Share Analysis: Bamburi Cement

The Company

Bamburi Cement is the largest cement manufacturing company in East Africa. The company has three subsidiaries, Bamburi Special Products, Hima Cement in Uganda and Lafarge Eco systems. Bamburi exports cement mainly to regional markets. Kenyan operations contribute 67% of sales, while Uganda contributes 20% and other inland Africa sales contribute 13%. Among Bamburi Cement’s inland export markets, Rwanda accounts for 50%, Eastern Democratic Republic of Congo (DRC) accounts for 25%, while South Sudan accounts for 20%. Lafarge is the largest shareholder, with a 58.6% stake. The company has a market share of 39% and a capacity to produce 2.9m tonnes per year.

Electricity accounts for 40% of total operating costs. The removal of electricity subsidies in Uganda led to a significant rise in overall energy costs for the company. The upward movements of global fuel prices have resulted in higher raw material and transportation costs. A recently introduced mining levy in Kenya is also expected to increase operating costs and raise the price of cement. Bamburi Cement has, however, embarked on various cost-cutting measures. These include the substitution of HF4 energy with renewable fuel in Uganda, as well as the purchase of electrostatic precipitators, which has improved the efficiency of clinker production. The company has also changed its distribution policy, shifting distribution to middlemen and customers; this has led to lower transportation costs.

The demand for cement in the region is expected to increase with most countries commissioning transport infrastructure, and demand for housing is expected to rise with increasing urbanisation. The issuance of the $2bn eurobond by the Kenyan government will improve the government’s liquidity and spur infrastructure development, while a reduction of government domestic borrowing could see a fall in interest rates that should stimulate private sector-led housing development.

Electricity concerns in the Kenyan and Ugandan grinding plants are still a major challenge. Hima Cement’s grinding operations face losing hours due to frequent power failures. With the commissioning of the Uganda petcoke mill in first-quarter 2014, the company expects to realise a significant reduction in energy costs. Meanwhile, conflicts in the DRC and South Sudan have significantly affected export volumes.

In financial year 2013 full-year turnover decreased by 9.5% to KSh34bn ($387.6m). Turnover decreased as a result of lower revenues in Uganda. Following a solid start to the year, the Ugandan market slowed significantly over the second half of 2013, as slower export markets resulted in a glut in local supply. The Kenyan market was hit by sluggish sales due to the uncertainty surrounding the elections. Operating profit stood at KSh5.2bn ($59.3m) in 2013, compared to KSh6.8bn ($77.5m) in 2012. Capacity utilisation for the company remained relatively high. Full-year profit before tax declined by 23%, while profit after tax fell by 25%. Earnings per share were KSh9.55 ($0.11) in 2013, compared to KSh12.17 ($0.14) in 2012, declining by 21%. The dividends yield was 6%. Notably, the company paid out as dividends 115.18% of full-year earnings per share.

Development Strategy

2014 is expected to be a better year, with easing political tensions in major inland Africa markets out of Uganda and an improved business environment in Kenya. The first two months of financial year 2014 have been positive for Bamburi, with prices in Uganda starting to recover, however, South Sudan remains weak because of the conflict. The Kenyan market continues to grow, however, the complexities around the funding of the newly devolved counties are delaying progress on large projects. Margins are expected to be well supported over the short to medium term by factors including lower clinker imports, increased use of petcoal and lower electricity tariffs in both Kenya and Uganda. The company is looking to identify capacity-increase opportunities, in line with Lafarge’s plan of a 10m-tonne increase in sub-Saharan African production capacity. The company expects to maintain market leadership through a growing focus on improving both its route to market and operational excellence.