Category Archives: EAPC

Cement Moment: CDC Buys into ARM

ARM (Athi River Mining) Cement seems to have been grappling with a short-term debt burden. It was reported that an Indian firm Ultratech was interested in investing $125 million, a few weeks ago for a stake in the firm. But today’s results announced by ARM, which show a full-year loss of Kshs 3.5 billion, 9blamed on an unrealised exchange loss  of Kshs 3.7 billion) also came with a notice that the CDC Group, the UK  government-owned development finance institution, has committed to invest Kshs 14 billion (~$140 million) for equity in the listed company.

CDC will become the largest shareholder in ARM and the company will use $110 million of the new funding to reduce their short-term debt (payments stand at about $1.5 million per month) and which totaled $200 million at the end of 2015. ARM shares have lost 2/3 of their value, now at 30 after trading as high as 80 in 2013

A few days ago, CDC also announced an acquisition of 10.7% of I&M Holdings, the parent group of I&M Bank. More detail here about ARM’s debt and fund-raising history, and when they kicked Bamburi, then a large shareholder, off their board.

Other Cement Companies

An Oxford Group report notes that The growth in (Kenya) construction activity has been a boon for producers, but the scope for further increases in the near term is sizeable, given that Kenya’s per-capita consumption remains well below that of other major economies on the continent. Annual per-capita demand for cement averages 100 kg, according to sector players, compared with 506 kg in Egypt and 230 kg in South Africa…However, the rise in domestic demand has not necessarily translated to a healthier balance sheet for the country’s producers. The average net profit margins for Kenya’s cement firms hit an all-time low of 11% last year, according to ARM Cement.

  • Bamburi: A recent investor note about Bamburi mentions that its shares have gained 25% in the last year and it increased its’ profit by 45% in an industry which recorded a decline in average net profits. Bamburi also has a generous dividend policy and has paid an increasing level of divided since 2011.
  • EAPCC East African Portland Cement is said to be trying to negotiate with the government to use some of their vast land holdings in Athi River / Kajiado area to restructure the company.
  • Dangote: Is still interested in investing in Kenya? Media reports say there’s a grinding plant in Kenya with others planned.
  • Savannah Cement completed a major plant upgrade to boost the firm’s production and efficiency.

East African Portland Cement 2009 AGM

The 2009 East African Portland Cement Company (EAPC) annual general meeting (AGM) was held at the company’s sports club in Athi River on November 19. The company is the second-largest cement producer in the country, but has one of the smallest shareholding pools, with just 996 shareholders. One of its largest shareholders is rival cement company Lafarge who were evicted from the board of Athi River Mining (ARM), another cement company, earlier this year.

What would have been a tough year for the company was smoothened over by an ‘other income’ boost

Shareholder questions:

How will Portland compete with the many new opening cement companies in the country? – Mombasa Cement has launched plant in Athi River, while ARM is building a new large cement plant in Tanzania?

  • By externally increasing sales in the region –  to Uganda, South Sudan, Burundi, and the Democratic Republic of Congo (DRC)
  • More media advertising to promote their cement brand (Blue Triangle) and they are relocating sales & marketing department from Athi River to Nairobi.
  • Internally improving processes e.g. use cheaper fuel, apply cheaper distribution methods. Also plan to install a new kiln to produce clinker for the company’s operations and sell the excess as exports to other cement companies (they have appointed consultants to begin the process of commissioning the 5,000 metric tons per day plant).
  • By Going Green initiatives: while cement companies not associated with environmental causes, but rival Bamburi (Lafarge) was able to create a beautiful Wildlife park (Haller Park) from a depleted quarry. Now Portland has signed up with the JP Morgan climate care program, and by reducing fuel oil they use in operations and carbon emissions, the company earns about 80 million per year (~$1 million). Also for some of their exhausted land in Athi River, they have applied for a Kshs. 250 million environmental grant from the (Kenya) Prime Minister’s office towards the planting of 4 million jatropha trees whose seed oil will be used in kiln operations and earn more carbon credits.

