Cement Sector ARM and Bamburi Valuation Summary 31 st July, 2016
Table of Contents I. ARM Cement Limited II. Bamburi Cement Limited III. Comparison 2
3 I. ARM Cement Limited
Athi River Mining Company Limited Qualitative Analysis Strengths New Clinker Plant in Tanga will reduce costs associated with import of raw materials (Clinker) USD 140 mn investment by CDC Group will go into capacity improvement and debt relief Weaknesses ARM is exposed to a large amount of short term debt funding long term projects ARM has inferior products in comparison to its biggest competitor Bamburi Poor corporate governance with large influence by the Paunrana Family Opportunities Alignment with large government infrastructural projects and real estate players Revenue diversification into cement blocks and ready mix Regional expansion Threats Competition from regional players and Dangote cement which is looking to enter the Kenyan space Risk of being priced out by cheaper imports 4
Athi River Mining Company Limited Valuation Recommendation We recommend a Buy on ARM with a fair value of Kshs. 39.7 We recommend a Buy on ARM, with a target price of Kshs. 39.7, a 24.1% upside from its current price of Kshs. 32.0. Our recommendation is based of Improved Capacity - New Clinker Plant in Tanga and plans to set up a new plant in Kitui will reduce costs associated with import of raw materials (Clinker) and improve cement production capacity New Investment by CDC Group - USD 140 mn investment by CDC Group will go into capacity improvement and debt relief Endorsement from Ministry of Agriculture The endorsement of Mavuno fertiliser by the ministry of Agriculture is set to boost ARM s revenue going forward Risks: Increased Competition - Competition from regional players and Dangote cement which is looking to enter the Kenyan space Cheap Imports - Risk of being priced out by cheaper imports 5 Recommendation BUY Fair Value 39.7 Current Price 32.0 Upside/(Downside) 24.1% Dividend Yield 0.0% Total Potential Return 24.1% 52 Week Range 28.0-74.0 Forward PE 15.1x Cost of Equity 22.6% Cost of Capital 14.8% Issued Shares (adjusted for CDC shares) (bns) 0.8 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 13-Jul-15 13-Aug-15 13-Sep-15 ARM 1-year Share Performance 13-Oct-15 13-Nov-15 13-Dec-15 13-Jan-16 13-Feb-16 13-Mar-16 13-Apr-16 13-May-16 13-Jun-16 13-Jul-16
Athi River Mining Company Limited Intrinsic Valuation We arrive at a target price of Kshs. 43.4, representing an upside of 35.6% FCFE VALUATION 2016 2017 2018 2019 2020 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 PAT 1.0 1.1 1.1 1.3 1.4 add Depreciation and Amortization 1.2 1.3 1.5 1.7 1.9 Less Changes in Working Capital (1.1) 0.9 (2.1) 0.9 (2.3) less CAPEX 4.4 4.9 5.3 8.8 10.1 Debt 10.2 10.2 10.2 10.2 9.4 Interest 0.9 0.9 0.9 0.9 0.9 Free Cashflows 8.2 6.0 8.7 2.5 4.0 Terminal Value 24.0 Timing 0.4 1.4 2.4 3.4 4.4 Discount Factor 0.9 0.7 0.6 0.5 0.4 Present Value of Cashflows 7.5 4.4 5.3 1.3 1.6 PV of Terminal Value 9.7 Total PV 7.5 4.4 5.3 1.3 11.3 Sum of PV of Free Cash flows 29.9 Add Cash 0.2 Firm Value 30.1 No. Of Shares (Adjusted) 0.8 Target Price Per Share 43.4 Current Price 32.0 Upside/(Downside) 35.6% 6
