SSA Cement Industry Report January 2014 Let the games begin. Asset Management Corporate Finance Securities Trust Services IMARA INVESTING IN AFRICA

Transcription

1 SSA Cement Industry Report January 214 Let the games begin Asset Management Corporate Finance Securities Trust Services IMARA INVESTING IN AFRICA

2 Table of Contents Executive Summary.... Valuation Metrics.... Sector charts... The Playing Field... (An Overview).... SSA Regional Roundup (Setting the stage)... The Players Companies Athi River Mining... Bamburi Cement... EAPCC. Ashaka... CCNN.. Dangote Lafarge Wapco Tanga. Twiga.. Lafarge Zambia.. Lafarge Zimbabwe Analysts: Chenge Besa Dexter Mahachi Loyiso Hoza Tonderai Maneswa cbesa@stockbrokerszambia.com.zm Dexter.Mahachi@imara.co.za Loyiso.Hoza@imara.co.za Tonderai.Maneswa@imara.co.zw

3 Executive summary African Cement let the games begin The Cement production process Source: Lafarge Cement This month we review our SSA cement stocks universe where we find that global cement consumption has been growing at a CAGR of over 5.2% for the past ten years driven mostly by consumption from emerging markets such as China, India and Brazil. The rise in consumption of cement is expected to result in cement consumption of around c4.5 billion metric tonnes per annum by the end of 216. In Sub Saharan Africa, cement consumption has been increasing at a rapid pace in line with the general rise in GDP. In West Africa, we look at the Nigerian cement manufacturers which have been on an active expansion drive. This has been backed by the Nigerian government which has assisted by offering significant incentives for manufacturers to raise their output. The result of this is that from an installed capacity of around 4 million metric tonnes in 22, Nigeria now has a cement capacity in excess of 22.5 million metric tonnes. Key stocks to watch in Nigeria include Dangote Cement and Lafarge Wapco. Average cement consumption in East Africa has been growing at double digit CAGR s over the last decade with regional cement demand expected to reach 14.4 million metric tonnes by 217. As a result, local and international cement companies have embarked on ambitious investment and expansion drives in the East African cement markets. In the markets we look at, Tanzania and Kenya, Dangote has been amongst the leading investors earmarking investments into new plants in both markets. All in all, new and old players are currently jostling for a share of the booming cement market in East Africa using imports as well as expanding cement production capacities. Companies to watch in East Africa include Lafarge Bamburi in Kenya and Tanga in Tanzania. In Southern Africa we look at cement companies in Zambia and Zimbabwe where demand for cement continues to increase dramatically with cement manufacturers again striving to increase capacity by raising investments into the sector. Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9-million tonnes in 212 and is expected to be boosted by new cement manufacturing plants to 18.1-million tonnes by 218. Dangote Industries is also targeting the southern African region and is expected to enter South Africa through Sephaku Cement whilst building another plant in Zambia. Central once again to the investment drive in Southern Africa is the demand for infrastructure and housing which are some of the principal drivers of cement consumption in both Zambia and Zimbabwe. As a result, we are generally bullish on the medium terms prospects for cement companies in the SSA for the next few years.

4 Our Stock Universe Company Country Price Mkt Cap Revenue PER (x) PER P/BV (x) EV EBITDA EV / EV/ Tn ROA ROE Div Current (USD) (USD m) (USD m) (T +1) USD m USD m Ebitda (USD) Yield Call Ashaka Nigeria % 6.5%.% SELL Dangote Nigeria ,151 1, , , % 43.7% 1.6% HOLD CCNN Nigeria % 19.3%.% REDUCE Wapco Nigeria.79 2, , % 23.6% 1.% ACCUMULATE Bamburi Kenya % 24.9% 4.6% ACCUMULATE ARM Cement Kenya % 19.1%.6% REDUCE EAPCC Kenya % 29.6% 1.% REDUCE Twiga Tanzania % 3.7% 7.1% SELL Tanga Tanzania % 27.2% 5.% HOLD Lafarge Zam Zambia % 28.2% 3.7% BUY Lafarge Zim. Zimbabwe % 16.% n/a HOLD Average 2, % PPC Cement RSA 3.1 1, , % 56.1% 5.% Lafarge S. A. France , , , , % 3.4% 2.% Holcim Switzerland , , , , % 3.3% 1.8% Heilderberg Germany , , ,64.3 3, % 3.3%.9% Cemex Mexico , , na 1.7 3,38. 2, % -6.9% na Average 15, , , % Sources: IAS Estimates, Bloomberg, Capital IQ - 31 Dec 213

5 Stock Charts Dangote remains the largest stock by market cap in our stock universe, worth over USD 2bn Dangote is also the largest generator of revenues dwarfing the rest with over USD 2bn in revenues 3, Market Cap (USD m) 2,5 Revenues (USD m) 2,5 2, 1,5 1, 2, 1,5 1, 5 5 Mkt Cap Average Revenue Average EAPCC and Tanga are currently priced the most competitively on a PER basis However on a P/BV basis Ashaka and Lafarge Zim are best placed Price to Earnings Price to Book PER (x) Average On an EV/EBITDA basis Twiga and Tanga are the best priced P/BV (x) Average Tanga Cement and EAPCC are relatively the cheapest cement producers on an Ev/ Tonne basis Ev/Ebitda Ev / Tonne Ev / EBITDA Average EV/ Tn Average

6 Millions of MT The Playing Field (An Overview) Global outlook: Global cement consumption has been growing at a CAGR of over 5.2% for the past ten years driven mostly by consumption from emerging markets such as China, India and Brazil. On an individual country basis, China is the single largest consumer of cement. It is expected to be one of the main drivers for increased demand for cement between now and 216 wherein it will be accounting for close to 5% of total cement consumption as shown below. The rise in consumption of cement has been fuelled principally by four critical factors and these factors are expected by the International Cement Review, to help increase cement consumption to c4.5 billion metric tonnes per annum by the end of 216. These factors include the following: Key drivers of global demand for Cement Economic growth mostly in developing / emerging markets (e.g. China, India, Brazil, Asia, etc.) Rising global population. Global population growing just over 1% per annum and is projected to grow from the current 7.2 billion to 9.6 billion by 25, up 33% (Source: UNPF) Increased urbanisation rates & housing demand: In 195, only 3% of the world population was urban. In 2, 47% of the world population was urban. By 23, it is expected that 6% of the world s population will live in urban areas. Source: International Cement Review....China is also the global leader in the production of cement, mostly producing cement for its own domestic consumption as shown below Rising infrastructure spend - as countries seek to provide goods and services to increasing numbers of their citizens. In Sub Saharan Africa, cement consumption has been increasing at a rapid pace in line with the general rise in GDP This has led to increasing infrastructure spend by SSA governments as they strove to close the gap which exists between infrastructure in SSA and in first world countries Source: USGS In addition, thanks to the rapidly rising populations (& middle classes), demand for housing and associated infrastructure has soared, resulting in increased investment by private investors and development finance institutions as they identified opportunities to help close the supply-demand gap..sub Saharan Africa Cement demand has also been driven by the same four fundamental drivers.

