UK firm Exotix warns on Kenya cement stocks valuations

Bamburi, ARM Cement and EAPCC underwent a price correction last year.
Bamburi, ARM Cement and EAPCC underwent a price correction in 2015.
Kenya cement stocks have remained strong despite a tough operating environment resulting mainly from rising production costs and lethargic demand in a slowing local economy.

But according to a new report by UK-based investment bank Exotix Partners, it might be time to exit the sector before a looming downturn hits.

Exotix predicts that lower earnings for the 2017 financial year will exert downward pressure of up to 52 per cent on the current prices of the stocks this year.

The projections are based on the fact that local manufacturers are facing cost-side pressure on higher clinker cost due to rising coal prices in the global markets.


They are also facing increased competition from cheaper imports from the region and a growing gap between production and demand in a slowing economy.

Last year, global coal prices rose by an average of 34 per cent due to a cutback in production in China for environmental reasons, the investment bank says.

“Kenya cement is overvalued at a 23 per cent premium to sub-Sahara Africa [cement] stocks on average. We think that this premium is unjustified, particularly in the context of the lower earnings quality of the companies in that market relative to Nigeria and Tanzania, as well as our weak earnings outlook for the sector and increasing competition,” reads the Exotix report.

READ: Kenya cement prices drop to 15-year low, could fall further

The company notes that the local cement sector is more fragmented and exposed to cheap imports than its peers in the East African region.

“We expect 2017 earnings to be weighed down by lower prices, weaker volumes, higher imported clinker and coal costs, higher interest expenses and forex losses on foreign currency liabilities for ARM Cement and EAPCC,” the report further reads.

Of the three listed cement companies, Bamburi has been assigned the lowest downside on its stock, at 2.2 per cent on its current price of Sh180 per share, mainly due to its reliance on imported clinker whose impact will be felt once its planned additional grinding capacity comes online.

ARM Cement has a downside of 22.7 per cent on its present price of Sh13.45, Exotix says, with concern on the execution of risks relating to capital restructuring and turnaround plans for the business, its high interest burden and foreign exchange exposure on dollar denominated loans.

Troubled EAPCC has been assigned the highest downside of up to 52 per cent on its current price of Sh27.