Athi River Mining Company Limited Relative Valuation ARM is undervalued on a P/E basis Values in Kshs. bns Name Mkt Cap EV EV/SALES P/E ARM CEMENT LTD 14.6 24.8 1.7x 12.1x BAMBURI CEMENT LTD 61.7 56.1 1.5x 10.5x NAJRAN CEMENT CO 60.8 75.7 2.7x 10.0x EASTERN PROVINCE CEMENT CO 69.7 56.3 2.3x 7.7x RAYSUT CEMENT CO 69.9 71.4 2.0x 11.6x OMAN CEMENT CO 41.2 43.7 2.8x 9.1x TABUK CEMENT CO 33.6 41.2 6.2x 15.4x NATIONAL CEMENT CO 33.5 8.0 0.5x 17.1x ARABIAN CEMENT CO 30.1 32.6 N/A 6.3x SOUTH VALLEY CEMENT 27.5 17.4 N/A 34.2x High 69.9 75.7 6.2x 34.2x Low 27.5 8.0 0.5x 6.3x Average 44.1 42.6 2.4x 13.6x EV/SALES P/E Price 16.5 33.1 7
Athi River Mining Company Limited Valuation Summary ARM is undervalued with a potential return of 25.3% Assumptions Terminal Growth rate 5.0% Risk Free Rate 13.0% Country Risk Premium 6.7% Beta 1.4 Ke 22.6% Valuation Value Per Share Weight Intrinsic Valuation 43.4 80.0% P/E 33.1 10.0% EV/SALES 16.5 10.0% Target Price 39.7 Current Share Price 32.0 Upside/(Downside) 24.1% Dividend Yield 1.2% Total Potential Return 25.3% 8
Athi River Mining Company Limited Summary Financials ARM s EPS is expected to grow at a CAGR of 9.1% in the next 5 years Income Statement 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 CAGR CAGR Sales / turnover 13.74 14.74 16.47 19.05 21.93 25.24 29.00 19.8% 14.5% Cost of sales (10.02) (10.39) (11.12) (13.14) (15.46) (18.02) (20.94) 21.9% 15.0% Gross profit 3.72 4.35 5.35 5.90 6.47 7.22 8.06 15.7% 13.2% Foreign exchange income/loss (0.16) (3.52) 0.22 0.25 0.33 0.39 0.45-295.3% -166.2% Expenses (1.72) (2.03) -2.10-2.40-2.80-3.20-3.70 18.1% 12.9% EBITDA 1.84 (1.21) 3.49 3.74 4.01 4.39 4.79 8.3% 8.3% Dep. and Amortization 1.21 1.34 1.47 1.69 1.94 Operating profit 1.84 (1.21) 2.28 2.40 2.54 2.70 2.85 8.3% 5.89% Finance costs/(income) 0.17 (2.33) (0.90) (0.90) (0.90) (0.90) (0.90) 59.4% -17.4% Profit before tax 2.02 (3.54) 1.38 1.51 1.64 1.80 1.95 16.0% 9.1% Current tax (0.52) 0.65 (0.41) (0.45) (0.49) (0.54) (0.59) 93.2% 7.2% Profit after tax 1.49 (2.89) 0.96 1.05 1.15 1.26 1.37 8.6% 9.1% Minority Interest - - - - - - - Profit Attributable to Equity holders 1.49 (2.89) 0.96 1.05 1.15 1.26 1.37 8.6% 9.1% Annual dividend 0.19 0.21 0.23 0.25 0.27 EPS 3.02 (5.84) 1.95 2.13 2.32 2.54 2.76 8.6% 9.1% DPS 0.60-0.39 0.43 0.46 0.51 0.55-23.5% 9.1% EPS Growth Rate 10.7% -293.6% 133.4% 9.3% 9.0% 9.6% 8.5% Source Company Financials 9
Athi River Mining Company Limited Summary Financials ARM s assets are expected to grow at a CAGR of 12.5% in the next 5 years BALANCE SHEET 31-Dec-1331-Dec-1431-Dec-1531-Dec-1631-Dec-1731-Dec-1831-Dec-1931-Dec-20 CAGR CAGR Property and equipment 22.44 28.26 43.66 48.07 52.93 58.28 67.10 77.24 29.1% 12.1% Other Assets 0.41 0.45 0.51 0.51 0.51 0.51 0.51 0.51 30.4% 0.0% Total Non-current assets 22.86 28.71 44.17 48.59 53.44 58.79 67.61 77.75 29.1% 12.0% Inventories 2.53 4.04 3.87 4.30 4.99 5.92 6.87 8.00 27.9% 15.7% Current Receivables 2.78 3.75 3.54 4.19 4.74 5.55 6.37 7.36 13.8% 15.8% Other current assets 1.53 0.48 0.37 0.37 0.37 0.37 0.37 0.37-22.0% 0.0% Total