What will happen to idle plant/asset/farm?

  • Farm animals were sold as it was a loss-making venture and animals would have died of drought if they had been kept. The idle farm will be planted with jatropha forest, to prevent squatter encroachment.
  • Useable old mill machinery will be shifted to other countries to reduce the cost of production of some cement. Unusable plant parts (old technology) were to be sold, but global economic crunch meant that steel prices plummeted and so they have halted this until prices pick up later.

Poor dividend and share price: DPS is always 1.30, while EAPC shares rarely trade/move up or down

  • Shareholding structure is Government of Kenya – 50%, and Lafarge (France) – 42% and what is traded is from the small 6% owned by the public. The Board did not answer if they would emulate ARM and boot Lafarge/Bamburi (more difficult to do here)
  • Reserves are there but some can’t be paid out i.e. asset evaluation reserves.

Yen-denominated Japan loan: Portland received a 20 year 2.5% loan from Government of Japan that has now become a burden to pay as the Japanese Yen has gotten stronger over the years (the company lost them 921 million in 2008, and still has 10 years to go with the loan). The Board is aware of constraints and shareholder concerns and so the company will look at hedging to resolve the costly loan issue by next year.

Sticky Issues: Shareholders asked why they were being asked to re-elect directors who skipped AGM’s – Titus Naikuni (CEO of Kenya Airways) and Joseph Kinyua (Permanent Secretary, Ministry of Finance), and why the Government’s Controller & Auditor General was listed as the Portland auditor and gave an opinion, yet contracted the audit function to audit firms (this year’s done was by Ernst & Young, and the previous one by Deloitte).

Goodies: Buffet lunch, umbrella, tote bag (with cap, polo shirt).

Odd moment: Prayer by famous shareholder Mr. Chami before and after the meeting.

Banking on Other Income

It’s crunch time in Kenya’s economy and many companies are feeling the pinch. While operations may be hurting, listed (and unlisted) companies still strive to report (increasing) profits to shareholders and they will look to unconventional, or other income opportunities to deliver by year-end:

some examples; 

East African Portland Cement: Went from a profit warning issued at their ½ year to a full-year profit increase thanks to a property revaluation exercise.

Mumias Sugar: Full-year profits were attained due to a tax credit they gained from investing in electricity co-generation.

Scangroup: Profit in the ½ year was credited to income from their investment in Government bonds.

Access Kenya: Profit growth in the ½ year was attributed to the strengthening of the US$ against the Kenya shillings – and most of their revenue is dollar-denominated.

Counting on Other Income: Going forward, other companies can also employ similar measures to plug income gaps e.g.

  • Tax breaks from listing – Safaricom.
  • Green energy – carbon credits, co-generation – Kengen, Safaricom.
  • Fibre cable/IT investment writebacks.
  • Property and investment revaluations.
  • Forex: a weak shilling is usually good for Kenya Airways and tea companies.

Bad News Bears

Correction Window: At the beginning of the month it was Crown Berger shares that did a swan dance on some pedestrian financial results and last week it was the turn for Portland cement (EAPC) shares to take a drastic dip in value with the announcement of reduced profits.

This has generally been a tough year for manufacturing stocks and the next few days should see year end results of both Kengen and KPLC who have been battling over tariffs and leaving consumers suffering and manufacturing companies & industries threatening to shut down or decamp owing to high electrical costs.

There are some shares on the NSE that are perceived to be under-valued and some that are over-valued (don’t pay dividends, appreciate on speculation, limited trading activity) – and the announcement of financial results (with the waiver of the 10% daily share price rule) gives the market the chance to correct/adjust share prices. But will these share drop? Do they have any reason to? Their P/E ratios are already so low.

Already Safaricom CEO Michael Joseph has said that the price dip of Safaricom shares have no impact on the company’s performance (their quarterly results will also be tricking in soon)