NGN 1.6bn in 9M 12. Profit after tax for the 9 months thus came in at NGN 1.5bn, down 58.87% y-o-y from NGN 3.7bn with the PAT margin also falling to 9.02% from 22.43% in 9M 12. Net cash generated from operations fell by 14.40% y-o-y to NGN 2.8bn mainly as a result of the decline in profitability of the company. Cash from investing activities grew by 353.5% from an inflow of NGN 201.7m in 9M 12 to an inflow of NGN 914.6m in 9M 13. Cash used in financing activities increased y-o-y from a negative NGN 926.8m to a negative NGN 2.8bn. The net result from the above was a rise in cash and cash equivalents to NGN 14.3bn from the previous year’s NGN 13.4bn. Total assets grew by a marginal 0.37% in nine months to NGN 67.6bn as at 9M 13 from NGN 67.3bn at FY 12. This increase was mostly due to an increase in trade debtors (+185.14%) whilst inventories fell by over 34.38% to NGN 3.3bn. The current ratio improved to 2.58x vs. 1.98x as at FY 12 and net working capital also improved by 17.18% to NGN 11.1bn reflecting better liquidity in the business. Shareholder’s equity however, was only up by a marginal 3.07% to NGN 51.0bn from NGN 49.5bn in 9M 12 reflecting the lower profitability of the business in 9M 13 as ROE fell to 3.0% vs 6.5% at FY 12.

Outlook

Capacity increases have become essential for the company’s future… Ashaka remains one of the lowest capacity cement producers in Nigeria with only 3.62% of the installed Nigerian productive capacity as at the end of 2012. This places it in a weak competitive position when compared to other competitors such as Dangote. Thus one of the stated goals of the company is to increase its current capacity to over 3 million metric tonnes of cement by 2015 which management hope will assist it in maintaining

its close to 5% market share of cement in Nigeria.


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9M 13 Financial & Operational Review

27

Security challenges in Northern Nigeria remain a key risk factor… One of the principal risks of operating mostly in Northern Nigeria is the level of insecurity caused by the insurgence being waged by Islamists. This has in the recent past hampered the distribution and movement of goods and services within the region. In FY 2012, management attributed the 4.4% fall in sales volumes to the security challenges experienced in the North East of the country. Given that the underlying security issues remain unresolved, we expect Ashaka to continue to face security risks in its key North Eastern markets which it will need to overcome. Liquidity and profitability challenges remain… Whilst Ashaka Cement has recovered from the losses it suffered in 2009, its margins and profitability remain lower than those of its peers in the Nigerian cement market. In the nine months to date, Ashaka Cement‘s profitability has been weak which may indicate a swing back to 2009 margins and returns. One of the key challenges which remain for Ashaka Cement is how it can reduce the volatility of its returns to shareholders and improve its liquidity and earnings profile. Valuation and Recommendation Ashaka is currently trading on a TTM PER of 49.4x and a P/BV of 0.9x. Using a DCF valuation, we obtain a value of NGN 15.6 per share, indicating potential downside of 25.6% from the current share price of NGN 20.99. Furthermore, Ashaka has lower operating margins and a weaker liquidity profile than other larger cement companies in Nigeria, coupled with a relatively low market share of the high growth cement market; as a result we assign a SELL recommendation on the stock.

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Source: Company Reports As of 2012, Ashaka Cement held slightly over 3.62% of the total cement production capacity in Nigeria.

Dangote 69.12%

Lafarge Wapco16.16%

UNICEM7.90%

Ashaka3.59%

CCNN1.80%

Edo Cement Ukpilla0.90%

Purchem0.54%

Est FY 2012 Production Capacity

Source: www.Dangote.com

http://www.dangote.com/

28

Financial Summary

NGN Millions 2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 16 772 16 473 21 378 17 194 19 154 20 780 21 826 22 263 23 042

Y-o-Y % -1.8% 29.8% -19.6% 11.4% 8.5% 5.0% 2.0% 3.5%

Gross Profit 7 978 5 605 7 339 5 423 7 237 7 504 8 325 7 124 8 058

Y-o-Y % -29.7% 30.9% -26.1% 33.5% 3.7% 10.9% -14.4% 13.1%

EBITDA 4 452 2 697 3 784 1 533 3 100 5 520 5 824 4 191 5 317

Y-o-Y % -39.4% 40.3% -59.5% 102.2% 78.1% 5.5% -28.0% 26.9%

EBIT/Operating Profit, exlc exceptionals 4 016 2 183 3 265 1 007 3 100 3 709 3 933 2 004 3 107

Y-o-Y % -45.6% 49.6% -69.2% 207.8% 19.6% 6.0% -49.1% 55.0%

Attributable Net Income/Profit After Tax 3 378 1 152 2 519 -98 3 005 2 886 3 125 1 923 2 703

Y-o-Y % -65.9% 118.7% -103.9% -3166.3% -4.0% 8.3% -38.5% 40.5%

Per Share data

Attributable Diluted EPS 1.51 0.51 1.12 -0.04 1.34 1.29 1.40 0.86 1.21

Y-o-Y % -65.9% 118.7% -103.9% -3166.3% -4.0% 8.3% -38.5% 40.5%

Dividend Per share (DPS) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Y-o-Y % NA NA NA NA NA NA NA NA

NAV/Basic Share 5.2 4.8 5.7 5.9 6.8 20.9 22.1 23.0 24.2

Y-o-Y % -7.6% 19.3% 2.8% 15.4% 208.2% 6.0% 3.9% 5.3%

Margin Performance

2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 47.6% 34.0% 34.3% 31.5% 37.8% 36.1% 38.1% 32.0% 35.0%

EBITDA margin % 26.5% 16.4% 17.7% 8.9% 16.2% 26.6% 26.7% 18.8% 23.1%

EBIT margin% 23.9% 13.3% 15.3% 5.9% 16.2% 17.8% 18.0% 9.0% 13.5%

Net Income Margin % 20.1% 7.0% 11.8% -0.6% 15.7% 13.9% 14.3% 8.6% 11.7%

Ratios

ROaA 21.8% 10.7% 13.8% 4.0% 11.5% 7.9% 5.9% 3.0% 4.6%

ROaE 29.1% 10.3% 21.4% -0.8% 21.2% 9.3% 6.5% 3.8% 5.1%

Earning yield on current price 7.8% 2.7% 5.8% -0.2% 6.9% 6.7% 7.2% 4.4% 6.2%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Cash Flow

Cash Flow from Operating Activities 2 767 3 424 5 905 2 749 1 901 8 734 3 315 (816) 4 205

Net Cash in Investing Activities (3 545) (4 951) (4 315) (2 921) 288 (464) 202 (15 889) (1 147)

Net Cash in Financing Activities (3 408) (1 101) (1 123) (615) 156 (700) (927) - -

Cash at the end of the period 3 798 1 169 1 636 850 3 195 10 766 13 356 (3 349) (292)

29

Cement Company of Northern Nigeria Plc (CCNN) commenced production in 1967 with a capacity of 100,000 tonnes per annum at its Kalambaina plant. This was subsequently increased to 500,000 tonnes p.a. through the addition of a second line in 1985. In 2010 BUA International Limited indirectly became the key investor after acquiring Damnaz Cement Company Limited, Sokoto Cement’s majority shareholder.

Well established as a niche / regional cement player…

CCNN’s cement plant is located in North Western Nigeria, a region that has few cement plants and the company is able to benefit from being the major cement supplier for the Kebbi, Sokoto and Katsina states. This regional dominance is reinforced by the poor transport infrastructure in the Northern parts of Nigeria which have hitherto prevented some of the other large cement companies such as Dangote and Lafarge from establishing themselves in this market.

High cement demand has resulted in most cement companies in Nigeria increasing their capacity over the past three years…with the exception of CCNN.

Demand for cement in Nigeria has risen at a double digit CAGR of over 10.2% in the past six years. As a result, cement manufacturers have increased capacity with the exception of CCNN whose capacity at its Kalambaina plant in Sokoto has remained stagnant at c500,000mt/p.a. for the past few years. This places the company at risk of losing market share to more aggressive competitors such as Dangote and Lafarge should they decide to expand into North Western Nigeria.

Valuation Using a DCF valuation, we value CCNN at NGN 10.10, indicating a downside of 14.03%. Although it currently trades on a low TTM PER of 8.9x and P/BV of 2.5x, we see better value in other cement stocks in Nigeria and recommend that investor REDUCE their exposure to the stock.


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CCNN vs. S & P Africa Frontier Index (Rebased)

CCNN STEIAFDP Index


Dominates the North Western Small plant relative to peers

Nigeria market Located in North West Nigeria, a region

Has pricing power as there are that has a history of political instability

fewer competing cement plants Fund raising initiatives yet to be

announced


Located in a low per capita Competition from more efficient

consumption region producers e.g. Dangote

Expansion and improved efficiencies Uses LPFO and as such vulnerable to

can add value fuel price fluctuations


Bloomberg Code CCNN NL Equity

Current Price (NGN) 11.75




Upside (%) -14.03%

Liquidity


Market Cap (USD m) 95.6

Shares (m) 1 312


Ave. daily vol ('000) 537

Price Performance


Change (%) -69.3


Change (%) 9.2


Turnover 15 126 15 852 17 040

EBITDA 1 296 1 892 2 749



EPS (NGN) 0.94 1.26 1.70

DPS (NGN) - - -

NAV/Share (NGN) 4.86 5.99 7.69

Ratios

RoaA (%) 6.5 10.0 14.4

RoaE (%) 19.3 23.6 24.8

EBITDA Margin (%) 8.6 11.9 16.1


Earnings Yield (%)* 11.2 10.8 14.5

Dividend Yield (%) - - -

PE (x)* 8.9 9.3 6.9

PBV (x) 2.5 2.0 1.5

EV/EBITDA (x) 11.3 7.7 5.3

* NB: TTM

30

For the full year to December 2012, CCNN posted an 8.70% growth in total revenues to NGN 15.1bn (from NGN 13.9bn in FY 11) driven by higher demand for cement in CCNN’s target market. The cost of sales for FY 12 however, grew by 31.66% y-o-y to NGN 10.9bn. This resulted in a decline in the gross profit margin to 29.06% (vs. 40.61% in FY 11). Resultantly, gross profits fell to NGN 4.24bn in FY 12 from NGN 5.7bn in FY 11. Selling & distribution costs rose by 12.26% y-o-y to NGN 1.6bn (FY 1.4bn) whilst admin costs were up by 6.71% y-o-y to NGN 1.8bn (FY 11 NGN 1.7bn). In contrast, finance costs shrank by 22.22% y-o-y to NGN 151.9bn from NGN 195.3bn in FY 11. Consequently, PBT almost halved to NGN 1.7bn (FY 11: NGN 3.3bn) and the PBT margin was down to 10.93% vs. 23.67% in FY 11. PAT also followed the general trend lower to NGN 1.20bn (FY 11: NGN 2.30bn), whilst PAT margin fell to 7.91% from 16.56%. EPS was thus down 48.09% y-o-y to NGN 0.95. As a result of the weaker profitability no dividend was declared. On the balance sheet, the working capital position remained rather static at NGN 2.53bn (FY 11: NGN 2.68bn). Leverage continued at a subdued level with the gearing ratio standing at 5.77% as at the end of FY 12. Net cash generated from operating activities fell by 35.08% y-o-y to NGN 1.09bn, while net cash used in investing activities increased 74.27% to NGN 1.09bn. Net cash outflows from financing activities more than quadrupled to NGN 427.5m and as a result, cash & cash equivalents stood at NGN 17.78m as at the end of FY 12, a significant decrease from NGN 608.5m as at the end of the previous period. CCNN posted a turnover of NGN 12.1bn, (up 5.83% y-o-y) for the first nine months of 2013. Cost of sales for the period was up a marginal 1.08% y-o-y to NGN 8.0bn as increased efficiency and effective cost management reduced production expenses. The GP margin was up 312 basis points y-o-y to 33.69% and EBIT margins for 9M 13 rose by 273 basis points to 14.81% (9M 12: 12.09%), as a result of cost containment strategies. EBIT thus grew by 29.70% y-o-y to NGN 1.8bn from NGN 1.4bn the previous year. Finance charges grew by 20.79% to NGN 106.7m in 9M 13. PBT for the period increased by 30.61% to NGN 1.7bn as the PBT margin improved slightly by 262 basis points to 13.93% from 10.31% in 9M 12. The tax charge for 9M 13 rose by 41.75% to NGN 578.0m resulting in a PAT of NGN 1.1bn, up 25.02% y-o-y from NGN 882.6m in 9M 12.