7 Percentage Change 1. Economic growth: SSA projected by IMF to be one of the fastest growing regions in the world IMF GDP annual growth rates GDP Percentage Growth Rates E 214E 215E 216E World Advanced economies European Union Central and eastern Europe Developing Asia ASEAN-5 Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa Source: IMF WEO Database Economic growth drivers include: Commodities - Undoubtedly the rise in commodity prices has been important. Taking together agricultural commodities, timber, metals and minerals, and hydrocarbons, the AfDB estimates that natural resources have accounted for roughly a third of Africa s growth since 2. The remaining growth has come from other sectors, such as wholesale and retail, transportation, telecommunications, financial services and manufacturing. This has been due to rising disposable incomes, an increasing work force, and the fact that many economies are growing from a low base. Indeed, the AfDB notes that in the region, services sector growth exceeds that of resource sector growth, even in some longstanding resource rich economies. 2. Average SSA population growth rates in Africa around 2.66% pa vs. global 1%. SSA s population is expected by the UN to rise from 639m in 2 to around 2.7bn by Urbanisation: although Africa is predominantly rural, with only 37.3 % living in urban areas in 1999, with a growth rate of 4.87% in terms of urban population, Africa is the continent with the fastest rate of urbanisation. (Source: UN habitat) By 23, Asia and Africa will both have higher numbers of urban dwellers than any other major region of the world. The UN projects that by 25 over 6% of Africa s population will be living in cities. 4. Infrastructure demand: According to AfDB, Africa needs to spend USD 93bn per annum on infrastructure for the next 1 years to catch up with the developed World. Currently it is only spending USD 4bn Finance has been the main limiting factor in infrastructure development. As such, 59% of current SSA infrastructure projects are owned by governments, a further 17% of projects are owned by US and European investors and 36% of the funds are currently provided by developmental finance institutions. With the increasing urbanisation trend in SSA, the African Development bank estimates that close to USD 93bn needs to be spent per annum maintaining and upgrading infrastructure over the next ten years for Africa to close the gap with the more developed countries. This is a gap that sees Africa with: Less than 4% of its population having access to electricity About a third of its rural population having access to roads. Just c5% of agriculture being under irrigation Only 34% of the population having access to improved sanitation Access to clean water slightly better at about 65% For all this to be accomplished, the continent will need a steady and reliable supply of cement for roads, power infrastructure, residential developments & dams. As a result, we are generally bullish on the prospects for cement companies across the region for the next few years.

8 Percentage Millions of MT Setting the stage - (A Regional Round-Up) West Africa In West Africa we look at the Nigerian cement manufacturers which have been on an active expansion drive. They have spent upwards of NGN 1.23tn on capacity increases with Dangote leading the drive. This has mostly been as a result of the backward integration policy of the Nigerian government which has assisted the manufacturers by offering significant incentives for them to raise their output. The end result of this is that from an installed capacity of around 4 million metric tonnes in 22, Nigeria now has a cement capacity in excess of 22.5 million metric tonnes vs. a local demand estimated around c18.3 million metric tonnes p.a. This has meant that the country has now achieved self-sufficiency in cement and as a result of this it has been able to significantly reduce imports. The various plant building projects including those implemented by Dangote are estimated to have cost almost USD 7.7bn in 7 years. Dangote remains the single largest cement manufacturer in Nigeria with close to million MT of capacity followed by Lafarge with 8.5 million metric tonnes of capacity across its various plants and subsidiaries. Rapid growth in the population creates demand pressure towards ensuring basic shelter & utilities are available. In most of Nigeria s urban centres, the problem of housing is not only restricted to quantity but also to the poor quality of available housing units. The effect is manifested in overcrowding in houses. Nigeria is perhaps the fastest urbanising country on the African continent and one of the most important challenges facing the country is the provision of affordable housing. As more Nigerians make towns and cities their homes, greater demand is created for social & economic amenities and these challenges will need to be urgently addressed. Nigerian cement sales reached c18.3 million metric tonnes in December 212 having grown at a CAGR of 1.2% since Cement Sales Source: Dangote.com Nigerian construction sector has averaged a growth rate around 6.45% for the past nine years helping to drive the demand for cement and cement products Dangote remains the most dominant producer of cement in Nigeria as seen below Dangote Lafarge Wapco Source: Dangote.com Main manufacturers est. FY 12 Production Capacity UNICEM Ashaka CCNN Edo Cement Ukpilla Purchem According to statistics from UN Habitat, the percentage of the population which is urbanised is set to rise above 65% by 23, up from c47% as of the end Source: UN habitat.com Percentage of urbanised population Nigeria 23 23

9 Volume ('s) MT East Africa In 212, cement demand in the East African market grew by an estimated 7% to 8.5 million tonnes compared to a 9% growth in 211. On average over the past decade, East African cement consumption has been growing at a CAGR close to 14% and it is expected to continue growing in the near future at around 8% per annum. As a result, regional and international cement companies have embarked on ambitious investment and expansion drives in East Africa with capacities expected to reach 14.4 m tonnes by 217. Kenya and Tanzania, the markets which we examine, are currently producing less than the market demand. Dangote and Lafarge have been amongst the leading investors in additional capacity in East Africa with Lafarge expanding capacity within its subsidiaries in the region whilst Dangote has earmarked investments into new plants in both Tanzania and Kenya. Imports from Asia e.g. Pakistan and China, have made a significant impact on the cement industry in East Africa and the Chinese have in addition invested into new cement companies such as Savannah in Kenya as they have been playing a central role in the development of infrastructure in East Africa. All in all, new and old players are currently jostling for a share of the booming cement market in East Africa using imports as well as expansion of cement production capacities. Demand for cement in Kenya and Tanzania, has risen to 3.94m metric tonnes and respectively, up by over 9% over the past five years. Infrastructure and housing remain key drivers for continued high demand for cement in East Africa with Tanzania estimated to be facing a housing backlog of over 3 million houses due to a high urbanisation rate. Kenyan construction sector has averaged a growth rate around 6.45% for the past nine years 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% Kenyan Construction Sector Growth Source: Kenya National Bureau of Statistics Giving rise to growth in demand for cement However, supply currently exceeds demand for cement in Kenya As a result the excess is being exported to the EA region. 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 - Production Consumption Sept 213* Source: Kenya National Bureau of Statistics Tanzanian Cement production has been growing at a CAGR of 1.3% for the last six years. On the back of high demand for cement Source: USGS Cement Production,'s metric tons e

10 's of metric tonnes. Southern Africa In Zambia and Zimbabwe, demand for cement continues to increase dramatically with cement manufacturers again striving to increase capacity by raising investments into the sector. Rapid infrastructure development has been a key driver of the demand for cement with Frost and Sullivan estimating that up to USD 94m would be invested in the cement industries of the three main markets - South Africa, Zambia and Zimbabwe - between 213 and 218. Domestic cement consumption in Zimbabwe is estimated to have risen by 1% in 212 to 984, tonnes p.a. from an estimated 898, in 211. In Zambia domestic cement consumption is estimated to be around 1.4 million tonnes per annum having risen by 13.2% in 212. Cement production in South Africa, Zambia and Zimbabwe, stood at 14.9m tonnes in 212 and is expected to be boosted by new cement manufacturing plants to 18.1m tonnes by 218. Dangote Cement also intends to enter the the Southern African cement market. In South Africa it intends to enter the market through Sephaku Cement, an associate company of JSE-listed Sephaku Holdings and a 64%-owned subsidiary of Nigeria's Dangote Cement. Sephaku is currently nearing completion of a 1.2-million tonne per annum cement plant in South Africa's North West province. This is expected to come on-line in the first half of 214 and will be the first new entrant to the South African cement production market to open a new plant since Est. Cement Production Zimbabwe Zambia Source: USGS Zambia Major cement companies Location of main facilities Est. Annual capacity Lafarge Cement Zambia plc Chilanga II plant, about 15 km 83,. south of Lusaka Ndola plant 45,. Chilanga I plant, about 15 km 2,. south of Lusaka Scirocco Enterprises Ltd. About 18 kilometers southwest of Lusaka 1,. Zambezi Portland Cement Ltd. Ndola 33,. Source: USGS Zimbabwe Major cement companies Location of main facilities Est. Annual capacity Pretoria Portland Cement Colleen Bawn, about 115 km 1 southeast of Bulawayo Lafarge Cement Zimbabwe Ltd. Harare 45 Pretoria Portland Cement Bulawayo 8 Sino-Zimbabwe Cement Gweru 3 Source: USGS In Zambia, Dangote is estimated to have spent close to USD 4m to build a 1.5Mt/yr. cement plant in Ndola, Zambia. Cement production is expected to start at the plant in mid-214.

