Standard Bank’s research team has initiated coverage of the three Kenyan cement producers and sees regional demand growing at an attractive rate. However, increased capacity indicate a phase of declining utilisation rates coupled with the risk of further pricing pressures going forward. Additionally, competitive pressures have intensified in East Africa particularly on the back of an increase in cheap cement imports.
Companies under Standard Bank’s coverage include Bamburi Cement, Athi River Mining and East African Portland Cement Company (EAPCC). Its top pick is EAPCC: BUY (12m TP 131Ksh - 57% upside) as the company’s low earnings base and cost saving measures are likely to result in a stronger earnings recovery than its peers. Bamburi: HOLD (12m TP 184Ksh - 16% upside) is likely to be materially affected by severe competitive pressures given its premium pricing policies and for Athi River Mining: HOLD (12m TP of 188Ksh - 11% upside) - most of the company’s potential has been captured in the share price.
In terms of the regional market, Standard Bank anticipates an attractive CAGR in East African cement demand of 15% during 2011-13. However, installed capacity is forecast to grow at a CAGR of 24% during the same period. This intimates a period of declining industry capacity utilisation from c65% currently to c50-55% in FY13, coupled with the risk of further pricing pressure going forward. Cement prices declined c10% in 2010, by Standard Bank’s estimates and its analysis suggests further weakness is likely over the medium-term.
Competitive pressures have intensified in East Africa, more so in Tanzania due to an increase in cheaper imported cement (which retails at a c15-20% discount to locally produced cement by Standard Bank’s estimates). In its view, imports into the region are set to increase given this pricing dynamic and East Africa’s proximity to Asia (mainly Pakistan). The reluctance of the East African Customs Union to hike the common external tariff (CET) leaves local cement producers exposed to these imports.