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31

Total assets put on 5.22% from FY 12 at NGN 15.0bn from NGN 14.2bn at FY 12. Net working capital for the nine months was also up, rising by 52.10% to NGN 3.9bn from NGN 2.5bn as at FY 12, whilst the current ratio improved to 1.84x vs 1.49x in 9M 12, indicative of the improved liquidity of the business.

Cash generated from operating activities grew by 20.79% to NGN 1.3bn over the nine months whilst cash used in investments fell to NGN 410.6m from NGN 1.1bn in FY 12. Cash outflows from financing rose 14.57% to a negative NGN 489.8m at 9M 13 from –NGN 427.5m the previous year. This lead to a net increase in cash and cash equivalents of 15.03% to NGN 204.5m (vs. NGN 177.9M as at FY 12).

Outlook

Margins set to remain weaker than industry leaders; Dangote & Wapco… CCNN’s margins have been volatile in the recent past between 2009 and 2012 with management struggling to control fluctuating production costs e.g. the cost of LPFO. In the past 9M, the company has stabilised its cost of production somewhat with the cost of goods sold rising by a mere 1.08% to NGN 8bn as at 9M 13. Whilst we find this as commendable in the short run, we believe that CCNN’s margins and returns will remain lower and less than those of the other cement manufacturers such as Dangote and Wapco particularly as the competing firms are eligible for pioneer tax status whilst CCNN is not.

Lack of capacity may hinder revenue growth in the medium term… CCNN is a relatively small cement producer in Nigeria with a capacity of 500,000 Mt/p.a. This places it in a position of weakness in relation to other Nigerian producers such as Dangote which have over ten times the capacity after under-going several expansion programs in the past few years. Given the growth rate of the cement market in Nigeria, CCNN may soon find itself losing market share as the market grows leaving it vulnerable to competition from other producers shown in the table below…

CCNN’s plant has one of the lowest production

capacities for cement in Nigeria

Purchem 150

Edo Cement Ukpilla 250

CCNN 500

UNICEM 2,200

Lafarge 5,300

Dangote 19,250

Source: Dangote.com

Nigeria est.2012 Cement Capacity

(000's Mt /pa)

Source: Company annual financial reports.


CCNN is currently trading on a TTM PER of 8.9x and P/BV of 2.5x. Using a DCF valuation, we value CCNN at NGN 10.10, indicating a downside of 14.03%. In our opinion, due to its relatively lower margins and low installed capacity, CCNN is one of the more vulnerable cement producers should there be a pricing war amongst the Nigerian cement companies. As a result of its weaker balance sheet and low investment into production capacity, we believe that there are better alternatives in terms of national producers such as Dangote and Lafarge. As a result we recommend that investors REDUCE their exposure to the stock.

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32

Financial Summary

NGN Millions 2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 6 374 8 043 9 878 11 869 11 181 13 915 15 126 15 852 17 040

Y-o-Y % 26.2% 22.8% 20.2% -5.8% 24.5% 8.7% 4.8% 7.5%

Gross Profit 1 759 2 284 4 169 5 165 4 113 6 286 4 244 5 231 6 128

Y-o-Y % 29.8% 82.5% 23.9% -20.4% 52.8% -32.5% 23.2% 17.1%

EBITDA 25 139 1 610 2 334 1 708 2 935 1 296 1 892 2 749

Y-o-Y % 456.0% 1058.3% 45.0% -26.8% 71.9% -55.9% 46.0% 45.3%

EBIT/Operating Profit, exlc exceptionals -221 -182 1 266 1 965 1 348 2 543 847 1 427 2 267

Y-o-Y % -17.6% -795.6% 55.2% -31.4% 88.6% -66.7% 68.5% 58.9%

Attributable Net Income/Profit After Tax -35 139 1 531 1 812 1 269 2 304 1 196 1 658 2 228

Y-o-Y % -497.1% 1001.4% 18.4% -30.0% 81.6% -48.1% 38.6% 34.4%

Per Share data

Attributable Diluted EPS -0.03 0.11 1.23 1.46 1.02 1.85 0.94 1.26 1.70

Y-o-Y % -497.1% 1001.4% 18.4% -30.0% 81.5% -49.5% 34.9% 34.4%

Dividend Per share (DPS) 0.00 0.10 0.91 0.91 0.00 0.00 0.00 0.00 0.00

Y-o-Y % NA 797.6% 0.0% -100.0% NA NA NA NA

NAV/Basic Share 1.2 2.5 3.2 3.4 3.9 5.0 4.9 6.0 7.7

Y-o-Y % 103.9% 26.3% 6.1% 15.0% 27.7% -2.6% 23.4% 28.4%

Margin Performance

2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 27.6% 28.4% 42.2% 43.5% 36.8% 45.2% 28.1% 33.0% 36.0%

EBITDA margin % 0.4% 1.7% 16.3% 19.7% 15.3% 21.1% 8.6% 11.9% 16.1%

EBIT margin% -3.5% -2.3% 12.8% 16.6% 12.1% 18.3% 5.6% 9.0% 13.3%

Net Income Margin % -0.5% 1.7% 15.5% 15.3% 11.3% 16.6% 7.9% 10.5% 13.1%

Ratios

ROaA -2.7% -2.1% 14.1% 21.1% 13.1% 22.6% 6.5% 10.0% 14.4%

ROaE -2.3% 5.9% 43.0% 44.2% 28.0% 41.7% 19.3% 23.6% 24.8%

Earning yield on current price -0.2% 1.0% 10.5% 12.4% 8.7% 15.8% 8.0% 10.8% 14.5%

Dividend yield current price 0.0% 0.9% 7.8% 7.8% 0.0% 0.0% 0.0% 0.0% 0.0%

Cashflow

Cash from Operations 2 189 (84) 698 3 412 586 1 678 1 090 385 1 591

Cash from Investing (1 930) (635) (526) (721) - (627) (1 093) (238) (244)

Cash from Financing (373) 1 068 (595) (2 043) (618) (112) (427) 285 276

Net cash (618) (269) (692) 55 23 609 178 611 2 234

33

Dangote is the largest cement producer in Nigeria, and is Sub-Saharan Africa’s largest cement market. As at the end of 2012, Dangote Cement had the capacity to produce up to 19.25m metric tonnes of cement and controlled more than 60% of the Nigerian cement market. Dangote is in the process of a rapid expansion programme designed to make it one of the top producers of cement in the world by 2016 with the capacity to produce over 55m metric tonnes of cement per annum.

Strong and aggressive pan African expansion underway funded most by profits from Nigerian business…

Dangote is currently under a massive expansion drive in SSA and is set to commit over USD 4bn towards creating a pan African footprint over the next four years. This should see the company deliver nearly 55mta integrated/grinding/import capacity in 14 countries across the African continent by 2016. Some of the countries it intends to expand to include: Senegal, Cote d’Ivoire, Sierra Leone, Liberia, Ghana, Cameroon, Rep. Congo, Ethiopia, South Sudan, Kenya, Tanzania, Zambia and South Africa.

High operating margins likely to remain in the medium term…

Due to its relatively new & efficient plants coupled with pioneer tax status in Nigeria, Dangote has been able to post net profit margins above 50% for the past few years aided by increasing sales volumes on the back of additional capacity and the rise in demand for cement in Nigeria. Whilst the tax status of older plants such as Obajana (lines 1+2), and Gboko are set to normalise, other newly constructed plants and lines will continue with the low tax regime. Consequently we project the high margins to persist over the next three years particularly as plants from other countries come on line as well.

Valuation Dangote cement is currently trading on a TTM PER of 17.9x, P/BV of 8.9x and dividend yield of 1.6%. Using a DCF valuation, we currently value Dangote at NGN 234 indicating an upside of 6.8% to the current share price. The company’s expansion plans provide it with a strong base from which to grow revenues over the medium term. Consequently we retain a HOLD recommendation on the stock.


0.90

1.10

1.30

1.50

1.70

1.90

26-Jun-12

26-Jul-12

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Dangote vs. S & P Africa Frontier Index (Rebased)

DANGCEM STEIAFDP Index

Recommendation HOLD

Bloomberg Code DANGCEM NL Equity





Upside (%) 6.8

Liquidity

Market Cap (NGN m) 3 731 701

Market Cap (USD m) 23 151

Shares (m) 17 041



Price Performance


Change (%) 71.0


Change (%) 14.2


Turnover 298 454 403 538 553 731

EBITDA 156 303 243 083 333 834

Net Finance Income (10 844) (3 819) (3 056)


EPS (NGN) 9.32 13.05 18.20

DPS (NGN) 3.56 5.23 7.29

NAV/Share (NGN) 25.35 33.71 46.70

Ratios

RoaA (%) 24.9 30.4 33.1

RoaE (%) 43.7 45.1 45.3

EBITDA Margin (%) 52.4 60.2 60.3




PE (x)* 17.9 16.8 12.0

PBV (x) 8.9 6.4 4.6

EV/EBITDA (x) 24.7 15.9 11.6

*N B : TTM


The most aggressive expansion plan Expansion is aggressive and can

in SSA lead to costly mistakes

Newer and more efficient plants Tightly held shares. DHL owns c96%

Strong backing from anchor shareholder Exposure to borrowing can lead to

Improving corporate governance earnings fluctuation.


SSA has lowest per capita consumption Expansion in its target markets -East

in the world. Huge volume additions may see prices

Nigerian coonsumption is rising at a CAGR decline in major Nigerian market

in excess of 10% spurring higher consumption Gas supply instability

34

Dangote Cement posted a good set of results for FY 12 with revenues rising by 23.6% y-o-y from NGN 241.5bn in FY 11 to NGN 298.5bn at FY 12. The revenue growth was mostly driven by rising volumes as Nigeria’s cement market grew. As a result, Dangote’s cement sales were up by 19.86% y-o-y to 10.38 million tonnes with the additional capacity installed at plants such as Obajana and Ibese coming in handy. The continued capacity expansion and high efficiencies at existing plants led to rising economies of scale with the cost of sales rising by 21.1% y-o-y to NGN 118.3bn in FY 12 from NGN 97.7bn in FY 11. Resultantly, gross profit margins were up by 90bps y-o-y from 59.50% in FY 11 to 60.40% in FY 12 leading to a 25.40% y-o-y growth in gross profits to NGN 177.7bn. Operating expenses grew by 40.48% y-o-y to NGN 31.0bn in FY 12, resulting in an EBITDA margin of 30.1%. Net interest costs rose by 173.7% y-o-y to NGN 10.8bn from NGN 4.0bn in FY 11. Consequently, PBT grew by over 19% y-o-y to NGN 135.6bn (FY 11: NGN 113.8bn). Net profit margin grew by 60 basis points from 50.2% in FY 11 to 50.8% in FY 12 resulting in a net profit of NGN 151.9bn (FY 11: NGN 121.4bn). On the balance sheet, the working capital position improved from (-NGN 49.20bn) in FY 11 to (-NGN 12.1bn) at the end of FY 12. Leverage also improved slightly during FY 12 with the gearing ratio standing at 27.25% as at the end of FY 12 following steps taken in FY 12 to reduce debt, as compared with 41.43% as at the end of FY 11. The net cash position improved from NGN 22.8bn at FY 11 to NGN 44.5bn as at FY 12. This was mostly due to a rise in short term deposits which grew to NGN 29.1bn from NGN 9.7bn in the previous year. Total shareholders’ equity rose 44.63% y-o-y to NGN 420bn in FY 12 from NGN 290.4bn in FY 11. During 9M 13, revenues grew by 28.73% to NGN 289.0bn (from NGN 224.5bn in 9M 12). Cost of sales rose by 12.31% y-o-y to NGN 99.6bn leading to a gross profit of NGN 189.4bn (+39.45% y-o-y) with the GP margin improving slightly to 65.53% in 9M 13 from 60.50% in 9M 12. Operating expenses increased by 56.77% y-o-y to NGN 33.6bn (9M 12: NGN 21.4bn), on the back of a 67.47% y-o-y increase in selling and distribution costs to NGN 17.8bn as at 9M 13. Net operating income thus rose to NGN 156.9bn (+36.42% y-o-y) from NGN 115.0bn. The EBIT margin improved slightly to 54.29% vs. 51.23% at 9M 12. Finance charges were lower y-o-y by 5.38% whilst finance income rose by 271.74% to NGN 4.0bn.