11 The Players Lafarge Cement The main man LAFARGE: AFRICA OPERATIONS Lafarge Cement is the global leader in the production of cement, generating revenues of over USD 14bn as at the end of 212. Lafarge is located in 58 countries globally with over 161 production sites for cement. Background & Operational Summary Lafarge has a significant presence in Africa with over 25 years of experience. As of December 212 Africa and the Middle East supplied close to a third of group cement revenues. It currently operates 24 production sites spread over 1 countries which include: Benin, Nigeria, Cameroun, Uganda, Kenya, Tanzania, Malawi, Zambia, Zimbabwe and South Africa which are strategically located with facilities for exports to other African countries Source: Dangote Cement A burgeoning African titan Dangote: Africa Operations & projects Dangote is one of Africa s leading cement manufacturers generating revenues of over USD 2.2bn as of the end of FY 12. It currently has a market share of over 6% of the Nigerian cement market and it is currently in the process of expanding aggressively across the African continent and establishing manufacturing bases in most of the SADC countries including South Africa. Background & Operational Summary As of FY 12, Nigeria provided over 9% of Dangote s revenues and profits. Management however, expect this to change by 215 with the rest of Africa expected to provide up to 25% of all revenues despite Nigeria continuing to be the main market. In total Dangote is expecting to spend around USD 4.7bn over the next few years in order to establish operations in 14 countries. Strong revenue growth is expected once the new plants come online. Source: Dangote Cement FY 12 Presentation

12 Holcim Cement Holding steady HOLCIM: AFRICA OPERATIONS The Group operates in around 7 countries globally and employs approximately 78, people As of FY 212 it had revenues of over USD 22.9bn, sold close to 143 million tonnes of cement worldwide and owned 147 cement and grinding plants. Background & Operational Summary Founded in Switzerland in 1912, Holcim is one of the world's leading suppliers of cement and aggregates (crushed stone, sand and gravel). As of FY 12, Africa & the Middle East provided up to 4.3% of Holcim s total revenues with Asia and Europe providing the bulk of its sales. Holcim s current capacity is around 1.7m metric tonnes of cement scattered across Africa, Middle East and the Indian Ocean region. It expects cement demand to hold steady across its African portfolio. Source: HOLCIM H1 213 presentation Heidelberg Cement A hidden gem Heidelberg Cement: Africa Operations Heidelberg is one of the world s largest manufacturers of building materials. As of FY 212, group revenue amounted to USD 14.67bn and it produced up to 89m tonnes of cement globally. Heidelberg currently owns 13 cement and grinding plants with the capacity to produce up to 122m tonnes of cement per annum.. Background & Operational Summary Heidelberg was formed in Germany in 1873 and it has been in Africa since the 196s. It currently operates 4 cement plants and 9 grinding mills in Central & West Africa. In FY 12, Heidelberg sold 9.2m tonnes of cement in Africa, which comprised 8% of total group revenues. Heidelberg is expanding in Africa due to the high cement demand with most of its plants being close to full capacity. Markets with expansion plans include Liberia, Ghana, Togo, Burkina Faso, the DRC and Tanzania. Source:

13 PPC Ramping up production. PPC: AFRICA OPERATIONS Pretoria Portland Cement is one of South Africa s leading cement manufacturers generating revenues of around USD 8m. It currently has a market share of over 35% of the South African cement market and it supplies slightly over 6% of the cement consumed in Southern Africa through its manufacturing bases in South Africa and other SADC countries. Background & Operational Summary PPC was formed in Pretoria in 1888 and has grown to become the leading cement producer in South Africa. As of FY 13, cement comprised 86% of PPC s total revenues with SSA ex SA? supplying up to 24% of PPC s total revenues. PPC is currently in the process of investing in its production capacity across various countries in SSA which include DRC, Zimbabwe, Mozambique, and Ethiopia. PPC s intentions are for it to earn up to 4% of its total revenues from SSA ex-sa by Source: Other potential Pan African players Afrisam AfriSam is one of the most widely spread cement, aggregate and readymix groups in the Southern African region, with operations in South Africa, Botswana, Lesotho, Swaziland and Tanzania. Founded in 1934, AfriSam has an annual cement production capacity of 5.8m tonnes produced from seven production facilities and distributed to customers through strategically located cement depots. AfriSam currently has a 62.5% interest in Tanzania-based and listed Tanga Cement Company Limited. ARM Cement Formerly Athi River Mining of Kenya. It manufactures cement on sites in Tanzania, Kenya and Rwanda. In addition to this is also produces Sodium Silicates at plant in Kenya and in South Africa, with Kenya being capable of manufacturing up to 75 tonnes, whilst South Africa can produce up to 3 tonnes of silicates. Cement is currently the highest contributor to group revenues with Kenya being the major market for the group. ARM is in the process of deepening its foothold in East Africa and is intent on expanding its production capacity to more than 5m metric tonnes of cement by the end of 215

14 Perc entage In summary High GDP growth rates and a rapidly expanding construction sector has led to double digit growth rates cement consumption across the markets we cover over the past five years. Population growth and urbanisation rates have also been significant drivers of demand as mentioned earlier. UN habitat estimates that the average SSA country will experience a growth rate of approx. 25% in its urban population between now and 23 which will need to a huge increase in demand for cement for housing and infrastructure. Per Capita consumption rates of cement in SSA remain significantly below the global average of 513kgs per capita leaving room for future expansion and growth. 3 key sector wide risks include: UN projects that by 23, an average of over 53% of people in SSA will be staying in urbanised environments, creating demand for the provision of housing etc. and ensuring sustainable demand for cement Percentage of urbanised population Power & energy supply: Power and energy supply are a critical issue facing most of the cement producers we cover. Energy comprises up to 3% of the cost of manufacturing cement and in East Africa, rising energy tariffs have been eroding the competitive advantage of producers, whilst weak and erratic supplies have been the bane of cement producers in West and Southern Africa. Rising competition: The rapid growth rate in cement consumption across SSA has attracted regional and international players to invest and increase distribution of cement into SSA countries. In the case of Asian producers, the low cost of transporting cement & clinker across the seas has made them an enduring threat to producers from South Africa to Kenya & Tanzania where imports have captured close to 1% of the cement markets. Source: UN Habitat Per capita consumption of cement across SSA remains lower than the global average leaving room for future growth est. per capita cement consumption Over capacity: The advent of increased levels of competition within the SSA cement markets has brought with it added risks for potential over-capacity. This is especially the case in Kenya, Tanzania and Zambia where Dangote intends to build cement plants, which has induced a response from incumbent producers who have also decided to increase their production capacities. In our view however, any potential over supply situation should not be expected to last long due to the rapid growth in cement demand across the markets we cover and the low per capita consumption rates. As a result, we do not foresee a need for companies to moth-ball plants in the medium to long term despite the rising capacity and competition. 2 1 DRC Rwanda Tanzania Zimbabwe Kenya Nigeria South Africa Source: IAS Estimates, Dangote, ARM, PPC Angola Global ave.