Current assets 6.85 8.26 7.77 8.85 10.09 11.84 13.60 15.73 12.9% 15.2% Total assets 29.71 36.97 51.94 57.44 63.53 70.63 81.21 93.48 25.7% 12.5% Current borrowings 4.27 13.22 15.43 6.15 6.15 6.15 6.15 5.65 51.2% -18.2% Other Liabilities 2.98 4.33 4.83 8.11 11.81 16.29 23.93 33.72 31.0% 47.5% Total Current Liabilities 7.25 17.55 20.26 14.26 17.96 22.44 30.08 39.37 44.6% 14.2% Long-term borrowings 12.00 7.66 8.95 4.10 4.10 4.10 4.10 3.76 5.8% -15.9% Other long-term liabilities 2.23 2.35 5.88 5.88 5.88 5.88 5.88 5.88 28.7% 0.0% Total long-term Liabilities 14.23 10.00 14.83 9.98 9.98 9.98 9.98 9.65 12.0% -8.2% Total liabilities 21.48 27.55 35.09 24.25 27.95 32.42 40.06 49.02 24.7% 6.9% Total Shareholders Equity 8.22 9.42 16.85 33.19 35.58 38.20 41.15 44.46 27.9% 21.4% Total liabilities and Equity 29.71 36.97 51.94 57.44 63.53 70.63 81.21 93.48 25.7% 12.5% Source Company Financials 10
11 II. Bamburi Cement Limited
Bamburi Cement Company Limited - Qualitative Analysis Strengths Has a large cash book of Kshs. 8 bn at their disposal Their parent Lafarge Holcim is a global player in the Cement industry so Bamburi can leverage on this expertise Has superior quality products compared to its competitors Weaknesses Lacks autonomy in decision making and bureaucracy can be a challenge Has been losing talent to other companies They have completely utilized their Bamburi plant and only have the Athi River plant to sustain Kenya's capacity thus incurring a lot of cost in importing Clinker Opportunities Alignment with large government infrastructural projects and real estate players Regional expansion Threats Competition from regional players and Dangote cement which is looking to enter the Kenyan space Risk of being priced out by cheaper imports 12
Bamburi Cement Company Limited Valuation Recommendation We recommend a Buy on Bamburi with a fair value of Kshs. 232.0 We recommend a Buy on Bamburi, with a target price of Kshs. 232.0, a 47.9% upside from its current price of Kshs. 166.0, including a dividend yield of 8.1%. Our recommendation is based of Large cash book Bamburi has a large cash book of Kshs. 8 bn at their disposal of which they can use for expansion Large Parent - Their parent Lafarge Holcim is a global player in the Cement industry so Bamburi can leverage on this expertise Superior Products - Has superior quality products compared to its competitors Capacity Utilization Bamburi has a high capacity utilization averaging 80.0%, making it one of the most efficient cement companies in the region Risk: Increased Competition - Competition from regional players and Dangote cement which is looking to enter the Kenyan space Cheap Imports - Risk of being priced out by cheaper imports 13 Recommendation BUY Fair Value 232.0 Current Price 166.0 Upside/(Downside) 39.8% Dividend Yield 8.1% Total Potential Return 47.9% 52 Week Range 146.0-200.0 Forward PE 9.9x Cost of Equity 18.4% Cost of Capital 18.4% Issued Shares (bns) 0.4 210.0 200.0 190.0 180.0 170.0 160.0 150.0 140.0 12-Jun-15 12-Jul-15 12-Aug-15 Bamburi 1-year Share Performance 12-Sep-15 12-Oct-15 12-Nov-15 12-Dec-15 12-Jan-16 12-Feb-16 12-Mar-16 12-Apr-16 12-May-16 12-Jun-16 12-Jul-16