Source: Company Financial Reports

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ROaA ROaE


35

This led to a PAT of NGN 156.1bn, up 42.83% y-o-y from NGN 1107.1bn in 9M 12 on the back of the awarding of pioneer tax status to Dangote’s new plant and lines. Total assets grew by 4.06% to NGN 158.1bn from NGN 151.9bn at FY 12. Working capital for the 9 months fell from a positive NGN 67.5bn to a negative NGN 12.1bn at 9M 13 as the company ramped up production across its businesses. Dangote Cement’s cash generated from operations increased by 57.90% y-o-y to NGN 200.8bn (vs. NGN 127.2bn at 9M 12), whilst cash from investing was a negative NGN 107.5bn (vs. –NGN 84.5bn in 9M 12). Cash from financing activities was a negative NGN 71.2bn in 9M 13 (vs. –NGN 35.8bn in 9M 12). This lead to a 95.71% y-o-y increase in cash and cash equivalents to NGN 17.4bn in 9M 13 from a balance of NGN 8.9bn as at 9M 12.

Outlook

On-going expansion projects place Dangote on track to become one of the largest cement companies in Africa… Dangote currently owns three state-of-the-art plants capable of serving most of Nigeria as its capacity alone of over 19.25 million metric tonnes as of FY 12, is able to satisfy over 90% of the current cement demand in the country. Dangote’s massive expansion into SSA will deliver nearly 55mta integrated / grinding / import capacity in 14 countries by the end of 2016. According to management, this expansion project will cost over USD 4bn. Management’s current plan is to fund the expansion plan using 40% debt and 60% equity. Countries included in the expansion plan include: Senegal, Cote d’Ivoire, Sierra Leone, Liberia, Ghana, Cameroon, Rep. Congo, Ethiopia, South Sudan, Kenya, Tanzania, Zambia and South Africa. We expect current profit margins to be maintained over the next few years as the expansion of the company continues… Dangote has managed to earn margins in excess of 50% for the past 4 years since listing due to its relatively new & efficient plants, pioneer tax status in Nigeria and aided by increasing sales volumes on the back of additional capacity and the rise in demand for cement in its primary market.



(40,000)

(20,000)

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Liquidity


Dangote 19,250

Lafarge Wapco 4,300

UNICEM 2,200

Ashaka 1,000

CCNN 500

Edo Cement Ukpilla 250

Purchem 150

Source: Dangote.com

Nigeria est.2012 Cement Capacity

(000's Mt /pa)

-

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36

Valuation and Recommendation Dangote cement is currently trading on a TTM PER of 17.9x, P/BV of 8.9x and dividend yield of 1.6%. Using a DCF valuation, we currently value it at NGN 234 indicating an upside of 6.8% to the current share price. The company’s expansion plans provide it with a strong base from which to grow revenues over the medium term and consequently we retain a HOLD recommendation on the stock. Nigerian cement sales have been rising at a CAGR of around 10.2% since 2004 as show below:

Nigeria currently provides over 90% of Dangote’s total revenues and profits as seen in the chart below…

Nigeria95.70%

West & Cdntral Africa

4.10%

East and Southern

Africa

0.19%

FY 2012 Revenue

Source: Company financials

Whilst the tax status of older plants such as Obajana (lines 1+2), and Gboko is set to normalise, other newly constructed plants and lines are due to come online in Nigeria, its main profit centre, in the next few years and the company will thus continue to be exposed to a low tax regime. Consequently we project the high margins to persist over the next three years. Nigeria to remain the main revenue and profit driver for the group At present Nigeria is the main profit driver for Dangote Cement supplying over 90% of its total revenues and 80% of its operational profits. Despite planned expansion to East, West and Southern Africa, over 70% of company’s total cement capacity will remain in Nigeria by the end of 2016. This will be in line with the company’s revenue split and with the high returns that the company has been able to generate from the Nigerian market. Furthermore, Nigeria currently has some of the highest prices for cement in the world with Dangote able to generate an average sales price of over USD 170 per tonne in FY 12, vs. less than USD 100 for USA, Spain, Germany and other developed nations.

We remain bullish in the medium term on Dangote Cement based on our expectations for rising cement consumption in key SSA markets…however risks remain… On the whole, our outlook for Dangote cement remains positive given its Pan African strategy and the current low consumption rates for cement in SSA. However, key risks remain such as the potential for over capacity should demand for cement slow-down in SSA. Furthermore, Dangote has increased the level of debt in the business and the potential for higher finance charges in the wake of increased rates remains. Other key risks which may affect the performance of the company include flooding such as that experienced in 2012 and also political instability within some of the regions that the company operate. For example, regarding the latter, the instability in the Northern part of Nigeria has at times slowed down commercial transactions, building projects and

distribution of cement in to the affected regions.

37

Financial Summary

NGN Millions 2009 2010 2011 2012 2013 E 2014 E

Revenues 189 621 202 566 241 406 298 454 403 538 553 731

Y-o-Y % NA 6.8% 19.2% 23.6% 35.2% 37.2%

Gross Profit 83 749 121 258 143 698 180 150 247 410 343 779

Y-o-Y % NA 44.8% 18.5% 25.4% 37.3% 39.0%

EBITDA 77 854 117 190 126 238 156 303 243 083 333 834

Y-o-Y % NA 50.5% 7.7% 23.8% 55.5% 37.3%

EBIT/Operating Profit, exlc exceptionals 66 327 102 970 121 665 149 197 228 968 318 611

Y-o-Y % NA 55.2% 18.2% 22.6% 53.5% 39.2%

Attributable Net Income/Profit After Tax 61 392 105 322 121 261 151 739 222 592 310 398

Y-o-Y % NA 71.6% 15.1% 25.1% 46.7% 39.4%

Per Share data

Attributable Diluted EPS 7.67 6.79 7.82 9.32 13.05 18.20

Y-o-Y % NA -11.5% 15.1% 19.2% 40.0% 39.4%

Dividend Per share (DPS) 0.00 4.25 1.25 3.56 5.23 7.29

Y-o-Y % NA NA -70.6% 185.1% 46.7% 39.4%

NAV/Basic Share 19.7 13.6 18.2 25.4 33.7 46.7

Y-o-Y % NA -30.8% 33.2% 39.5% 32.9% 38.6%

Margin Performance

2009 2010 2011 2012 2013 E 2014 E

Gross Margin 44.2% 59.9% 59.5% 60.4% 61.3% 62.1%

EBITDA margin % 41.1% 57.9% 52.3% 52.4% 60.2% 60.3%

EBIT margin% 35.0% 50.8% 50.4% 50.0% 56.7% 57.5%

Net Income Margin % 32.4% 52.0% 50.2% 50.8% 55.2% 56.1%

Ratios

ROaA 45.5% 29.8% 26.3% 24.9% 30.4% 33.1%

ROaE 77.9% 57.1% 49.2% 43.7% 45.1% 45.3%

Earning yield on current price 3.5% 3.1% 3.6% 4.3% 6.0% 8.3%

Dividend yield current price 0.0% 1.9% 0.6% 1.6% 2.4% 3.3%

Cash Flow

Cash Flow from Operating Activities 16 690 126 238 104 291 152 547 211 121 315 735

Net Cash in Investing Activities 6 221 (11 818) (53 166) (116 018) (51 739) (66 552)

Net Cash in Financing Activities 94 374 51 624 (54 047) (10 705) (76 069) (102 996)

Cash at the end of the period 117 385 283 429 18 319 43 162 126 475 272 662

38

Lafarge Cement WAPCO Nigeria Plc. is a subsidiary of Lafarge SA and owns three plants - one in Sagamu and two in Ewekoro with a current production capacity of 4.5 million metric tonnes. Wapco has grown sustainably since the take-over by Lafarge SA of France in July 2001 which supplies technical expertise and management support.

Second largest cement manufacturer in Nigeria, one of Africa’s largest markets…

Lafarge Wapco has grown to become the second largest cement manufacturer in Nigeria with an estimated 16% of the total production capacity for cement in the country. Its base in the Southern region of Nigeria offers it exposure to fast growing urban regions such as Lagos which have rising demand for cement and cement products.

Rising financial performance on the back of improved profitability….

Lafarge Wapco has posted improved financial results for the past three years with revenues rising by over 100% whilst Ebitda and profits after tax have tripled. Critical to this performance has been tighter cost control, increased capacity and rising sales volumes on the back of increased demand. Wapco will also benefit from being granted pioneer tax status on the back of its investment into new capacity. As a result we forecast that the company will continue to post double digit growth in profits for the next 3-5 years.

Valuation Lafarge Wapco is currently trading on a TTM PER of 14.2x, P/BV of 5.0x and a dividend yield of 1.0%. Using a DCF valuation, we value Wapco at NGN 126.9 indicating a potential upside of 10.3% from the present share price of NGN 115. Although the share price has risen by over 90% over the past 12 months, we believe that investors should continue to ACCUMULATE the stock as it is a good play on Nigeria’s Infrastructure demand.


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Lafarge Wapco vs. S & P Africa Frontier index (Rebased)

Lafarge Wapco STEIAFDP Index


Second largest cement manufacturer in Nigeria DCP well ahead in terms of capacity expansion.

with a 16.16% share of total mkt production capacity. Regional expansion limited due to holding company influence.

Increased cement capacity at Ewekoro will

help drive expansion in market share.

Strong parent company with formidable technical expertise.


Low per capita consumption in Nigeria coupled with Capacity expansion has potential to lead to price war.

high growth cement market, c10.2% CAGR . Susceptible to fuel price hikes

Relatively new & efficient plants

Access to national rail grid for lower distribution costs.

Plants located to high growth urban areas such as Lagos.

Recommendation ACCUMULATE

Bloomberg Code WAPCO NL Equity





Upside (%) 10.3

Liquidity


Market Cap (USD m) 2 141

Shares (m) 3 002



Price Performance


Change (%) 96.5


Change (%) 17.3


Turnover 87 965 96 762 108 857

EBITDA 26 178 33 432 38 979



EPS (NGN) 4.90 9.66 11.45

DPS (NGN) 1.20 2.37 2.80

NAV/Share (NGN) 22.77 33.65 42.73

Ratios

RoaA (%) 17.1 18.9 17.5

RoaE (%) 23.6 34.3 30.0

EBITDA Margin (%) 29.8 34.6 35.8




PE (x)* 14.2 11.9 10.0

PBV (x) 5.0 3.4 2.7

EV/EBITDA (x) 14.3 11.2 9.6

*NB: TTM

39

Lafarge Wapco released an impressive set of FY 12 results driven by the ramp up of production of the New Ewekoro Plant and commensurate increase in market share. The top-line jumped by 40.74% y-o-y to NGN 87.97bn while cost-of–sales grew at a slower pace of 28.67% to NGN 55.57bn. As a result gross profit went up by over 66% to NGN 32.40bn with GP margins expanding to 36.83% from the 30.91% recorded in FY 11. Selling & admin expenses were well contained, falling by a marginal 0.95% to NGN 6.24bn. In contrast however, finance costs significantly increased by 78.20% to NGN 5.39bn. This saw PBT more than double to NGN 21.26bn whilst attributable profit leapt by 70.29% y-o-y to NGN 14.71bn, having been dampened by a higher effective tax rate of 30.82% as opposed to 16.52% in FY 11. EPS came in at NGN 4.90 in comparison to NGN 2.88 in FY 11 while a DPS of NGN 1.20 was declared. The company’s gearing significantly improved to 41.57% from 73.66% as at the end of FY 11. However, the working capital position remained largely unchanged at a negative NGN 8.04bn in comparison to a similarly negative value of NGN 7.56bn as at the end of the previous financial year. In terms of the cash flow statement, net inflows from operating activities contracted by 20.33% to NGN 24.97bn. The net outflows from investing activities of NGN 5.12bn were approximately a fifth of the corresponding figure in FY 11. There were large net outflows from financing activities of NGN 22.37bn in contrast to an inflow of NGN 1.18bn in the previous financial year. Consequently, cash & cash equivalents at the end of the period declined to NGN 8.89bn from NGN 11.42bn at the beginning of the financial year. At the end of September 2013, Lafarge Wapco released a positive set of 9M 13 results wherein group revenues grew by 6.35% y-o-y to NGN 74.3bn (from NGN 64.8bn in 9M 12) whilst cost of sales fell marginally by 0.05% y-o-y to -NGN 45.1bn. The GP margin consequently improved to 39.29% in 9M 13 from 35.41% in 9M 12 resulting in a GP of NGN 29.2bn, (up 18.02% y-o-y). Operating expenses were up 39.28% y-o-y to NGN 6.1bn in 9M 13, leading to an operating income of NGN 23.1bn, (up 13.65% from NGN 20.3bn in 9M 12), with the EBIT margin improving slightly to 31.12% vs. 29.12% in 9M 12. Finance charges were lower by 38.33% y-o-y in the aftermath of the deleveraging process begun in 2012. This led to a PAT of NGN 20.5bn, up 88.63% y-o-y from NGN 10.8bn in 9M 12 on the back of a of pioneer tax status granted during the course of the year. Total assets grew by 4.06% to NGN 158.1bn from NGN 151.9bn at FY 12.