15 Equity Research Kenya January 214 Cement Athi River Mining (Kenya) Ltd, now known as ARM Ltd, was established in 1974 and listed on the NSE in Its focus is in the manufacturing and sale of cement, mining and processing of industrial minerals and chemicals, as well as trading in other building products and the sale of fertilizers. ARM currently operates in four countries in SSA with its main divisions located in Kenya. Regional diversification enables the company to take advantage of the growing demand for cement in East Africa ARM currently produces cement in Kenya, Tanzania and Rwanda, all of which have high demand for cement with low per capita consumption rates leaving room for possible expansion in consumption. Whilst the Kenyan market is currently in surplus, ARM has the ability to export part of its production regionally benefitting from the high economic growth rates in East Africa. Rising capacity allows ARM ability to take advantage of growing market The Tanzanian and Kenyan cement markets in which ARM currently operates have five year CAGR s in excess of 13% per annum. In order to maintain its current market share and position as one of the largest cement companies in EA, ARM is in the process of expanding production capacity. Capacity at its Tanzanian operations is expected to rise to 1.95m t per annum whilst the Kenyan operation will be able to produce up to 5m t per annum by 215. Valuation ARM currently trades on a TTM PER of 28.x, P/BV of 6.2x and DY of.6%. Using a DCF valuation we arrive at a target price of KES 76.8, representing downside of 12.2% from the current share price. Whilst margins will improve going forward due to increased efficiency and reduced use of clinker imports, we see ARM s price as being currently overpriced and therefore place a REDUCE recommendation on the stock. 12.% 1.% 8.% 6.% 4.% 2.%.% -2.% 29-Nov Dec Jan-13 ARM Kenya vs. STEIAFDP INDEX 28-Feb Mar-13 3-Apr-13 ARML KN Equity 31-May-13 3-Jun Jul Aug-13 STEIAFDP Index 3-Sep Oct-13 Recommendation REDUCE Bloomberg ARM KN Equity Current Price (KES) 87.5 Current Price (USc) 11.6 Target Price (KES) 76.8 Target Price (USc) 89.2 Upside (%) (12.2) Liquidity Market Cap (KES m) Market Cap (USD m) 53 Shares (m) 495 Free Float (%) 64.7% Ave. daily vol (') Price Performance Price, 12 months ago 44.4 Change (%) 97.1 Price, 6 months ago 63.3 Change (%) 38.2 Financials (KES m) 31 Dec FY F 214F Turnover EBITDA Net Finance Income (428) (527) (568) Attributable Earnings EPS (KES) DPS (KES) NAV/Share (KES) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios FY F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) NB: ** TTM STRENGTHS WEAKNESSES Well advanced in terms of EA regional Expansion is aggressive and some capacity expansion assumptions may turnout otherwise Diversified earnings stabilise growth Pan African expansion may shrowd management focus High debt levels + potential capital raise OPPORTUNITIES THREATS High growth rate in existing EA markets Rising competition amy result in Capacity expansion will allow it to excess capacity, ultimately harming margins compete effectively in EA 13

16 % Return KES KES 's FY 12 & 9M 13 Financial & Operational Review During FY 12 ARM Cement posted results in which revenue rose by 39.35% y-o-y to KES 11.4bn, with cement sales rising by 64% as market share increased in Kenya and Rwanda, and 3 months contribution came from the Dar-es-Salaam plant as it became operational in October 212. PBT leapt by 31.36% y-o-y to KES 1.79bn, while an effective tax rate of 3.42% from 15.52% in FY 11 caused PAT to rise at a slower 8.27% to KES 1.25bn. PBT margins declined slightly to 15.7% (FY 11: 16.67%), while the net profit margin came in at 1.93% (vs. 14.6% in FY 11). On the balance sheet, net working capital improved to KES 1.43bn from a negative value of KES 696.8m as at the end of FY 11. The current ratio also improved to 1.22x in FY 12 vs..84x in FY 11. Net cash inflows from operations of KES m were well below the FY 11 figure of KES 1.87bn due mainly to an outflow of KES 1.37bn for working capital changes in contrast to an inflow of KES m in the previous financial year. Net cash used in investing activities fell by 32.34% to KES 2.77bn whilst net cash from financing activities more than quadrupled to KES 4.53bn due to convertible debt issued to the Africa Finance Corporation (AFC) to complete funding requirements for the clinker plant in Tanga. Consequently, at the end of the period, cash & cash equivalents stood at KES 77.73m (vs. FY 11: -KES 1.2bn). ARM Cement posted turnover of KES 1.2bn, (up 3.18% y- o-y from KES 7.7bn) for the first nine months of 213 as new capacity in Tanzania came online and sales volumes increased. Cash from operating activities grew by % to KES 2.4bn whilst cash used in investments increased from KES 1.6bn in 9M 12 to KES 2.6bn in 9M 13 (+58.8%). A cash outflow of KES 253.2m in 9M 13 (vs. an inflow of KES 3.3bn in 9M 12), led to a decline in cash and cash equivalents to KES 2.2bn for 9M 13 vs. closing cash and equivalents of KES 3.1bn in 9M 12. 9, 8, 7, 6, 5, 4, 3, 2, 1, 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% Earnings Revenues EBITDA Profit After Tax Margins EBITDA margins fell by 155 basis points to 22.52% in 9M 13 (vs. 24.6% in 9M 12), largely as a result of higher operating costs. EBITDA thus grew by only 23.68% y-o-y to KES 2.3bn from KES 1.2bn in the previous year. An unrealised exchange rate gain of KES 18.1m in 9M 13 (vs. a loss of -KES 42.8m in 9M 12), led to a 27.51% y-o-y increase in PBT to KES 1.5bn despite a 55 basis point decline in the PBT margin to 14.92%. The tax rate for the period was relatively unchanged at 3.72% (vs.3.79% in 9M 12) resulting in a tax charge of KES 469.4m. This led to an attributable profit of KES 1.1bn, up 27.92% y-o-y from KES 826.5m. EBIT margin% Net Income Margin % Gross Margin Profitability 3% 25% 2% 15% 1% 5% % Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Net working capital for the nine months was down by 4.67% y-o-y to KES 85.5m from KES 1.4bn in the previous year, whilst net cash fell by 3.18% y-o-y to KES 2.2bn. Source: Company Reports 14

17 KES millions Outlook Rising revenues and increased efficiencies expected to make a positive impact on profitability over the long run ARM has seen its gross revenues rise at a CAGR of 24.4% for the past six years with EBITDA and PAT also rising at rates above 2% over the same period. Operating margins have fallen slightly over the past two years due to high levels of competition which have reduced pricing power. However, we expect that increased efficiencies and the reduced use of imported clinker in Tanzania as the new cement plant in Tanga comes on-line will impact the company s financial results positively in the medium to long term. Capacity expansion to continue in lieu of the high cement demand in operating markets According to ARM management, the company intends to continue expanding its production capabilities in Kenya and Tanzania on the back of continued high demand for cement. In Tanzania, ARM intends to complete a new 1.2Mt/year plant in Tanga by Q1 14 to add to the.75mt/year plant it recently commissioned in the country. This will take the company s total production capacity in Tanzania to 1.95Mt/yr. placing it in a better position to compete with Twiga, Tanga and other new entrants such as Dangote. Management is targeting a December 214 market share of the Tanzanian cement market of 25%, up by 8 percentage points from the current 17%. In Kenya, ARM hopes to embark on the construction of a USD 25m clinker factory in order to try and expand its production capacity to 5Mt/p.a. This will double the company s cement production in Kenya from the current 2.5Mt/p.a. by the end of 215. This additional production capacity will enhance ARM s ability to compete for market share as demand for cement increases in the economy should demand for cement in Kenya continue to growing at the current five year historic CAGR of 13.16%. Competition however, remains very high despite rising demand sparking worries of over capacity Kenya remains ARM's main cement market supplying over 9% of its total revenues as of the end of 212. Despite the high growth of the market, Kenya remains in surplus with production & supply exceeding demand. Cement prices in Kenya have thus been stable and low, around KES 7 per tonne. The entrance of new competitors such as Dangote and National Cement will add to the existing over supply and as a result, we foresee pricing remaining weak in the medium term with most producers being forced to continue to export excess supply regionally. 1.4x 1.2x 1.x.8x.6x.4x.2x.x Liquidity Working capital Current ratio Quick Ratio (5) (1 ) AS of December 212, Kenya supplied the bulk of ARM s revenues followed by Tanzania as seen in graph below South Africa Rwanda Tanzania Kenya Source: Annual Financial Reports Revenues KES millions Valuation and Recommendation ARM currently trades on a TTM PER of 28.x, P/BV of 6.2x and div. yield of.6%. Using a DCF valuation we arrive at a target price of KES 76.8, representing a downside of 12.2% from the current share price. Whilst increased efficiency and reduced use of clinker imports are likely to impact positively on the business, we expect margins to remain weaken slightly going forward due to the impact of the highly competitive environment in Kenya and Tanzania where some of its plants are located in coastal regions and vulnerable to competition from imports. As a result we see ARM as being currently overpriced and therefore place a REDUCE recommendation on the stock. Source: ARM Annual reports ARM East African Production Sites In addition to the above, ARM also produces Sodium Silicate at a 3, p.a. plant in South Africa. 15