Bamburi Cement Company Limited Intrinsic Valuation We arrive at a target price of Kshs. 243.1, representing an upside of 46.4% FCFE VALUATION 2016 2017 2018 2019 2020 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 PAT 10.0 10.7 11.4 12.1 13.0 add Depreciation and Amortization 0.7 0.8 0.9 0.9 1.0 Less Changes in Working Capital (0.1) (0.3) (0.2) (0.3) (0.5) less CAPEX 2.4 2.6 2.9 3.2 3.5 Debt 0.0 0.0 0.0 0.0 0.0 Interest 0.0 0.0 0.0 0.0 0.0 Free Cashflows 8.4 9.1 9.5 10.2 11.0 Terminal Value 86.6 Timing 0.4 1.4 2.4 3.4 4.4 Discount Factor 0.9 0.8 0.7 0.6 0.5 Present Value of Cashflows 7.8 7.2 6.3 5.7 5.2 PV of Terminal Value 41.0 Total PV 7.8 7.2 6.3 5.7 46.2 Sum of PV of Free Cashflows 73.2 Add Cash 8.5 Firm Value 81.7 No. Of Shares 0.4 Value Per Share 243.1 Current Price 166.0 Upside/(Downside) 46.4% 14
Bamburi Cement Company Limited Relative Valuation Bamburi is undervalued on a P/E and on an EV/EBITDA basis Values in Kshs. bns Name Market Cap EV EV/TTM EBITDA P/E BAMBURI CEMENT LTD 61.7 56.1 8.5x 9.9x RAYSUT CEMENT CO 69.9 71.4 8.1x 11.6x EASTERN PROVINCE CEMENT CO 69.7 56.3 4.7x 7.7x NAJRAN CEMENT CO 60.8 75.7 7.0x 10.0x OMAN CEMENT CO 41.2 43.7 8.7x 9.1x TABUK CEMENT CO 33.6 41.2 10.9x 15.4x NATIONAL CEMENT CO 33.5 8.0 9.7x 17.1x ARABIAN CEMENT CO 30.1 32.6 4.3x 6.3x MISR CEMENT (QENA) 28.9 37.4 N/A N/A HOLCIM (LIBAN) SAL 28.3 28.8 4.8x N/A SOUTH VALLEY CEMENT 27.5 17.4 10.6x 34.2x ARM CEMENT LTD 27.0 51.1 18.1x 8.9x High 69.9 75.7 10.9x 34.2x Low 27.0 8.0 4.3x 6.3x Average 41.0 42.2 7.6x 10.8x EV/EBITDA P/E Price 201.2 174.2 15
Bamburi Cement Company Limited Valuation Summary Bamburi is undervalued with a total potential return of 47.9% Assumptions Terminal Growth rate 5.0% Risk Free Rate 13.0% Country Risk Premium 6.7% Beta 0.8 Ke 18.4% Valuation Value Per Share Weight Intrinsic Valuation 243.1 80.0% P/E 174.2 10.0% EV/EBITDA 201.2 10.0% Target Price Per Share 232.0 Current Share Price 166.0 Upside/(Downside) 39.8% Dividend Yield 8.1% Total Potential Return 47.9% 16
Bamburi Cement Company Limited Summary Financials Bamburi s EPS is expected to grow at a CAGR of 9.1% in the next 5 Years Income Statement 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 CAGR CAGR Sales / turnover 36.03 39.20 43.60 47.76 52.11 56.89 62.24 6.9% 9.7% Cost of sales (26.68) (26.67) (29.21) (32.24) (35.44) (38.97) (42.94) 7.6% 10.0% Gross profit 9.35 12.53 14.39 15.52 16.68 17.92 19.29 5.4% 9.0% Foreign Exchange gain/loss 0.60 1.37 0.44 0.48 0.52 0.57 0.62 29.7% -14.6% Expenses (4.07) (5.44) -4.10-4.50-5.00-5.40-5.90 18.4% 1.7% EBITDA 5.88 8.46 10.68 11.46 12.25 13.08 14.00 2.0% 10.6% Dep. and Amortization 0.71 0.78 0.86 0.94 1.04 Operating profit 5.88 8.46 9.97 10.68 11.39 12.14 12.96 2.0% 8.9% Finance costs (0.08) - - - - - - Profit before tax 5.80 8.46 9.97 10.68 11.39 12.14 12.96 2.3% 8.9% Current tax (1.90) (2.59) (2.99) (3.20) (3.42) (3.64) (3.89) 2.7% 8.5% Profit after tax 3.90 5.87 6.98 7.48 7.97 8.50 9.07 2.1% 9.1% Minority Interest - - - - - - - Profit Attributable to Equity holders 3.90 5.87 6.98 7.48 7.97 8.50 9.07 2.1% 9.1% Annual dividend 4.36 4.72 5.58 5.98 6.38 6.80 7.26 3.4% 9.0% EPS 10.75 16.18 19.23 20.60 21.96 23.41 25.00 2.1% 9.1% DPS 12.00 13.00 15.39 16.48 17.57 18.73 20.00 3.4% 9.0% EPS Growth Rate 6.3% 50.4% 18.9% 7.1% 6.6% 6.6% 6.8% 17