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Working capital improved to a positive NGN 6.6bn from a negative NGN 7.5bn as at the end of FY 12. Wapco saw its cash generated from operations rise by 3.02% y-o-y to NGN 25.7bn (9M 12:NGN 25bn), whilst cash from investing was a negative NGN 1.1bn (9M 12:–NGN 5.1bn). Cash from financing activities was a negative NGN 16.1bn in 9M 13 (vs. –NGN 22.4bn in 9M 12). This lead to a 95.71% y-o-y increase in cash and cash equivalents to NGN 17.4bn in 9M 13 from a balance of NGN 8.9bn as at 9M 12.

40

Outlook

Wapco well placed to benefit from rising cement demand in Nigeria with increasing cement capacity enabling it to maintain its market share... Cement consumption in Nigeria is estimated to have risen to 18.3 million metric tonnes pa in 2012 from around 8 million metric tonnes in 2004 (CAGR - 10.2%). This is mostly due to demand drivers identified earlier such as rising infrastructure spend, urbanisation, population growth and rising per capita income. Lafarge is currently the second largest cement manufacturer in Nigeria in terms of capacity and in December 2011, Wapco’s new Ewekoro plant came online increasing Wapco’s total capacity to 4.3m metric tonnes. This puts it in a good position to benefit from high demand for cement in Nigeria and maintain its market share as the country tries to fill its significant infrastructure and housing gap.

Improved financial performance and rising profitability… Lafarge Wapco has posted improved financial results for the past three years with revenues rising by over 100% whilst Ebitda and profits after tax have tripled. Critical to this performance has been tighter cost control, increased capacity and rising sales volumes on the back of increased demand. Wapco will also benefit from being granted pioneer tax status on the back of its investment into new capacity. As a result we forecast that the company will continue to post double digit growth in profits for the next 3-5 years.

However, some downside risks remain… Although Lafarge Wapco has been increasing its capacity, some of its main rivals have also been doing the same. Chief amongst them is Dangote Cement which currently has plans to increase its capacity in Nigeria to 32.75m mt by FY 15. Whilst we expect any increased supply to be absorbed in the long-run due to the growing cement demand as well as export opportunities into West Africa, risks for short term over capacity remain should cement demand growth become sluggish which can affect margins in the medium term.


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Valuation and Recommendation Lafarge Wapco is currently trading on a TTM PER of 14.2, P/BV of 5.0x and a dividend yield of 1.0%. Using a DCF valuation, we value Wapco at NGN 126.9 indicating a potential upside downside of 10.3% from the present share price of NGN 115. Although the share price has risen by over 90% over the past 12 months, we believe that investors should continue to ACCUMULATE Lafarge Wapco so as to get exposure to Nigeria’s on-going infrastructure and construction boom.

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Lafarge Wapco’s cement production capacity is second only to

Dangote’s which can produce up to 19. 5 million metric tonnes

pa…

Source: Dangote.com

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UNICEM Ashaka CCNN EdoCement

Ukpilla

Purchem

est. FY 12 Production Capacity

41

Financial Summary

NGN Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 38 665 43 274 45 590 43 841 62 502 87 965 96 762 108 857

Y-o-Y % 11.9% 5.4% -3.8% 42.6% 40.7% 10.0% 12.5%

Gross Profit 15 342 16 667 13 501 11 982 19 319 32 400 39 672 45 916

Y-o-Y % 8.6% -19.0% -11.3% 61.2% 67.7% 22.4% 15.7%

EBITDA 10 801 12 125 8 433 8 434 13 781 26 178 33 432 38 979

Y-o-Y % 12.3% -30.4% 0.0% 63.4% 90.0% 27.7% 16.6%

EBIT/Operating Profit, exlc exceptionals 10 499 12 125 8 277 8 235 13 152 26 041 32 804 38 190

Y-o-Y % 15.5% -31.7% -0.5% 59.7% 98.0% 26.0% 16.4%

Attributable Net Income/Profit After Tax 10 679 11 252 5 055 4 881 8 639 14 712 29 002 34 380

Y-o-Y % 5.4% -55.1% -3.4% 77.0% 70.3% 97.1% 18.5%

Per Share data


Y-o-Y % 5.4% -55.1% -3.4% 77.0% 70.3% 97.1% 18.5%


Y-o-Y % -50.0% -83.3% 150.0% 200.0% 60.0% 97.1% 18.5%

NAV/Basic Share 10.9 13.5 14.6 16.1 18.7 22.8 33.6 42.7

Y-o-Y % 23.3% 8.0% 10.5% 16.2% 21.9% 47.7% 27.0%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 39.7% 38.5% 29.6% 27.3% 30.9% 36.8% 41.0% 42.2%

EBITDA margin % 27.9% 28.0% 18.5% 19.2% 22.0% 29.8% 34.6% 35.8%

EBIT margin% 27.2% 28.0% 18.2% 18.8% 21.0% 29.6% 33.9% 35.1%


Ratios

ROaA 20.8% 21.6% 11.1% 8.0% 9.7% 17.1% 18.9% 17.5%

ROaE 32.6% 30.7% 12.0% 10.6% 16.6% 23.6% 34.3% 30.0%



Cashflows

Cash Flow from Operating Activities 7 053 13 775 9 459 12 593 31 341 24 969 25 879 32 875

Net Cash in Investing Activities (1 221) (10 591) (26 765) (28 799) (24 941) (5 123) (7 741) (2 903)

Net Cash in Financing Activities (9 660) (1 430) 14 959 16 415 1 183 (22 373) (753) (7 549)

Cash at the end of the period 4 220 5 974 3 628 3 837 11 420 8 892 26 277 48 701

42

Tanga Cement Company Ltd is a Tanzania-based company engaged in the manufacture, sale and distribution of clinker and Portland Composite cement, which is mostly used in construction of bridges, roads, structural work, as well as with soil stabilisation, high-strength pavement blocks and roof tiles, among other uses. The company also offers technical support to its customers, comprising the selection of aggregates materials for concrete mix design, concrete mix design for different applications and general technical information on cement and concrete. Tanga Cement Co Ltd's major shareholder is Afrisam (Mauritius) Investment Holdings Limited.

Historic sales volumes Tanga marked a significant milestone in achieving sales volumes above a million tonnes for the first time in 2012. The increase in sales was driven by mixture of higher domestic and regional demand for cement. Export sales to regional markets in Rwanda and Burundi were key to the 55% rise in export sales volumes. Tanga is planning to increase its production capacity by up to 600,000 metric tonnes and this is expected to help drive sales growth once it comes online in the next two years.

Increased competition vs. macro-economic activity

There has been increasing competition from other cement producers and large cement imports from Asia contesting the Tanzanian cement market which has proved to be a headache for Tanga as seen in the interim performance. The Tanzanian government’s spend on infrastructure is growing, but whether this will be sufficient enough for all to benefit remains to be seen.

Valuation Tanga cement is currently trading on a TTM PER of 4.4x, P/BV of 0.8x and dividend yield of 5.0%. Using a DCF valuation we obtain a price target of TZS 2193.4, providing an 8.6% upside to the current price of TZS 2020. HOLD.

Equity Research Tanzania January 2014 Cement


Strong Balance sheet with healthy Current expansion drive may nt be aggressive enough

liquidity and cash generation. assumption may turnout otherwise

High operating margins due to operating regional expansion may be hampered by strength

efficiencies and management of distribution network.

International support from parent company


High growth in East African cement market Entrance of new aggressive competitors into market

Refurbished and newer plants. could result in excess capacity & lower margins

Asian imports remain a significant threat for cement

manufacturers in East Africa

Recommendation HOLD

Bloomberg Code SIMBA TZ Equity

Current Price (TZS) 2 020.0


Target Price (TZS) 2 193.4


Upside (%) 8.6

Liquidity

Market Cap (TZS bn) 128.62


Shares (m) 63.67


Ave. daily vol ('000) 3.32

Price Performance

Price, 12 months ago 2 400.0

Change (%) -15.8


Change (%) -15.8

Financials (TZS m) 31 Dec FY 2012 2013F 2014F

Turnover 257 922 239 223 224 197

EBITDA 62 382 52 636 51 129



EPS (TZS) 552.48 461.48 425.00

DPS (TZS) 100.41 82.60 75.92

NAV/Share (TZS) 2 268.69 2 671.97 3 042.62

Ratios

RoaA (%) 31.6 22.5 18.5

RoaE (%) 27.2 18.7 14.9

EBITDA Margin (%) 24.2 22.0 22.8


*Earnings Yield (%) 0.2 22.8 21.0


*PE (x) 4.4 4.4 4.8

PBV (x) 0.8 0.7 0.6

EV/EBITDA (x) 2.1 2.5 2.5 *NB: TTM

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Simba TZ vs. S&P Africa Frontier Index (Rebased)

SIMBA STEIAFDP Index

http://www.google.co.za/url?sa=i&source=images&cd=&cad=rja&docid=pffdh5YrFwP4WM&tbnid=FFdGVWWUDK46OM:&ved=0CAgQjRwwAA&url=http://www.mapsofworld.com/flags/tanzania-flag.html&ei=-AxlUtuZL_Op7Aac_oGwCg&psig=AFQjCNHIJGxjw5RfIUED2EF_gwMepwPYEw&ust=1382440568843706


43

Tanga Cement reached a milestone in FY 12 where it managed to sell over one million tonnes of cement in one year. Revenue for the FY 12 period improved 10.0% y-o-y to TZS 257.9bn as a result of a 21.0% increase in export sales volumes within the region. Cost of sales increased by 4.9% to TZS 178.5bn, and the gross profit margin reached 30.7% at FY 12 resulting in GP of TZS 79.3bn compared to 27.2% at FY 11, (i.e. TZS 63.7bn in profits in the previous period). Selling and administrative expenses declined 8.9% y-o-y to TZS 17.0bn in FY 12 from TZS 18.6bn in FY 11. This was due to low maintenance costs, reduction in electricity power use and control of general overhead costs, culminating in operating profits rising 43.1% y-o-y to TZS 57.0bn for the full year. Finance costs more than halved y-o-y, recording a decline of 51.8% to TZS 354.1m from TZS 741m in FY 11. As there were no long term borrowings in FY 12, the interest costs incurred of TZS 354.1m were mostly from bank overdrafts. Finance income for the period increased 9.6 times y-o-y from TZS 52.4m in FY 11 to TZS 507.3m in FY 12. Foreign exchange losses were 38.8% lower at TZS 1.3m, and PBT increased by 50.8% y-o-y to TZS 55.9bn in FY 12. Income tax expense came to TZS 18.8bn resulting in a PAT of TZS 37.1bn at FY 12, (up 66.5% y-o-y from TZS 22.3bn in FY 11. Attributable income after accounting for minorities came to TZS 35.3m, up 66.10% y-o-y from TZS 21.3m in FY 11. As at FY 12, the balance sheet reflected a 3.11% y-o-y increase in non-current assets to TZS 111.8bn, driven mostly by a 3.07% y-o-y rise in PPE to TZS 108.5bn with PPE making up 97% of non-current assets. Liquidity levels of the business remained relatively high with the current ratio improving y-o-y to 2.98x in FY 13 vs 1.82x in FY 11. This was reflected in a rise in net working capital to TZS 54.6bn in FY 13 from TZS 26.1bn in FY 12. Shareholder’s equity was up 26.62% to TZs 144.5bn as retained earnings rose by 25.9% to TZS 143.2bn. In terms of current liabilities, repayments reduced interest bearing loans to zero from TZS 2.5bn in FY 11. During H1-13, revenue slid 8.0% to TZS 112.8bn from TZS 122.6bn in the previous year. The performance was somewhat subdued due to an increase in competition which resulted in reduced sales volumes and lower selling prices for Tanga Cement’s products. Cost of sales shed 3.4% y-o-y to TZS 84.4bn also as a result of the lower sales volume. Gross profit margin thus weakened to 25.2% for H1 13 from the 28.7% achieved previously in H1 12 resulting in a GP of TZS 28.4bn for the half year. Selling and administrative expenses for the period increased by 23.09% to TZS 8.6bn as a result of inflation, increased use of external consultants and unexpected redundancy costs which caused operating profit to plummet by 34.9% y-o-y to TZS 16.0bn, leading to a PBT

margin of 14.22% (vs. normalised margins of around 20%).