18 Financial Summary KES Millions E 214 E Revenues Y-o-Y % NA 19.% 11.4% 15.9% 37.1% 39.4% 29.9% 28.5% Gross Profit Y-o-Y % NA 19.4% 1.7% 13.2% 25.3% 22.8% 28.4% 28.5% EBITDA Y-o-Y % NA 19.1% 5.7% 25.6% 35.7% 23.2% 21.2% 21.8% EBIT/Operating Profit, exlc exceptionals Y-o-Y % NA 24.6% 4.7% 22.% 37.2% 28.3% 24.3% 23.8% Attributable Net Income/Profit After Tax Y-o-Y % NA 19.% 28.4% 67.3% 6.6% 7.7% 23.8% 26.4% Per Share data Attributable Diluted EPS Y-o-Y % NA 19.% 28.4% 67.3% 6.6% 7.7% 23.8% 26.4% Dividend Per share (DPS) Y-o-Y % NA.% 19.8% 16.7% 14.2% 25.% 24.6% 26.4% NAV/Basic Share Y-o-Y % 31.% 22.6% 94.1% 19.7% 21.3% 16.9% 18.5% 19.7% Margin Performance E 214 E Gross Margin 36.1% 36.3% 36.1% 35.2% 32.2% 28.3% 28.% 28.% EBITDA margin % 25.% 25.1% 23.8% 25.8% 25.5% 22.5% 21.% 19.9% EBIT margin% 19.7% 2.6% 19.4% 2.4% 2.4% 18.8% 18.% 17.3% Net Income Margin % 1.9% 1.9% 12.6% 18.1% 14.1% 1.9% 1.4% 1.2% Ratios ROaA 19.8% 17.5% 1.8% 8.5% 9.% 9.% 9.6% 11.3% ROaE 27.6% 26.1% 2.7% 23.8% 21.1% 19.1% 2.1% 21.3% Earning yield on current price 1.% 1.2% 1.5% 2.5% 2.7% 2.9% 3.5% 4.5% Dividend yield current price.3%.3%.3%.4%.5%.6%.7%.9% Cashflow Cash Flow from Operating Activities Net Cash in Investing Activities 2 (358) (1 291) (2 454) (3 941) (4 93) (2 769) (197) Net Cash in Financing Activities (3) (529) Cash at the end of the period (1 24)

19 Equity Research Kenya January 214 Cement Bamburi Cement Limited (BMBC), was founded in 1951 and in 21, Lafarge, the world s largest cement company, became the company s biggest shareholder. BMBC s first plant started production in Mombasa in 1954 with a capacity of 14, tonnes of cement and today the company has the capacity to produce up to 2.5m tonnes at its two Kenyan plants as well as 85, tonnes at its Hima subsidiary in Uganda. Leading cement manufacturer in Kenya BMBC s production capacity of 3.35m metric tonnes of cement makes it the largest cement company in Kenya and East Africa. It currently exports part of its production to other East African countries such as DRC, Reunion, Rwanda and South Sudan. BMBC currently has a c4% share of the Kenyan cement market and benefits from strong technical support from its parent company Lafarge. Rising Capacity levels to cope with competition During FY 12 and H1 13, BMBC faced an increased level of competition from local and international cement manufacturers. The high growth rate in the Kenyan cement market, (CAGR of 13.16% over the past five years), has increasingly attracted local and international companies to increase capacity, whilst others have looked to establish green-field operations, (e.g. Dangote). Whilst competition levels are expected to remain high, Kenya and East Africa are a growing cement market and the current economic growth rate will allow the market to accommodate more players. Valuation Using a DCF valuation, we value BMBC at KES indicating an upside of 1.3%. It currently trades on a TTM PER of 13.9x, PBV of 3.2x and DY of 4.6%. We believe the company remains well positioned in an attractive market despite the increased competition. Consequently we have an ACCUMULATE rating on the stock. Recommendation ACCUMULATE Bloomberg Code BMBC KN Equity Current Price (KES) 195. Current Price (USc) Target Price (KES) Target Price (USc) Upside (%) 1.3 Liquidity Market Cap (KES m) Market Cap (USD m) 596 Shares (m) 263 Free Float (%) 64.7% Ave. daily vol (') Price Performance Price, 12 months ago 38.2 Change (%) 41.1 Price, 6 months ago 6.3 Change (%) Financials (KES m) 31 Dec F F 214F Turnover EBITDA Net Finance Income (374) (94) 6 Attributable Earnings EPS (KES) DPS (KES) NAV/Share (KES) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) *NB: TTM Jun Jul-12 Bamburi vs. S&P Africa Frontier Index (Rebased) 26-Oct Sep Aug Nov Dec-12 BMBC 26-Apr Mar Feb Jan May Jun Jul Aug-13 STEIAFDP Index 26-Sep Oct Nov-13 STRENGTHS WEAKNESSES The most dominant in Kenya with c4% market share Prime asset located away from the Ability to push it products at premium Nairobi market prices Has been losing market share to Increased cement capacity at Hima competition which has access to inland markets OPPORTUNITIES THREATS Cash generation capacity places it ahead Prices can be undercut by competition of international competition Susceptible to fuel price hikes High growth in cement market, c13% CAGR in Kenya Significant capacity addition in East Newer and more efficient plants Africa as a region. 17

20 % Return KES KES 's FY 12 & H1 13 Financial & Operational Review Bamburi Cement released its FY 12 results in which revenue rose by 4.48% y-o-y to KES 37.5bn (FY 11 revenue KES 35.9bn). Coupled with a faster rise in operating costs of 9.74% to KES 3.7bn, operating profit fell by 13.99% to KES 6.8bn. Operating profit margin thus shrank to 18.25% from 22.17% in FY 11. The company attributes the tepid turnover growth to a decline in growth of export sales into inland African markets in H2 12 due to political instability. However, despite the lack of a geographical breakdown for the top-line revenue growth, we believe that intensifying competition also affected its sales in its key Kenyan market. The increase in operating costs was driven by higher inflation in both Kenya & Uganda and the removal of power subsidies in Uganda that led to a 7% power cost increase as well as Uganda s higher than budgeted for reliance on clinker imports from Kenya. Finance costs shrank by 32.89% to KES 251m with PBT closing 15.24% lower at KES 7.2bn. PAT dropped by 16.68% y-o-y to KES 4.9bn. EPS was KES compared to KES in FY 11. A final dividend per share of KES 8.5 was declared resulting in a total dividend per share of KES 1.5 for FY 12. On the balance sheet, Shareholder s equity was up 28.86% y-o-y to KES 3.9bn. Current assets rose by 23.26% to KES 16.5bn whilst non-current liabilities rose to KES 25.6bn, up 31.92% y-o-y from KES 2.2bn in FY 11. This led to an improvement in working capital to KES 9.5bn, up 14.43% y-o-y. In terms of cash flow, net cash generated from operations improved by 31.36% y- o-y to KES 7.5bn while net cash used in investing activities didn t change much y-o-y, at KES 1.42bn (FY 11: KES 1.32bn). Net cash used in financing activities was slightly lower at KES 4.4bn in comparison to KES 4.8bn in the previous financial year. Consequently, cash & cash equivalents were higher at KES 8.8bn as at the end of FY 12 (vs. KES 7.1bn at FY 11). During H1 13, turnover fell by 17.5% y-o-y to KES 15.8bn as a result of a general market slow-down in the first quarter as election uncertainty afflicted the market and infrastructure projects were delayed. The operating margin was up 77 basis points y-o-y resulting in an operating profit of KES 3.1bn, down 14.6%. Lower finance costs of KES 74m (vs. KES 153m in H1 11), coupled with lower investment income of KES 267m, (down 38.19% y-o-y) led to a PBT of KES 3.3bn ( % y-o-y). The PBT margin however remained slightly unchanged, (up a marginal 131 basis points to 2.64%). Attributable profit for period of KES 2.3bn the half year was lower by 1.24% from that achieved in H1 12 of KES 2.6bn. Total assets fell slightly to KES 35.1bn, (-2.51% over six months), with working capital also falling to KES 8.6bn, down 8.76% from KES 9.5bn at FY 12 Shareholder s equity also declined slightly to KES 27.9bn from KES 28.4bn in FY % 45.% 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% % 5% 4% 3% 2% 1% 5 % Earnings Revenues EBITDA Profit After Tax Margins EBIT margin% Net Income Margin % Gross Margin Profitability Attributable Diluted EPS ROaA Source: Company Reports Dividend Per share (DPS) ROaE

