High East Africa demand to drive earnings

High East Africa demand to drive earnings
Published: 15 July 2011

Limestone deposits and growing demand in East Africa will drive the profitability of cement companies in Kenya, according to a research by investment bank Renaissance Capital.

The deposits in Kenya and Tanzania are expected to lower the costs of production for the firms with Athi River Mining (ARM)—Kenya’s integrated minerals firm – becoming the largest producer in Tanzania over the next two years.

The deposits give cement manufactures in the two countries a cost edge over other manufacturers who have to import clinker, the base ingredient in cement production.

“Kenya and Tanzania produce most of the cement in the region, and will benefit from the strong demand from inland countries,” said the RenCap analysts, projecting demand to rise by 2Mt by 2015.

Uganda, Rwanda, Burundi, Democratic Republic of Congo and South Sudan have no known limestone deposits and capacity expansion will be concentrated in Kenya.

“Producers in Kenya are, in our view, best placed to benefit from the strong growth expected in most of these markets—especially in Uganda, Rwanda and the recovering regions of East DRC and South Sudan,” the note says. The investment bank expects a stellar performance from ARM over the next four years especially after its unit in Tanzania reaches full capacity.

“We expect the Group to see its cement volumes growing fivefold and its profits sevenfold between 2010 and 2015. Its capital structure is well designed to support this massive expansion,” says the investment bank.

Bamburi Cement’s volumes may decline and its margins remain under pressure in Kenya, the investment bank says. However, it says Bamburi has good growth prospects in Uganda.

“The profitability outlook for Bamburi is not attractive. In our view, we expect the Group to see earnings declining due to lower prices in Kenya,” the analysts said.

However, the company has a dividend yield of five per cent which RenCap says is attractive to investors because of “potential for special dividends as the company is cash rich.”

Tororo Cement also entered the Kenyan market in 2009 and now has a production facility of 1Mt. Last month, National Cement, a subsidiary of Devki Group, disclosed plans to grow its production capacity six times to 2.5Mt by the end of next year, making it East Africa’s largest producer.

The investment banks estimates that, last year, Uganda imported 20 per cent of its cement consumption, Rwanda 70 per cent and Burundi close to 100 per cent. Although capacity in Uganda increased, half of the production was based on imported clinker while the grinding facilities in Rwanda and Burundi have low utilisation.