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44

Net finance income declined by 5.6x y-o-y from TZS 219m to TZS 39m whilst the income tax expense of TZS 5.4bn,(34.3% of PBT), resulted in a PAT of TZS 10.5bn (down 36.9% from TZS 16.6bn achieved in H1 12).

Total Assets in the balance sheet grew by a marginal 3.20% to TZS 200.1bn at H1 13 from TZS 193.9bn as at FY 12. Liquidity remained relatively high with the current ratio standing at 3.14x in 9M 13 vs 2.98x in 9M 12. Net working capital was also positive, up 8.61% y-o-y to TZS 59.3bn. Shareholder’s equity was up 4.08% in the half year to TZS 152.9bn as retained earnings rose to TZS 150.1bn (+4.85% from FY 12).

Cash flow from operating activities dipped 25.5% to TZS 17.4bn (from TZS 23.4bn in H1 12), as receivables increased 907.0% to TZS 1.8bn from TZS 179.3m in H1 12 due to higher credit sales. Cash from investing activities rose to TZS 4.1bn (+13.34% y-o-y) and cash from financing activities fell 21.4% y-o-y to TZS 4.6bn as there were no loan repayments in H1 13. The net result of this was a 90.27% y-o-y increase in cash and cash equivalents to TZS 48.6bn at the end of H1 13.

Outlook Full year margins showing rising trend… Tanga managed to do exceptionally well, achieving its highest volume sales of one million tonnes in a single year in 2012 as demand grew in line with macro-economic growth and rising demand for road and residential infrastructure development domestically and regionally. This translated directly into increased sales revenues for Tanga.

...however, headwinds from competition remain TCC’s main challenge going forward… In 2013 however, the attractiveness of the market has seen the business face rising competition from Asian cement imports especially from Pakistan, which have resulted in low prices and lower sales volumes in H1 13. Furthermore, various competitors have announced new initiatives to increase their productive capacity. In response, Tanga’s management has indicated that it intends to streamline and lower distribution & production costs to mitigate against the rising threat to its profit margins. Chief amongst the costs it intends to address is the need for a more reliable energy source for Tanga as hiring of generators has proved to be an expensive option whenever there are power failures.

Capacity increase also on the cards… The board of directors has also approved the building of a 600,000 tonne capacity kiln which is intended to be completed by end of 2015. This will help raise the company’s cement and clinker production capacity, which will lead to a reduced reliance on costly imported clinker,

and thus increases gross margins.


We remain bullish on the Tanzanian cement markets prospects… Tanzania’s macro-economic environment is inherently supportive of the cement sector with the Tanzanian government increasing infrastructure spend whilst housing and residential infrastructure demand remains high. Tanzania’s per capita cement consumption is still very low at 50Kg vs. global average consumption at 513kg per capita, which leaves room for improvement in this regard. With the country still experiencing a cement deficit of around 1.0m tonnes per annum, we believe that Tanga Cement will be able to compete and maintain a double digit market share.


Whilst competition in its home and regional markets is rising, we forecast that the company will be able to maintain its EBITDA margins around 22-23% over the next few years. Using a DCF valuation we obtain a price target of TZS 2193.4 and this provides an 8.6% upside to the current price of TZS 2020.

Tanga cement is currently trading on a PER of 4.4x, P/BV of 0.8x and dividend yield of 5.0%. This makes it one of the relatively cheaper cement stocks in our stock universe. Part of the reason for this may be traced to limits placed on foreign shareholding of 60% on listed Tanzanian companies. With Afrisam owning up to 62% of the shares in issue, trading opportunites for foreign shareholders are limited and this may have negatively

affected demand. HOLD.

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Financial Summary

TZS Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 93 784 121 349 119 898 199 428 233 863 257 922 239 223 224 197

Y-o-Y % 29.4% -1.2% 66.3% 17.3% 10.3% -7.2% -6.3%

Gross Profit 42 727 52 477 56 070 67 584 63 736 79 384 64 590 62 775

Y-o-Y % 22.8% 6.8% 20.5% -5.7% 24.6% -18.6% -2.8%

EBITDA 35 136 44 007 47 238 52 821 45 044 62 382 52 636 51 129

Y-o-Y % 25.2% 7.3% 11.8% -14.7% 38.5% -15.6% -2.9%


Y-o-Y % 26.2% 7.1% 5.2% -15.8% 43.4% -18.0% -3.9%


Y-o-Y % 28.2% 0.6% 4.1% -32.9% 66.1% -16.6% -8.1%

Per Share data


Y-o-Y % 28.2% 0.6% 4.1% -33.0% 65.8% -16.5% -7.9%


Y-o-Y % NA 49.2% 38.0% -65.1% 16.5% -17.7% -8.1%

NAV/Basic Share 793.4 964.4 1 443.1 1 674.9 1 806.0 2 268.7 2 672.0 3 042.6

Y-o-Y % 21.6% 49.6% 16.1% 7.8% 25.6% 17.8% 13.9%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 45.6% 43.2% 46.8% 33.9% 27.3% 30.8% 27.0% 28.0%

EBITDA margin % 37.5% 36.3% 39.4% 26.5% 19.3% 24.2% 22.0% 22.8%

EBIT margin% 35.3% 34.4% 37.4% 23.6% 17.0% 22.1% 19.5% 20.0%


Ratios

ROaA 48.1% 53.0% 43.7% 34.9% 24.8% 31.6% 22.4% 18.4%

ROaE 46.7% 54.1% 39.7% 31.9% 19.2% 27.2% 18.7% 14.9%



Cashflow



Net Cash in Financing Activities 133 - (379) (10 074) (19 206) (9 664) (5 522) 16 091

Cash at the end of the period 5 525 (2 274) 10 170 8 698 11 749 40 032 59 482 103 267



46

Tanzania Portland Cement Company Limited (Twiga) was established in 1959. The company manufactures, sells and distributes high quality construction cement in Tanzania. It remains the market leader in the country.

Demand for cement in Tanzania is currently rising at a CAGR of 10% p.a. and Twiga is currently the leading manufacturer with a market share of over c40%...

Twiga is well established with a distribution network of over 35 outlets within Tanzania and in neighbouring countries. Twiga’s main shareholder, the Heidelberg Cement group (69% stake in Twiga), provides a strong technical partner which has enabled Twiga to capture a significant share of Tanzania’s cement market. The steady growth of the Tanzanian market has been sustained by road infrastructure, construction and housing demand. With the outlook on these remaining positive, we foresee further growth in demand especially as the Tanzanian government has announced plans to increase its infrastructure spend over the next few years.

Competitive pressures however, are rising as the market’s growth has attracted investment from other international players…

The sustained steady growth of the Tanzanian cement market has proved attractive to several local and international companies, with several announcing plans to either increase existing capacity or build new plants. Examples include Dangote Cement (building a USD 500m plant), Athi River Mining (1.2m mt plant under construction) and Lake Cement Company (500,000 mt plant under construction). In response, Twiga is building additional capacity (+700,000 mt plant) and diversifying its product range to include aggregates.

Valuation Twiga currently trades on a TTM PER of 9.8x, P/BV of 1.6x and dividend yield of 7.1%. Using a DCF valuation we arrive at a target price of TZS 2005.6, representing a downside of 24.6% to the current share price. Despite Twiga being the leading cement manufacturer in Tanzania, we currently see better value elsewhere as the competitive environment evolves. SELL.

Equity Research Tanzania January 2014 Cement

Recommendation SELL

Bloomberg Code TWIGA TZ EQUITY

Current Price (TZS) 2 660.0


Target Price (TZS) 2 005.6


Upside (%) (24.6)

Liquidity

Market Cap (TZS m) 478 595


Shares (m) 179.92



Price Performance


Change (%) 10.8


Change (%) 10.8

Financials (TZS m) 31 Dec F2012 2013F 2014F

Turnover 249 112 231 674 227 040

EBITDA 102 011 94 530 92 664

Net Finance Income 1 181 120 137


EPS (TZS) 342 317 310

DPS (TZS) 188 159 155

NAV/Share (TZS) 1 188 1 694 2 163

Ratios

RoaA (%) 33.9 25.9 19.7

RoaE (%) 30.7 22.0 16.1

EBITDA Margin (%) 40.9 40.8 40.8


*Earnings Yield (%) 10.2 11.9 11.7


*PE (x) 9.8 8.4 8.6

PBV (x) 1.6 1.2 1.0

EV/EBITDA (x) 4.2 4.5 4.6

*NB:TTM


The most aggressive expansion Expansion is too aggressive and some k

Very high prifitability ratios and earn assumption may turnout otherwise

margings owing to more efficient plants Pan African expansion may shrowd

$ management focus

Strong cash generation


Cash generation capacity places it ah Fall in consumption will leave it with

of international competition excess capacity

High growth in SSA Trade embagos in West african region

Newer and more efficient plants affest export from Nigeria

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Twiga vs. S & P Africa Frontier Index (Rebased)

Twiga STEIAFDP Index


47

In FY 12 Tanzania Portland Cement Company managed to maintain its market leadership position in Tanzania as it grew its dispatch volumes by 5% y-o-y. This lead to a double digit increase in gross revenues of 14.66% to TZS 249.1bn from TZS 217.3bn in the previous year. Cost of sales rose by 7.64% mostly due to rising energy costs and inflation. This lead to a y-o-y increase in gross profits of 22.96% to TZS 122.4bn. Gross profit margins for the year also showed growth rising by 332 basis points to 49.1% in FY 12 from 45.8% in FY 11. Operating expenses for the year were higher by 11.81% y-o-y to TZS 19.62bn from TZS 17.6bn on the back of a TZS 2.0bn rise in administrative expenses leading to an EBITDA of TZS 103.1bn, up 24.36% y-o-y from TZS 82.9bn. EBITDA margin was up 323 basis points to 41.39% from 38.17% in FY 11, while profit before tax was up 26.89% to TZS 92.3bn from TZS 72.8bn, after accounting for gains from foreign currency translation and net finance income. The tax charge for the year was up 38.77% to TZS 30.8bn from TZS 22.2bn and led to a net profit of TZS 61.6bn, up 21.68% from TZS 50.6bn with the net profit margin rising by 143 basis points to 24.72%. Twiga’s total assets grew by 9.96% y-o-y to TZS 277.8bn from TZS 252.7bn in FY 11. This was mostly due to a 50.93% increase in working capital as inventories and trade receivables grew by 16.12% and 113.60%, respectively. Cash and cash equivalents grew by 18% y-o-y to TZS 54.6bn from TZs 46.2bn in the previous year whilst shareholders’ equity rose by 14% y-o-y, driven by a +14.27% y-o-y rise in retained earnings. Twiga recorded H1 13 revenue of TZS 102.2bn, down 20% y-o-y when compared to TZS 127.0bn achieved in H1 12. This decline in revenue was mainly caused by a decrease in sales volumes due to competition from large quantities of imported cement from Pakistan. The company’s cost of sales declined by 12% y-o-y during H1 13 to TZS 58.2bn compared to TZS 66.1bn in H1 12 on the back of tighter cost control and improved efficiencies. As a consequence of the fall in revenues, gross profit margins eased by 500 basis points to 43% in H1 13 (vs. the 48% achieved in H1 12). Operating expenses for the half year rose by 18% y-o-y to TZS 10.7bn. The higher costs were mostly due to operational disturbances such as the fire breakouts in the main plant experienced in the first half. To cope with the disruptions, Twiga resorted to the importation of clinker and rental of electricity generators which led to higher costs.