21 KES Millions KES millions On the cash flow statement, net cash generated from operating activities at KES 2.5bn was down 45.2% from H1 12. Net cash used in investing activities also fell to KES 336m at H1 13 from KES 55m at H1 12. Cash used in financing remained relatively unchanged y-o-y resulting in a net cash outflow of KES 1.2bn, (vs. a cash inflow of KES 529m in H1 12). As a result cash at the end of H1 13 of KES 7.5bn was lower by 182 basis points from that achieved at the end of H1 12. Outlook Demand for cement set to continue due to infrastructure & housing deficit We believe that the infrastructure and housing deficit in East Africa is set to ensure that demand for cement is sustainable going forward. At present, consumption of cement over the past eight years has been rising at a CAGR of 13.61% per annum with the current average economic growth rate of over 5% per annum proving one of the main drivers. Kenya and Uganda are expected to continue to witness high rates of cement consumption and Bamburi should be expected to be one of the main beneficiaries of this rising demand. However, rising competitive forces have been affecting profit growth The increased competition in Kenya is likely to continue to put cement prices under pressure and hence to some extent hold back Bamburi s top-line growth. Consequently, Bamburi needs to continue trying to reduce and control its operating expenditure, (i.e. use cost leadership as a strategy). An example of this is reducing the use of imported clinker in its operations by improving capacity utilisation and lowering of its energy costs through increased use of alternatives such as biogas and coal for its furnaces. Inflation in both Kenya and Uganda has also come down and this should help lower operating costs further. Bamburi expected to retain leadership position in Kenya s cement sector Despite the higher competition we believe that Bamburi s regional export strategy coupled with its market leadership position in Kenya, provide it with a solid base from which to compete effectively. With high cash flows and a strong balance sheet, the company should be able to withstand the current market volatility. As a result of the continued regional economic expansion, and robust demand for cement we maintain a positive outlook for Bamburi in Kenya and Uganda. 3.x 2.5x 2.x 1.5x 1.x.5x.x 25, 2, 15, 1, 5, - Liquidity , 8, 7, 6, 5, 4, 3, 2, 1, Working capital Current ratio Quick Ratio Shareholder's Equity Source: Company financial Reports Retained Earnings Valuation and Recommendation BMBC currently trades on a TTM PER of 13.9x, PBV of 3.2x and div. yield of 4.6%. Using a DCF valuation, we value BMBC at KES indicating upside of 1.3% to the current share price. We believe that the company remains well positioned in an attractive market. With its strength and experience in management coupled with the influence of the main shareholder Lafarge, Bamburi should be able to withstand the higher competition from Asian producers and new investors. This should see the company manage to maintain or slightly improve its margins in the medium term as cement demand increases in Kenya its main market. As a result, we have an ACCUMULATE rating on the stock. - 19

22 Financial Summary KES Millions E 214 E Revenues Y-o-Y % NA 24.2% 9.2% -6.4% 27.8% 2.% 2.5% Gross Profit Y-o-Y % NA 21.4% -13.8% -11.1% 3.6% 2.9% 4.3% EBITDA Y-o-Y % NA 18.1% 28.9% -3.2% 11.% 4.1% 3.3% EBIT/Operating Profit, exlc exceptionals Y-o-Y % NA 19.8% 29.7% -5.8% 9.2% 5.4% 4.7% Attributable Net Income/Profit After Tax Y-o-Y % NA -11.4% 18.6% -23.5% 3.% 8.2% 7.4% Per Share data Attributable Diluted EPS Y-o-Y % NA -11.4% 18.6% -23.5% 3.% 8.2% 7.4% Dividend Per share (DPS) Y-o-Y % NA -1.% NA NA -18.2% 8.2% 7.4% NAV/Basic Share Y-o-Y % NA 8.9% 25.8% 3.4% 9.2% 12.8% 12.% Margin Performanc e E 214 E Gross Margin 46.8% 45.7% 36.1% 34.3% 27.8% 28.% 28.5% EBITDA margin % 25.5% 24.2% 28.6% 29.5% 25.7% 26.2% 26.4% EBIT margin% 22.5% 21.7% 25.8% 25.9% 22.2% 22.9% 23.4% Net Income Margin % 16.3% 11.6% 22.2% 18.1% 14.6% 15.5% 16.2% Ratios ROaA 47.2% 24.4% 25.6% 22.3% 23.8% 24.9% 25.7% ROaE 5.5% 21.4% 38.% 25.7% 24.9% 24.2% 23.1% Earning yield on current price 5.1% 4.5% 9.4% 7.2% 7.4% 8.% 8.6% Dividend yield current price 3.1%.%.% 5.6% 4.6% 5.% 5.4% Cash Flow Cash Flow from Operating Activities Net Cash in Investing Activities (5 84) (1 912) (3 49) (1 373) (1 385) 262 (79) Net Cash in Financing Activities (2 426) (4 155) (4 83) (4 44) (4 289) (4 285) Cash at the end of the period

23 Equity Research Kenya January 214 Cement East African Portland Cement Co. Ltd., EAPCC, is a Kenyabased company engaged in the manufacturing and selling of cement. It sells its products under the brand name Blue Triangle. Blue Triangle is used for cementing, mortar and concrete building applications. The company also manufactures custom-made cement products for use in construction, as well as pre-cast concrete items, such as paving blocks, tiles, building blocks, and pre-stressed concrete components. East African Portland Cement's concrete pavers are used in the construction of roads, hydraulic and marine structures, walkways, parking areas, petrol stations and go-down floors. Recovery of profitability and margins EAPCC has managed to recover in terms of profitability and margins after implementing strict cost cutting measures and rationalising operations. This cost cutting exercise was also backed up by a sustained marketing campaign which resulted in improved profitability with gross profit margins rising back to 25% in FY 13 from 13% in FY 12. Increasing competition despite rising macro-economic activity Cement consumption in Kenya has been rising at a CAGR of 13.61% for the past eight years and this is set to accelerate as the Kenyan government has pledged to increase infrastructure spend. This coupled with continued economic growth has proved attractive to local and international cement manufacturers resulting in new investments and increased competition for market share in Kenya. Valuation EAPCC currently trades on a PER of 3.9x, PBV of 1.x and dividend yield of 1.%. Assuming normalised earnings and using a DCF valuation we arrive at a target price of KES 66.3 representing a downside of 13.3% to the current price. With competition set to remain high and without a respite in terms of cheap imports, we foresee EAPCC being forced to maintain low pricing to remain competitive. As a result, we see better performance coming from other cement stocks. REDUCE Jun Jul Aug-12 EAPCC vs. S & P Africa Frontier Index (Rebased) 26-Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov-13 Recommendation REDUCE Bloomberg EAPC KN EQUITY Current price (KES) 76.5 Current price (USc) 88.9 Target price (KES) 66.3 Target price (USc) 77. Upside (%) (13.3) Liquidity Market Cap (KES m) Shares (m) 9 Free Float (%) 64.7% Ave. daily vol (') Price Performance Price, 12 months ago 39. Change (%) 96.2 Price, 6 months ago 58. Change (%) 31.9 Financials (KES m) 31 Dec F F 215F Turnover EBITDA Net Finance Income (84) (162) (141) Attributable Earnings EPS (KES) DPS (KES) NAV/Share (KES) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 214F 215F Earnings Yield (%) Dividend Yield (%) PE (x) PBV (x) EV/EBITDA (x) STRENGTHS WEAKNESSES Well positioned within Kenyan market A weak strategy may prevent the with market share of c24% company from maximising regional Rising margins owing to tighter cost opportunities. controls Strong shareholding structure OPPORTUNITIES THREATS Public sector stake offers Rising competition from Dangote opportunity to maintain gvt patronage. and other international manufacturers. High growth in region offers export Imports from Asian exporters may opportunities withing East Africa continue to under cut pricing. EAPCC KN Equity STEIAFDP Index 21