Bamburi Cement Company Limited Summary Financials Bamburi s assets are expected to grow at a CAGR of 16.6% in the next 5 Years BALANCE SHEET 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 CAGR CAGR Property and equipment 25.65 24.26 23.15 25.53 28.16 31.05 34.24 37.73 5.4% 10.3% Other fixed assets 1.33 1.18 0.75 5.92 11.24 16.99 22.97 29.06-22.0% 107.7% Total Non-current assets 26.98 25.45 23.90 31.46 39.41 48.05 57.21 66.80 3.2% 22.8% Inventories 5.36 5.59 6.60 7.30 8.02 8.84 9.71 10.70 13.4% 10.1% Current Receivables 1.49 2.21 2.95 3.02 3.44 3.68 4.06 4.42 11.8% 8.5% Other current assets 9.19 7.75 8.58 8.58 8.58 8.58 8.58 8.58 2.3% 0.0% Total Current assets 16.04 15.55 18.13 18.91 20.05 21.10 22.35 23.71 7.1% 5.5% Total assets 43.02 40.99 42.03 50.36 59.45 69.15 79.56 90.51 4.8% 16.6% Current borrowings 0.31 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Current prepayments liabilities 5.24 6.41 6.80 7.45 8.28 9.14 10.11 10.94 5.5% 10.0% Other Liabilities 0.45 0.35 0.89 0.89 0.89 0.89 0.89 0.89 19.6% 0.0% Total Current Liabilities 5.99 6.77 7.69 8.34 9.17 10.03 11.00 11.83 0.6% 9.0% Long-term borrowings 0.31 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other long-term liabilities 5.21 5.10 4.63 4.63 4.63 4.63 4.63 4.63 8.0% 0.0% Total long-term Liabilities 5.52 5.10 4.63 4.63 4.63 4.63 4.63 4.63 1.9% 0.0% Total liabilities 11.51 11.87 12.32 12.97 13.80 14.67 15.63 16.47 1.1% 6.0% Total Shareholders Equity 31.51 29.12 29.71 37.40 45.65 54.48 63.93 74.04 6.6% 20.0% Total liabilities and Equity 43.02 40.99 42.03 50.36 59.45 69.15 79.56 90.51 4.8% 16.6% 18
19 III. Comparison
Key Metrics - Comparison Bamburi is more efficient in its asset utilization to generate profit Name Mkt Cap EV EV/TTM EBITDA EV/Sales P/E P/B ARM CEMENT LTD 14.86 25.03 18.10x 1.70x 12.27x 1.51x BAMBURI CEMENT LTD 61.70 56.07 8.46x 1.43x 10.51x 1.95x Return Margins - ARM Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Gross Profit Margin 24.3% 27.1% 29.5% 32.5% 31.0% 29.5% 28.6% 27.8% Operating Profit Margin 16.6% 13.4% (8.2%) 13.8% 12.6% 11.6% 10.7% 9.8% EBITDA Margin 16.6% 13.4% (8.2%) 21.2% 19.6% 18.3% 17.4% 16.5% Pretax Profit Margin 14.1% 14.7% (24.0%) 8.4% 7.9% 7.5% 7.1% 6.7% Net Profit Margin 9.5% 10.9% (19.6%) 5.9% 5.5% 5.2% 5.0% 4.7% ROaE 17.6% 16.9% (22.0%) 3.9% 3.1% 3.1% 3.2% 3.2% ROaA 4.8% 4.5% (6.5%) 1.8% 1.7% 1.7% 1.7% 1.6% Return Margins - Bamburi Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Gross Profit Margin 25.1% 25.9% 32.0% 33.0% 32.5% 32.0% 31.5% 31.0% Operating Profit Margin 16.6% 16.3% 21.6% 22.9% 22.4% 21.9% 21.3% 20.8% EBITDA Margin 16.6% 16.3% 21.6% 24.5% 24.0% 23.5% 23.0% 22.5% Pretax Profit Margin 16.3% 16.1% 21.6% 22.9% 22.4% 21.9% 21.3% 20.8% Net Profit Margin 10.8% 10.8% 15.0% 16.0% 15.7% 15.3% 14.9% 14.6% ROaE 24.5% 24.2% 15.8% 11.7% 13.4% 19.8% 18.7% 16.4% ROaA 15.9% 17.5% 11.4% 8.5% 9.5% 14.0% 13.9% 12.6% 20
Q&A 21