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48

Other operating income earned rose to TZS 153m in H1 13 from a negative TZS 773.0m in H1 12. Despite this improvement, the EBITDA margin still fell y-o-y by 752 basis points to 32.65% leading to an EBITDA of TZS 33.4bn, down 34.65%. Depreciation and amortisation rose by 19% y-o-y to TZS 6.3bn, leading to operating profit plummeting 41% to TZS 26.9bn compared to TZS 45.6bn in H1 12. Finance income improved from TZS 54m in H1 12 to TZS 788m on the back of higher interest income from short-term deposits and other investments. A lower tax charge for the half year (down 39% y-o-y) led to a profit after tax of TZS 19.3bn for H1 13 (down 40% y-o-y from TZS 31.9bn in H1 12) with the profit margin falling by only 624 basis points to 18.85% from 25.08% in the previous year. Total assets in the balance sheet fell by a marginal 1.23% to TZS 274.4bn at H 1 13 from TZS 277.8bn as at FY 12. The current ratio fell slightly y-o-y to 3.34x at H 1 13 (vs. 3.91x at FY 12), whilst the net working capital remained a positive TZS 82.1bn as at H1 13 despite falling 10.38% from TZS 91.6bn at FY 12. Interest bearing borrowings fell by 37.5% to TZS 44.1m from TZS 70.5m at FY 12 as the company reduced its debt levels whilst shareholder’s equity declined marginally by 2.67% to TZS 207.3bn from TZS 213.0bn at FY 12. In the cash flow statement, cash flow from operating activities declined 79.24% to TZS 6.4bn from TZS 29.7bn in H1 12 largely as a result of reduced profitability. Cash flows from investing were marginally down by 1.21% y-o-y to TZS 8.9bn whilst cash flows from financing were a negative TZS 24.3bn in H1 13, down 5.31% from –TZS 23.1bn in H1 12. As a result of the weaker cash flows, cash and cash equivalents at H1 13 were down 37.32% y-o-y to TZS 27.6bn from TZS 44.0bn at H1 12.

Outlook Tanzanian market for cement remains strong with per capita consumption estimated at 52kg (vs. the global average of 513kg per capita), leaving Twiga / TPCC room for future growth… Overall, Tanzania still has a country wide cement deficit estimated at 0.5m tonnes as total production capacity is running at 3.5m tonnes, whilst annual demand is estimated to be around 4.0m tonnes. Despite this gap between supply and demand being filled at present by imports from Pakistan and neighbouring Kenya, it has the potential to expand further as the market growth rate is estimated to be around 10.0% per annum due to rising demand for housing, road and other infrastructure in the country.

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The above is backed up by the fact that Tanzania is presently consuming cement at an estimated per capita rate of 52kgs which is very low when compared to the global average consumption of 513kg per capita. Tanzania’s construction sector currently contributes roughly 7.9% to the country’s GDP and with the IMF forecasting a GDP growth rate of 7.0% - 7.2% for the next two years, we foresee a continued surge in demand for cement throughout the country. …However, headwinds from competition are rising affecting the company’s prospects in the short term… Twiga Cement has seen rising competition during the past few years as a result of increased cement imports from Pakistan and following the reduction of tariffs for cement from neighbouring countries such as Kenya, where competitors such as Bamburi and Athi-River Mining have been ramping up exports to neighbouring countries

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49

With over 35 distributors throughout the country and beyond, Twiga remains well placed and is also able to export to neighbouring Malawi, DRC, Rwanda, Mozambique and Burundi. This key competitive advantage will ensure that the company is able to take advantage of regional trade agreements within EAC and COMESA, ensuring a wider market for its products. TPCC’s wide distribution network in Tanzania

Source: Company Financial Reports.


Twiga currently trades on a TTM PER of 9.8x, P/BV of 1.6x and dividend yield of 7.1%. Using a DCF valuation we arrive at a target price of TZS 2005.6, representing a downside of 24.6%. With the tougher competitive environment being experiencing in Tanzania, Twiga will need to vigourously defend its position as the leading cement manufacturer aided by its established distribution network illustrated above. Imports from Asian countries such as Pakistan have already made a significant impact on the local market with Twiga’s sales volumes falling by up to 20% in H1 13. As a result, despite Twiga being the market leader in the Tanzanian cement industry, we are currently seeing value elsewhere at the present share price. SELL.

In response Twiga has ramped up its investment programme…increasing capacity by up to 54%… Twiga is currently the leading manufacturer of cement in Tanzania with a market share of over c40% as of the end of FY 2012. The reduction of import tariffs for cement in Tanzania as a result of EAC & COMESA reforms has seen Twiga’s management move to try and shore up its market share by increasing capacity in order to cater for the anticipated higher cement demand. Twiga, assisted by Tianjin Cement Industry Design & Research Institute Co. of China is currently building a fifth plant worth USD 31m in Dar es Salaam which is expected to boost the company’s capacity to 2 million metric tonnes of cement from the present 1.3 million metric tonnes. The investment programme entered into by Twiga is essential for the company to keep up with the rising demand for cement which is growing in response to the construction boom in Tanzania that has seen the building & construction industry grow at an average 8% p.a. over the past five years. With competition set to intensify in the Tanzanian market following investments by other cement companies such as Dangote, Twiga will be able to better defend its market share. The East African cement market has attracted regional and international players such as Dangote Cement which has invested up to USD 500m into a 3 million metric tonne a year plant in Mtwara, Tanzania, where construction is expected to be completed by March 2015. Other regional cement companies such as Kenya’s Athi River Mining have also jumped into the fray, investing in additional capacity within the Tanzanian market. Other investment programmes entered into by the company include:

Upgrading a clinker line at its Wazo Hill plant which will reduce the company’s reliance on expensive imported clinker, increasing profitability.

Twiga is also expected to diversify its product line further and will begin to produce aggregates including gravel and sand to bring additional revenue streams into the business.

Twiga’s strong distribution network will be key to the company’s ability to retain a meaningful market share in a tougher competitive environment. Twiga’s distribution networks is one of the widest in Tanzania and has enabled the company to compete effectively in the past, establishing it as the leading cement manufacturer in Tanzania.


50

Financial Summary

TZS Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 119 765 148 710 179 000 199 601 217 259 249 112 231 674 227 040

Y-o-Y % 24.2% 20.4% 11.5% 8.8% 14.7% -7.0% -2.0%

Gross Profit 59 118 68 661 92 445 101 827 100 048 122 405 111 203 108 979

Y-o-Y % 16.1% 34.6% 10.1% -1.7% 22.3% -9.2% -2.0%

EBITDA 48 803 55 486 78 604 86 549 82 698 102 011 94 530 92 664

Y-o-Y % 13.7% 41.7% 10.1% -4.4% 23.4% -7.3% -2.0%


Y-o-Y % 16.6% 35.8% 5.7% -4.6% 25.3% -8.2% -2.5%


Y-o-Y % 16.1% 37.3% 4.6% 0.8% 21.7% -7.3% -2.4%

Per Share data


Y-o-Y % 16.1% 37.3% 4.6% 0.7% 21.6% -7.2% -2.3%


Y-o-Y % 62.8% 85.7% 6.9% 29.6% 4.5% -15.7% -2.4%

NAV/Basic Share 438.5 589.8 786.5 935.6 1 038.6 1 188.4 1 694.1 2 162.7

Y-o-Y % 34.5% 33.4% 18.9% 11.0% 14.4% 42.6% 27.7%

Margin Performance

2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 49.4% 46.2% 51.6% 51.0% 46.1% 49.1% 48.0% 48.0%

EBITDA margin % 40.7% 37.3% 43.9% 43.4% 38.1% 40.9% 40.8% 40.8%

EBIT margin% 37.6% 35.3% 39.8% 37.7% 33.1% 36.1% 35.7% 35.5%


Ratios

ROaA 43.7% 38.6% 39.5% 36.8% 30.6% 33.9% 25.8% 19.7%

ROaE 38.2% 37.8% 38.8% 32.4% 28.5% 30.7% 22.0% 16.1%



Cash Flow



Net Cash in Financing Activities 660 17 924 (38 369) (23 441) (24 816) (32 464) (33 945) (28 607)

Cash at the end of the period (3 984) (9 497) (30 375) 15 833 42 071 46 148 84 100 123 410



51

The Zambian Government in the last few years has demonstrated strong commitment to infrastructure development and has further cemented this commitment by pledging a substantial percentage of the proceeds from the USD 750m Eurobond to infrastructure projects. The domestic cement market grew by 13.2% in 2012 and we expect it to continue to grow by more than 10% until 2018. Over the past 5 years, domestic cement demand has grown steadily, accounting for 73.52% of cement sold. Cement produced by Lafarge has risen from 0.58mt in FY 2011 to 1.07mt pa in FY 2012, with sales revenues growing at a 5-year CAGR of 18.2%, whilst net profits have grown at a 5-year CAGR of 31.9%.

Dominant cement producer The company remains the dominant cement producer in Zambia despite its market share dropping from 80% in 2011 to 68% and has a production capacity of 1.23mt pa. In FY 12, 24% of its total production was exported, which combined with 32,000 tonnes of clinker exports, accounted for 27% of total revenue. The company exceeded production levels from FY 11 by 8.81% to 1.07mt pa, representing 87% capacity utilisation. The company continues to operate close to full capacity, which has been the case since mid-2011.

Strong financial performance LCZ continues to demonstrate strong financial performance. Total revenue recorded in FY 12 was ZMW 992.4m, while net profit after tax was ZMW 295.8mn (USD 45m). Following the successful introduction of a new cement product dubbed ’SupaSet‘ cement targeted at Zambian concrete and block consumers in 2011, LCZ has further launched the Extra Mile Programme which is aimed at introducing new products and services.

Valuation LCZ is currently trading on a TTM PER of 13.2x, P/BV of 3.3x and dividend yield of 4.1%. Using a DCF valuation we obtain a price target of ZMW 18.6 leaving an upside of 17.8%. With the cement market set to continue growing at double digit rates and despite the increased competition following the entry of Dangote into the market, we continue to remain positive on Lafarge Zambia’s prospects,

BUY.