24 % Return TZS KES 's FY 13 Financial & Operational Review During the year ended 3 June 213, EAPCC managed to increase its gross revenues by 8.27% y-o-y to KES 9.2bn due to an effective marketing and advertising campaign and an improved supply of cement to the market. The cost of sales fell by 6.94% to KES 6.8bn following stringent cost management and rationalisation of operational activities. This lead to a y-o-y increase in the gross profit margin to 25% (FY 12: 13%) with gross profit rising to KES 2.3bn from KES 1.1bn in FY 12. Administrative costs increased marginally by 2.67% to KES 2.1bn due to inflationary pressure, which lead to an operating profit of KES 34.9m from a previous loss of KES 793.7m. Net finance costs increased by 38.38% to KES 245.6m largely as a result of lower interest earnings as interest rates declined during the course of the year. The strengthening of the Kenya shilling and the improved performance of the company s hedge led to a foreign exchange gain of KES 594.1m, while the revaluation of investment property resulted in a gain of KES 73m. Thus the profit before tax rose to KES 1.4bn in FY 13 from a loss of KES 1.bn in FY 12, with the effective tax credit of KES 355.9m (i.e. 25% of earnings), leading to a net income of KES 1.7bn in FY 13 from a net loss of KES 972.7m in the previous year. (*NB: Normalised earnings for the year would have come in KES 161.9m after excluding the revaluation & tax credit) On the balance sheet, total non-current assets rose by 8.77% y-o-y to KES 12.5bn. This was mostly attributable to a 7.5% increase in PPE to KES 8.1bn and a 48.8% y-o-y increase in investment property to KES 2.2bn. Current assets grew by 46.7% y-o-y to KES 3.6bn driven higher by increased inventories (+27.3% y-o-y to KES 2.2bn), trade receivables (+54.64% to KES 1bn), and cash and equivalents (+48.87% to KES 42.6m). Share capital and share premium remained flat at KES 45m and KES 648m, respectively, whilst retained earnings went up by 78.4% y-o-y to KES 4.1bn leading to an increase in total equity of 54.9% to KES 7.1bn. Long-term loans decreased by 25.94% to KES 2.4bn whilst trade and other payables rose 51.6% y-o-y to KES 3.bn resulting in total liabilities of KES 9.bn, down 3.54% y-o-y from KES 9.4bn in FY 12. Cash flow from operating activities recorded a net inflow of KES 485.5m in FY 13 from a net outflow of KES 332.7m in FY 12 largely due to an increase in operating profits. Net cash flow used in investing activities decreased for the year from KES 372.6m to KES 161.9m. Net cash outflows for financing activities rose y-o-y to KES 47.2bn from KES 228.7m. This led to an overall increase in net cash outflows of KES 83.6bn resulting in a closing cash balance as at FY 13 of a negative KES 45.6bn, up 22.3% from KES 368.5bn in FY 12. 4% 3% 2% 1% % -1% -2% 12, 1, 8, 6, 4, 2, -2, Profitability Attributable Diluted EPS ROaA Source: Company financial Reports Earnings Revenues EBITDA Profit After Tax Source: Company financial Reports 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% -5.% -1.% -15.% Margins EBIT margin% Net Income Margin % Gross Margin Source: Company financial Reports Dividend Per share (DPS) ROaE

25 Volume ('s) MT KES Millions KES millions Outlook Rising cement consumption in Kenya has attracted competitors & imports The Kenyan cement market is marked by rising competition and over-supply of cement which continues to have a depressing effect on prices. Cement consumption in the market has been rising at a CAGR of 13.61% for the past eight years. Furthermore, regional economic growth has averaged above 5% for the past five years and this coupled with an accelerated effort by the Kenyan government to increase infrastructure spending has provided a positive outlook for cement demand in Kenya and its neighbouring countries. This has proved attractive for new and existing cement manufacturers who have increased their investments into the market and beefed up their production facilities resulting in excess capacity. (E.g. Lafarge & Dangote). Cement Consumption in Kenya 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 - Kenyan Cement Consumption CAGR % Sept 213* Source: Kenya National Statistics bureau In response EAPCC is also planning to increase its capacity to defend market share EAPCC currently has a market share of around 24% in Kenya through its distinctively recognisable Blue Triangle brand, which is distributed throughout Kenya and Uganda through a subsidiary. The company s management has indicated that it intends to continue investing in additional capacity in terms of clinker and cement along with diversifying into new product lines as a priority in order to defend market share. In addition, the company is currently installing a new packing line with plans for a precast plant still being developed. Profitability has improved but From the look of the FY 13 results, EAPCC has managed to stabilise from its recent internal problems that resulted in prolonged production stoppages that impacted negatively on its earnings. Things seem to be on the road to recovery in spite of the improvement in margins which appears to have been partially driven by a tax credit and the revaluation of investment property. 2.5x 2.x 1.5x 1.x.5x.x 8, 7, 6, 5, 4, 3, 2, 1, - Source: Company annual reports Liquidity In the absence of these factors, the profitability of the company is only starting to improve marginally, taking an upward trend for the first time in two years, with the gross margin rising to 25%. EBIT margins are positive whilst returns on assets and equity have also turned the tide from low negative levels. However, with the market s production capacity running ahead of current consumption levels by close to 2%, some of the producers are being forced to operate at less than 1% capacity resulting in reduced efficiency and lower economies of scale. Without a proper strategy in place this situation coupled with cheap imports, escalating fuel and higher energy costs could result in EAPCC s margins returning to levels. Valuation and Recommendation Working capital Current ratio Quick Ratio Shareholder's Equity EAPCC currently trades on a PER of 3.9x, PBV of 1.x and dividend yield of 1.%. Assuming normalised earnings and using a DCF valuation we arrive at a target price of KES 66.3 representing a downside of 13.3% to the current price. With competition set to remain high and without a respite in terms of cheap imports, we foresee EAPCC being forced to maintain low pricing to remain competitive. As a result, we see better performance coming from the other cement stocks. REDUCE. - 23

26 Financial Summary KES Millions E 215 E Revenues Y-o-Y % 12.5% 16.1% 8.1% -16.4% 8.3% 9.% 9.3% Gross Profit Y-o-Y % 7.% -19.9% 16.6% -52.8% 18.9% 16.2% 5.2% EBITDA Y-o-Y % 1.7% -68.1% 77% -165% -269% 7.3% 5.4% EBIT/Operating Profit, exlc exceptionals (914.4) Y-o-Y % 21.1% -92.5% 486% -291% -15% 8.9% 9.3% Attributable Net Income/Profit After Tax Y-o-Y % 241.5% % -11% % % -81.8% 16.5% Per Share data Attributable Diluted EPS Y-o-Y % 241.5% % -1.6% -5667% % -81.7% 16.7% Dividend Per share (DPS) Y-o-Y % NA -1.% NA -1.% NA -52.% 16.5% NAV/Basic Share Y-o-Y % 49.% -4.9%.% -13.8% 44.2% 4.8% 4.6% Margin Performance E 215 E Gross Margin 32.9% 31.3% 21.6% 23.3% 13.1% 25.3% 27.% 26.% EBITDA margin % 18.1% 17.8% 4.9% 8.% -6.2% 9.7% 9.6% 9.2% EBIT margin% 12.4% 13.4%.9% 4.7% -1.7% 5.% 5.% 5.% Net Income Margin % 7.5% 22.6% -3.%.% -11.4% 19.3% 3.2% 3.4% Ratios ROaA 9.9% 1.3%.7% 3.7% -6.6% 3.% 3.3% 3.7% ROaE 13.3% 36.6% -4.8%.% -18.3% 29.6% 4.5% 5.% Earning yield on current price 7.8% 26.6% -4.1%.% -14.1% 25.7% 4.7% 5.5% Dividend yield current price.% 1.7%.%.7%.% 1.%.5%.5% c CashFlow Cash Flow from Operating Activities (333) Net Cash in Investing Activities (1 41) (1 84) (58) (617) (373) (162) (764) (65) Net Cash in Financing Activities (365) (274) (425) (376) (229) (47) (341) Cash at the end of the period (289) (369) (451)

