Apex Issues Buy Alert on Bamburi Cement, Fair Value of Sh 194

Apex Africa Capital has initiated coverage on Bamburi Cement; a mature cement maker in Kenya which is currently a subsidiary of LafargeHolcim.

Informed by a fair value of Ksh 194.00, the stockbroker issued a BUY recommendation on Bamburi seeing that it represents a potential upside of 7.4% from Thursday’s closing price of Sh 180. They project a mild appreciation of the group’s top-line in the medium-term; a 3-year CAGR of 4.1%. The allure of the counter comes in its cost mitigation measures which are anticipated to realize a 3-year CAGR of 6.3% in its net earnings.

Tailwinds

  • Projected 10.0% y/y annual growth in cement consumption in the region.
  • Phase 1 of the expansion program to help in combating rising competition.
  • Cost mitigation measures to keep Bamburi among the region’s lowest cost producers.
  • Product diversification to sustain volumes and margins.
  • Change of tact in distribution channels to support volumes and protect margins

Headwinds

  • Political environment to dampen cement consumption in Kenya in FY17F.
  • A barrage of challenges to hit Bamburi in FY17F. Projection of a 29.6% y/y slump in FY17F earnings.
  • Lower FY17F earnings point to lower DPS for the year. The lower earnings and dividend could pile pressure on the counter’s price at the bourse.
  • Rising competition eats into market share, threatens volumes and compresses margins.
  • Debt financing of Phase 2 of the expansion program to leverage the group’s balance sheet.

Growth Drivers

According to Apex Capital Research team, Kenya’s cement consumption is projected to grow at a 5-year CAGR of 10.3% driven largely by Government investment in transport infrastructure. Bamburi is expected to leverage on its strong brand name more-so in high strength projects to augment its top-line. Of key interest is the construction of Phase 2 of the SGR as well as the capital intensive LAPSSET projects.

They further argue that Eastern and Inland African markets of DRC and South Sudan are still cement deficit which gives Bamburi an avenue to bolster its top-line. The cement consumption avenues for these countries remains constrained by the civil strife facing these countries. As such, though the opportunity exists, it’s hindered by the political instability in the regions. Despite this, Bamburi has, according to management, secured a deal that’ll see them supply cement to Kibali gold mine (Eastern DRC) for the next 18 years.

Risks

The region is poised to experience heightened cement competition with the entry of new cement players. Dangote Cement plans on setting up two 1.5M tonnes plant in Kenya by 2021. In addition, Prime Cement plans to set up a 0.6M tonnes plant in Rwanda while Tororo cement intends to scale up its production capacity in Uganda to 3.0M tonnes. Adding insult to injury, the three countries are currently operating below capacity with cement demand lagging productive capacity. Informed by this, competition in these markets is projected to remain elevated.