Equity Research Zambia January 2014 Cement

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Lafarge Zam vs. S & P Africa Frontier Index (Rebased)

LAFARGE Zam STEIAFDP Index

Recommendation BUY

Bloomberg code LAFA ZL Equity

Current Price (ZMW) 15.75

Current Price (USc) 285

Target Price (ZMW) 18.6

Target Price (USc) 336

Upside (%) 17.8%

Liquidity

Market Cap (ZMW m) 3 151


Shares (m) 200



Price Performance


Change (%) -58.8


Change (%) 57.5

Financials (ZMW m) 31 Dec F2012 2013F 2014F

Turnover 992.36 972.51 1 033.78

EBITDA 452.28 446.52 473.38

Net Finance Income 15.42 15.95 18.94

Attributable Earnings 248.58 253.22 257.12

EPS (ZMW) 1.24 1.27 1.29

DPS (ZMW) 0.58 0.70 0.74

NAV/Share (ZMW) 4.81 5.63 6.55

Ratios

RoaA (%) 32.5 28.3 27.0

RoaE (%) 28.2 24.3 21.1

EBITDA Margin (%) 45.6 45.9 45.8


*Earnings Yield (%) 7.6 8.0 8.2


*PE (x) 13.2 12.4 12.3

PBV (x) 3.3 2.8 2.4

EV/EBITDA (x) 5.7 5.8 5.4

*NB: TTM


Zero debt & strong operating cashflows Possible medium-term capacity constraints

Minimal CAPEX requirements Demand is largely driven by competing on pricing

Dominant domestic market share

Access to regional markets

Broadest cement product range


Increased regional Economic growth Entry of Zambezi Portland & Dangote Cement

Growth from new product lines Govt. pressure on environmental impact

increased infrastructure projects New cement plants in export markets

Opening of new mines Kwacha strength to pressure exports

Quality perceptions relative to competition

52

LCZ’s revenue for FY 2012 increased by 12.9% y-o-y from ZMW 879.0m to ZMW 992.4m, largely driven by domestic sales which accounted for 73.5% of total revenue. Sales revenue and profitability levels were higher than the prior year due to increased volumes and improved cost control in 2012. Domestic revenue grew by 18.13% y-o-y versus a 14.19% decline in export revenue. Key export markets remained DR Congo (66%), Burundi (16%) and Malawi (7%) for cement, and Malawi (100%) for clinker volumes and this trend is expected to be carried forward into FY 13. Total volumes sold for the year came in at 1.1 million tonnes, up 5.37% y-o-y from 1.05m tonnes sold in FY 11. Distribution and administrative expenses decreased by 6.38% y-o-y to ZMW 77.0m and 3.31% y-o-y to ZMW 108.9m, respectively. Employee remuneration accounted for 43% of overall operating expenses and decreased by 1% y-o-y, whilst the average number of employees fell by 3.62% y-o-y from 580 employees to 559 employees in FY 2012. Marketing spending decreased sharply by 51.48% to ZMW 5.36m. Net finance costs came in at ZMW 1.2m, up 29.56% from 0.95m in FY 11. Investment income increased by 94% y-o-y to ZMW 16.7m from ZMW 8.3m in the previous year. PBT for FY 2012 was ZMW 437.2m, up 34.92% from ZMW 324.1m achieved in FY 11. The tax charge for the year was up slightly by 235 basis points to 32.35% resulting in a PAT of ZMW 295.7m, up 30.30% y-o-y from ZMW 227.0m in FY 11. Minority interest for the year rose by 30.30% resulting in an attributable income of ZMW 248.58m, (up 30% y-o-y from ZMW 190.8m in FY 11). H1 13 Results Review H1 13 saw continued strong growth in terms of revenue and profitability. Revenues grew 11.43% y-o-y to ZMW 482.0m on the back of higher sales volumes, optimised product mix and higher investment income. Domestic demand for cement was stronger than that for H1 12 leading to a reduction in exports volumes. Regional demand grew slowly with the DRC remaining the largest market. Selling prices were adjusted in line with the increase in input costs during H1 13 as the company sought to remain profitable. Power supply remained a key risk compared with H1 11 with production being affected by the quality of power supply in H1 13. Given the slightly higher operating costs, the PBT margin for H1 13 came in at 35.88%, down 369 basis points from 39.57% at H1 12. PAT for H1 13 came in 8.17% lower y-o-y at ZMW 108.6 after accounting for a 10% surge in taxes whilst attributable income came to ZMW 91.2m, down 8.17% y-o-y from that achieved in H1 12. Balance sheet gearing remains low with equity providing the main source of funding. The current ratio for the half year came in at 2.92x vs 2.54x in H1 12, This is reflective of an improvement in working capital in the business which rose by 21.88% y-o-y to ZMW 442.7m.

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Cashflows from operating activities fell 14.29% y-o-y ZMW 131.1 whilst cash from investing activities was a negative ZMW 0.6m vs. a positive ZMW 6.2m in H1 12. Net cash used in financing rose to –ZMW 145 from –ZMW 75.8 in H1 12. This lead to a cash and cash equivalent balance of ZMW 560.6, up 27.14% y-o-y from ZMW 441 in H1 12.

Outlook

The company is well positioned to benefit from the government’s pledge to invest heavily in infrastructure development, and so demand is expected to remain strong. It is estimated by LCZ management that demand for cement in Zambia may double over the next 10 years and the average pace of growth will probably be more than 10% per year until 2018. Competition In our last report we highlighted that they were 2 other operational cement producers in Zambia, namely Oriental Quarries and Zambezi Portland Cement (“ZPC”). LCZs closest competitor still remains ZPC, which has a daily production capacity of 1,400mt and is currently producing at over 95% of its installed capacity. ZPC earlier in the year announced that it would reduce its exports by 50% effective 1 August, 2013 to cater for the increased demand for the product on the local market. Additionally, the Dangote Group (‘Dangote’) of Nigeria is currently constructing a cement plant in the Masaiti region of Zambia. The plant is expected to cost USD 400m with a production capacity of 1.5mt pa, and is expected to be completed by mid-June 2014. It is expected that a significant portion of supply from Dangote will be targeted towards regional markets. Continuous Innovation In mid-2011, LCZ introduced a new Portland Composite Cement formulation called ’SuperSet’, which is targeted at block-making and concrete. SupaSet has been very successful in the market in 2012 and has become the cement of choice for block makers and concrete product manufactures. The launch in 2013 of the Lafarge Extra Mile Programme aims at further developing new products and services. In addition to the company’s strong base regarding values and principles, this type of innovation from LCZ will set it apart from current competition by developing home grown solutions for the local consumer, whilst leveraging the group’s R&D capabilities.

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Shareholder's Equity Retained Earnings Source: Company Annual Financials

New Product Lines Following completion of the significant capacity expansion in 2009, and the subsequent move to eliminate all debt owed by the company, Lafarge management has focussed on product depth. In FY 2011, the CAPEX bill was largely due to an investment in aggregates crusher equipment, which will enable the company to foray into the aggregates and concrete business.

Valuation and Recommendation LCZ is currently trading on a TTM PER of 13.2x, P/BV of 3.3x and dividend yield of 4.1%. Using a DCF valuation we obtain a price target of ZMW 18.6 leaving an upside of 17.8%. In 2013, the Company will launch its Aggregates business for the benefit of the construction sector this is expected to enhance profitability. Lafarge Zambia is well positioned in the region and has further opportunities for growth in its export markets such as DRC. With the domestic cement market set to continue growing at double digit rates and despite the increased competition we remain positive on Lafarge Zambia’s prospects. BUY.

54

Financial Summary

ZMW Millions 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 324.60 430.13 737.48 733.90 879.16 992.36 972.51 1 033.78

Y-o-Y % NA 32.5% 71.5% -0.5% 19.8% 12.9% -2.0% 6.3%

Gross Profit 156.96 221.16 386.73 412.06 518.83 612.74 600.49 638.32

Y-o-Y % NA 40.9% 74.9% 6.5% 25.9% 18.1% -2.0% 6.3%

EBITDA 119.16 163.22 309.88 253.60 344.96 452.28 446.52 473.38

Y-o-Y % NA 37.0% 89.8% -18.2% 36.0% 31.1% -1.3% 6.0%

EBIT/Operating Profit 107.57 146.20 284.71 220.76 312.81 421.39 412.96 438.97

Y-o-Y % NA 35.9% 94.7% -22.5% 41.7% 34.7% -2.0% 6.3%

Attributable Net Income/PAT 63.32 62.21 145.10 119.16 190.78 248.58 253.22 257.12

Y-o-Y % NA -1.7% 133.2% -17.9% 60.1% 30.3% 1.9% 1.5%

Per Share data


Y-o-Y % NA -1.7% 133.2% -17.9% 60.1% 30.3% 1.9% 1.5%


Y-o-Y % NA -58.0% 566.7% -50.0% 200.0% 128.3% 21.1% 6.7%

NAV/Basic Share 1.75 2.02 2.86 3.46 4.02 4.81 5.63 6.55

Y-o-Y % NA 15.3% 41.2% 21.0% 16.2% 19.8% 17.0% 16.3%

Margin Performance

Gross Margin 48.4% 51.4% 52.4% 56.1% 59.0% 61.7% 61.7% 61.7%

EBITDA margin % 36.7% 37.9% 42.0% 34.6% 39.2% 45.6% 45.9% 45.8%

EBIT margin% 33.1% 34.0% 38.6% 30.1% 35.6% 42.5% 42.5% 42.5%


Ratios

ROaA 31.0% 19.5% 32.4% 22.6% 28.4% 32.5% 28.3% 27.0%

ROaE 18.0% 16.5% 29.7% 18.9% 25.5% 28.2% 24.3% 21.1%



Cashflow

Cash Flow from Operating Activities 100.8 117.2 227.0 189.2 326.5 355.4 283.3 358.5

Net Cash in Investing Activities (266.3) (140.7) (90.6) (19.3) (17.7) (7.5) (20.7) (20.9)

Net Cash in Financing Activities (0.1) (12.1) (114.1) (114.4) (115.0) (137.0) (137.3) (137.4)

Cash at the end of the period 112.6 77.0 99.3 163.7 357.6 575.0 700.3 900.5

55

Lafarge Cement Zimbabwe Limited is a Harare-based manufacturer and distributor of cement and allied products. Its ideal location affords it the control of a lion’s share of the nation’s foremost cement market. Clinkering capacity stands at 0.35mtpa while grinding capacity stands at 0.45mtpa. The company has excess clinkering capacity and often exports clinker to Malawi. The cement industry in Zimbabwe is mainly controlled by Pretoria Portland Cement Company Limited (PPC) (0.85mtpa) followed by Lafarge and finally Sino Cement (0.25mtpa), for a total capacity of 1.6mtpa. PPC will be commissioning a kiln in December 2013 which will ramp up production to 1m tonnes/annum and the company is doing feasibility studies on Rushinga Limestone deposits for another

factory.

Per capita consumption below 70kg GDP per capita has been proven to have a strong positive correlation with cement consumption per capita, with demand rising in line with economic development. In Zimbabwe, cement consumption per capita is below 70kg, lower than the 100kg average for developing countries and sharply contrasting with developed countries with averages of 450kg.

National capacity increasing Lafarge’s main competitor locally, PPC, is undertaking a feasibility study at the Rushinga limestone deposit with a view to building a USD 250m factory with total capacity of 1m tonnes per annum. PPC has just finished upgrading its Bulawayo factory increasing capacity from 0.85mtpa to 1mtpa. Lafarge however is targeting to increase its capacity to 1mtpa but there is currently no visible work on the ground to support that assertion.

Valuation The restructuring exercise will reduce head count for Lafarge and we believe this will improve margins. Furthermore, the reduction in the average cost of borrowings will significantly improve pre-tax margins while gross margins are expected to improve on production efficiencies. However, the tight liquidity situation meant that Lafarge could not realise the full benefit of restructuring in H1 13 but we expect the second half to have improved. Ratings are demanding at an EV/EBITDA of 5.9x and PER of 19x compared to peers that are trading at an average EV/EBITDA of 10.15x and PER of 15. 5x. HOLD.

Equity Research Zimbabwe January 2014 Cement

Recommendation HOLD

Bloomberg Code LAFARGE ZH EQUITY

Current Price(USD) 1.10

Target Price (USD) 1.17

Upside (%) 6.5

Price Performance


Change (%) 10.0


Change (%) 4.8

Liquidity

Market Cap (USD'000) 88 000

Shares (000) 80 000

Free Float (%) 7.0%


Financials (USD 000) 31 Dec 2012 2013F 2014F

Turnover 69 927 69 280 72 663

EBITDA 14 950 13 856 14 533



EPS (USD) 0.06 0.09 0.09

DPS (USD) - 0.01 0.03

NAV/Share (USD) 0.43 0.51 0.59

Ratios

RoaA (%) 19.6 15.7 15.3

RoaE (%) 16.0 18.8 15.9

EBITDA Margin (%) 21.4 20.0 20.0

Valuation Ratios 2012 2013F 2014F

Earnings Yield (%) 5.3 8.0 8.0

Dividend Yield (%) - 0.8 2.9

PE (x) 19.0 12.5 12.5

PBV (x) 2.6 2.1 1.9

EV/EBITDA (x) 5.9 6.3 6.0

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Lafarge Zim vs. S & P Africa Frontier Index (Rebased)

LAFARGE Zim STEIAFDP Index


Located in the heart of the capital Harare Dependence on parent company for key decisions

Strong brand equity Limited price adjustments due to excess

Strong strategic alliances with Parent Companycapacity in SA

Robust enviromental & health record

Lean operation after restructuring


Quintessential recovery play on Zimbabwe Slow down in GDP per capita

Rehabilitation of the road networks Limited growth in mortagage finance

Huge demand for infrastructure projects Uncertainity in the implementation of Indeginisation Law

A relatively stable environmemt Expansion by PPC in Ruchinga Mt Darwin close to Harare

Aggressive competition from PPC

56

In its FY 12 results, Lafarge reported a solid set of numbers showing a 32% growth in net earnings to USD 4.6m despite the company having incurred USD 3.5m in once off restructuring costs. The solid revenue growth was on the back of a 48% growth in local sales volumes accompanied by a 44% decline in clicker export volumes as the company focused on satisfying domestic demand. We estimate that adjusted EBITDA (excluding restructuring cost) margins widened to 21.2% from 20.5% on improved efficiencies post plant refurbishment resulting in a solid 46% growth in adjusted EBITDA. A 21% decrease in net finance costs coupled with a reduction in the effective tax rate to 28% from 31% boosted net income growth. Cash generated from operations was up 15% to USD 7.9m. Net cash inflow of USD 4.7m represented a cash interest cover of 8.8x. Net gearing improved from 2.8% to a negative 1.5% as borrowings were reduced by 28% to USD 2.4m. The current ratio was solid at 3.5x. Lafarge Zimbabwe implemented a successful restructuring programme in FY 12 when the company retrenched staff and upgraded its plant to enhance production capacity. This resulted in once off costs amounting to USD 3.5m charged to the income statement for that year. Refurbishments have allowed higher plant utilisation levels which brought about improved efficiency and profitability. Lafarge’s H1 13 results were lacklustre reflecting a 12.0% reduction in cement and clinker sales. The decline in cement sales was attributable to depressed domestic demand which was down 8.0% to 0.16 mt (0.17mt: June 2012) as well as the prevailing liquidity crunch. Consequently, revenue generated for the period under review declined by 6.3% from USD 34.3m to USD 32.2m. Profit before tax of USD 3.7m was marginally down compared to the comparative period in view of the drop in sales volume. Retrenchment costs of USD 0.6m were incurred in the first half. An operating profit margin of 11.5% was achieved for the period compared to 11% for H1 12. Profitability is expected to improve in the second half of the year after a successful implementation of various cost reduction exercises. A USD 2.6m profit after tax was reported which was USD 0.1m lower than the prior period due to payments of retrenchment costs and lower sales volumes. Basic earnings per share did not change at US 3c.

Source: Imara & Lafarge Zim



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ROaE Net Income Margin % ROaA

FY 12 & H1 13 Financial & Operational Reviews

57

The balance sheet reflected a USD 6.7m increase in current assets from USD 21.7m to USD 28.4m mainly as a result of an increase in the stock of cement. The increase in stock was due to the increased productivity post the plant refurbishment as well as the slowdown in sales in the first half due to a tight liquidity environment. Reflecting a slowdown in business was the decline in cash and cash equivalents from USD 2.9m to USD 1m. Long term assets slightly decreased from USD 34m to USD 33m. Current liabilities were maintained at the same level with the prior period at USD 17m.

Outlook: Cement sector in Zimbabwe

The performance of the cement industry in Zimbabwe is symbiotically related to the fortunes of the construction industry, although manufactures of pipes and roofing sheets also play a role in affecting the direction for demand. The long run demand for cement bears a strong and positive correlation with economic growth and demographic effects. Thus projections from multilateral institutions indicate that GDP growth in Zimbabwe is not expected to breach the 4% mark in the next five years capping growth within the construction sector. Although inflation is in the ultra-low category (0.86%), the liquidity crunch currently being experienced in the economy continues to drive up interest rates and this has seen a freeze on the nascent growth registered on mortgages. Most companies are also suspending major capex projects due to the need to keep borrowings down and thereby avoid a high interest bill on financials. Although all these factors seem to point to a slowing in the construction sector, it should be noted that some of the major construction companies have order books strong enough to take them through the coming twelve months. Projects such as the Tokwe-Mukosi dam which have entered critically completion stages and the Plumtree-Mutare highway currently under construction represent projects which are on-going. Thus demand for cement should remain firm in the short term before slowing after the completion of major projects if there is no change in the macro-economic situation.



Where are we in the Cycle

Zimbabwe is still to undertake a wholesome overhaul of her dilapidated infrastructure ranging from water reticulation, road resurfacing, hydro-electric generation and other new virgin projects that need significant capital investment. This provides room for improvement in the current consumption per capita of less than 70kg. Demand is presently being driven largely by retail buyers, but we envisage improved activity on bigger construction projects going forward as we are cautiously optimistic on the fortunes of the economy. We believe that large scale ventures in the mining and other sectors will take longer to implement given the fluid economic environment. As a result, we expect retail demand to continue to anchor demand fundamentals in the cement industry with isolated projects contributing as well.

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58

Valuation and Recommendation Management indicated that margin expansion will continue into the second half on enhanced efficiencies. The pace of construction activity remains muted and we believe this activity in the industry, by both government and private players and also from the mining sector, will support domestic cement sales growth at modest growth rate of 4% pa. Valuations on a tonnage basis are demanding at an EV/tonne of USD 259 compared to an average of USD 504 for regional peers, while financial indicators are also demanding at an EV/EBITDA of 5.9x and PER of 19x compared to peer averages of 10.15x and 15.5x respectively. HOLD.

The mining sector which is expected to be the anchor sector in the economy is facing significant headwinds locally due to the indigenisation and empowerment law. The indigenisation and empowerment law remain a handicap to a full capitalisation of the mining sector and international commodity prices remain soft in the face of weak demand from China. Irrespective of all this the long term fundamentals of the Zimbabwean cement industry remain very attractive. Shareholder Structure and Indigenisation Lafarge is majority-owned by the Lafarge Group, which currently controls 76% of its issued share capital. Lafarge Zim in 2011 expressed an interest in increasing cement capacity to 1mtpa and placed a five year time frame on the programme. We however, believe that the indigenisation laws may impact that commitment negatively as the 76% control is well in excess of the 49% foreign ownership threshold. Our opinion is that, while full compliance will obviously hurt Lafarge, its listing provides a much better position than many other foreign owned companies in Zimbabwe.

Shareholder % of Total

Associated International Cement Limited 76%

The Farlow Trust 3%

Standard Chartered Nominees 3%

Turner Roy 3%

others 16%

Total 100%

Lafarge Zim Shareholding Structure as of June 2013

Source: Imara Estimates

In its FY 2012 financials Lafarge reported that an agreement was reached with the relevant authorities on the indigenisation modalities to bring down foreign shareholding to 49% in line with the Indigenisation and Economic Empowerment (General) Regulations 2010. Thus Lafarge’s Indigenisation Plan was approved by the minister of Youth Development, indigenisation and Empowerment. Furthermore, the company reported in the first half numbers that the process of implementing the approved indigenisation policy is underway. Part of this process involves the establishment of a community share ownership trust with a seed capital of USD 3.0m, whose disbursement plan is still under consideration.

59

Financial Summary

USD Thousands 2009 2010 2011 2012 2013 E 2014 E

Revenues 28,333 41,661 49,691 69,927 69,280 72,663

Y-o-Y % NA 47.0% 19.3% 40.7% -0.9% 4.9%

Gross Profit 5,213 10,204 11,752 19,448 20,784 21,799

Y-o-Y % NA 95.8% 15.2% 65.5% 6.9% 4.9%

EBITDA 3,938 8,207 9,377 14,950 13,856 14,533

Y-o-Y % NA 108.4% 14.3% 59.4% -7.3% 4.9%

EBIT/Operating Profit, exlc exceptionals 1,251 4,012 5,116 10,413 9,513 9,972

Y-o-Y % NA 220.6% 27.5% 103.5% -8.6% 4.8%

Attributable Net Income/Profit After Tax 2,685 2,800 3,496 4,626 7,054 7,056

Y-o-Y % NA 4.3% 24.8% 32.3% 52.5% 0.0%

Per Share data

Attributable Diluted EPS 0.03 0.04 0.04 0.06 0.09 0.09

Y-o-Y % NA 4.3% 24.8% 32.3% 52.5% 0.0%

Dividend Per share (DPS) 0.00 0.00 0.00 0.00 0.01 0.03

Y-o-Y % NA NA NA NA NA 262.1%

NAV/Basic Share 0.2 0.3 0.3 0.4 0.5 0.6

Y-o-Y % NA 15.6% 17.8% 42.1% 20.8% 15.5%

Margin Performance

2009 2010 2011 2012 2013 E 2014 E

Gross Margin 18.4% 24.5% 23.6% 27.8% 30.0% 30.0%

EBITDA margin % 13.9% 19.7% 18.9% 21.4% 20.0% 20.0%

EBIT margin% 4.4% 9.6% 10.3% 14.9% 13.7% 13.7%

Net Income Margin % 9.5% 6.7% 7.0% 6.6% 10.2% 9.7%

Ratios

ROaA 6.6% 10.0% 11.4% 19.6% 15.7% 15.3%

ROaE 30.6% 14.8% 15.8% 16.0% 18.8% 15.9%

Earning yield on current price 2.9% 3.0% 3.8% 5.0% 7.7% 7.7%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 0.8% 2.8%

Cash Flow

Cash Flow from Operating Activities 1,881 3,672 5,631 4,734 10,951 8,986

Cash Flow from Investing Activities (1,691) (2,413) (6,345) (3,557) (4,755) (4,750)

Cash Flow from Financing Activities 70 596 827 (913) (2,401) 1,000

Cash at the end of the period 620 2,476 2,588 2,852 6,647 11,882

Imara Africa Securities (A division of Imara SP Reid) Imara House Block 3, 257 Oxford Road, Illovo Johannesburg 2146 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295

Imara Securities Angola SCVM Limitada Rua Rainha Ginga 74, 13th Floor, Luanda Angola Tel: +244 222 372 029 +244 222 372 036 Fax: +244 222 332 340

Imara Capital Securities 2nd Floor, Morojwa Mews, Unit 6, Plot 74770, Western Commercial Road CBD, Gaborone Botswana Tel: +267 318 8886 Fax: +267 318 8887 Members of the Botswana Stock Exchange

Imara Edwards Securities (Pvt.) Ltd. Tendeseka Office Park 1st Floor Block 2 Samora Machel Avenue Harare Zimbabwe Tel: +263 4 790590 Fax: +263 4 791435 4 Fanum House Cnr. Leopold Takawira/Josiah Tongogara Street Bulawayo Zimbabwe Tel: +263 9 74554 Fax: +263 9 66024 Members of the Zimbabwe Stock Exchange

Imara S.P. Reid (Pty) Ltd Imara House 257 Oxford Road Illovo 2146 P.O. Box 969 Johannesburg 2000 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295 Members of the JSE Limited

Stockbrokers Malawi Ltd Able House Cnr. Hanover Avenue/ Chilembwe Road Blantyre Malawi Tel: +265 182 2803 Members of the Malawi Stock Exchange

Namibia Equity Brokers (Pty) Ltd 1st Floor City Centre Building, West Wing Levinson Arcade Windhoek Namibia Tel: +264 61 246 666 Fax: +264 61 256 789 Members of the Namibia Stock Exchange

Stockbrokers Zambia Ltd 2nd Floor, Stock Exchange Building, Central Park Cairo Road/ Church Road P O Box 38956 Lusaka Zambia Tel: +260 211 232456 Fax: +260211 224055 Members of the Lusaka Stock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara S.P. Reid (Pty) Ltd, (“Imara”) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. © Imara S.P. Reid (Pty) Ltd.

Documents

IMARA INVESTING IN AFRICA - capital.bwcapital.bw/docs/IAS_SSA Cement Report_02 January 2014-1.pdf · Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9-million