27 Equity Research Nigeria January 214 Cement Ashaka Cement Plc. is engaged in the manufacturing and marketing of cement and was incorporated on 7th August, 1974, and started operations in September Its principal offices are located in Gombe State, Nigeria. Ashaka also has depots in twelve locations and offices in Abuja, Kano and Lagos. Since 22, Lafarge has been Ashaka s controlling shareholder and currently owns 58.61% of its share capital, held through Lafarge Nigeria (UK) Limited. New energy sources set to reduce production costs Ashaka Cement has completed its coal mine near Maiganga which will supply lignite to the cement factory s kiln. The coal is expected to impact positively on the cement factory by reducing the unit cost of production which will ultimately lead to higher margins and improved returns for shareholders. Ashaka is currently the only cement manufacturer in Nigeria utilising coal as its primary energy source in its operations instead of petroleum products which will help protect it from volatility in fuel prices.. Drive to increase capacity to over 3 million metric tonnes of cement in order to cope with rising demand and increased competition levels Consumption of cement in Nigeria has been rising at a CAGR of over 1.2% for the past six years. As a result, Ashaka s competitors such as Dangote have rapidly expanded their production capacity in order to capture more of the growing market. In response, Ashaka has announced that it is undertaking feasibility studies to establish if it can expand its plant production capacity from 1m to around 3m metric tonnes per annum. Valuation Ashaka is currently trading on a TTM PER of 49.4x and a P/BV of.9x. Using a DCF valuation, we obtain a value of NGN 15.6 per share, indicating potential downside of 25.6% from the current share price of NGN Ashaka cement currently also has weaker operating margins coupled with a relatively lower market share of the high growth cement market when compared to counters such as Lafarge Wapco and Dangote. As a result, we see value elsewhere and assign a SELL recommendation on the stock Jun Jul Aug-12 Ashaka vs. S & P Africa Frontier Index (Rebased) 26-Sep Oct-12 ASHAKA 26-Nov Dec Jan Feb Mar Apr May Jun Jul-13 STEIAFDP Index 26-Aug Sep Oct Nov-13 Recommendation SELL Bloomberg ASHAKACE NL EQUITY Currrent Price (NGN) 21. Currrent Price (USc) 13. Target Price (NGN) 15.6 Target Price (USc) 9.7 Upside (%) (25.6) Liquidity Market Cap (NGN m) Market Cap (USD m) 269 Shares (m) 2 24 Free Float (%) 64.7% Ave. daily vol (') 1 28 Price Performance Price, 12 months ago 8.5 Change (%) Price, 6 months ago 9. Change (%) Financials (NGN m) 31 Dec F F 214F Turnover EBITDA Net Finance Income Attributable Earnings EPS (NGN) DPS (NGN) NAV/Share (NGN) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) *NB: TTM STRENGTHS WEAKNESSES Dominant in its north eastern corner of Small plant size compared to peers Nigeria Slow to substitute LPFO with coal, Access to own coal mine hence still has a high percentage of Strong parent company in Lafarge Work stoppages due to power cuts which provides technical support OPPORTUNITIES THREATS Room to improve efficiency Competition from bigger and more North eastern Nigeria has very low efficient producers like DCP consumption rates Still vulnerable to fuel price fluctuation 25

28 % Return NGN NGN million 9M 13 Financial & Operational Review In 9M 13, revenues were up a marginal 2.48% y-o-y to NGN 16.8bn (from NGN 16.5bn in 9M 12). Cost of sales rose by 29.3% y-o-y to NGN 13.8bn from NGN 1.7bn in 9M 12 as production costs escalated led by higher energy and distribution costs. Consequently, gross profit fell by 47% y-o-y to NGN 3.bn from NGN 5.8bn in 9M 12 with the gross profit margin weakening to 18.1% from 35.2% in 9M , 2, 15, 1, 5, Earnings Operating expenses were lower by 27.7% at NGN 1.8bn (vs. NGN 2.4bn in 9M 12) with other income of NGN 914.6m(down 52.66% y-o-y from NGN 1.9bn), leading to a profit before tax of NGN 2.2bn, (down 58.87% y-o-y from NGN 5.3bn in 9M 12). Taxation for 9M 13 was lower y-o-y by 58.87% to NGN 65.9m vs. NGN 1.6bn in 9M 12. Profit after tax for the 9 months thus came in at NGN 1.5bn, down 58.87% y-o-y from NGN 3.7bn with the PAT margin also falling to 9.2% from 22.43% in 9M 12. Net cash generated from operations fell by 14.4% y-o-y to NGN 2.8bn mainly as a result of the decline in profitability of the company. Cash from investing activities grew by 353.5% from an inflow of NGN 21.7m in 9M 12 to an inflow of NGN 914.6m in 9M 13. Cash used in financing activities increased y-o-y from a negative NGN 926.8m to a negative NGN 2.8bn. The net result from the above was a rise in cash and cash equivalents to NGN 14.3bn from the previous year s NGN 13.4bn. Total assets grew by a marginal.37% in nine months to NGN 67.6bn as at 9M 13 from NGN 67.3bn at FY 12. This increase was mostly due to an increase in trade debtors ( %) whilst inventories fell by over 34.38% to NGN 3.3bn. The current ratio improved to 2.58x vs. 1.98x as at FY 12 and net working capital also improved by 17.18% to NGN 11.1bn reflecting better liquidity in the business. Shareholder s equity however, was only up by a marginal 3.7% to NGN 51.bn from NGN 49.5bn in 9M 12 reflecting the lower profitability of the business in 9M 13 as ROE fell to 3.% vs 6.5% at FY 12. Outlook Capacity increases have become essential for the company s future Ashaka remains one of the lowest capacity cement producers in Nigeria with only 3.62% of the installed Nigerian productive capacity as at the end of 212. This places it in a weak competitive position when compared to other competitors such as Dangote. Thus one of the stated goals of the company is to increase its current capacity to over 3 million metric tonnes of cement by 215 which management hope will assist it in maintaining its close to 5% market share of cement in Nigeria. -5, Revenues EBITDA Profit After Tax Source: Company Reports 5.% Margins 4.% 3.% 2.% 1.%.% % EBIT margin% Net Income Margin % Gross Margin Source: Company Reports Profitability 35% 2 3% 1 25% 1 2% % 1 1% 5% % -5% Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Reports 26

29 NGN millions NGN Millions Security challenges in Northern Nigeria remain a key risk factor One of the principal risks of operating mostly in Northern Nigeria is the level of insecurity caused by the insurgence being waged by Islamists. This has in the recent past hampered the distribution and movement of goods and services within the region. In FY 212, management attributed the 4.4% fall in sales volumes to the security challenges experienced in the North East of the country. Given that the underlying security issues remain unresolved, we expect Ashaka to continue to face security risks in its key North Eastern markets which it will need to overcome. Liquidity and profitability challenges remain Whilst Ashaka Cement has recovered from the losses it suffered in 29, its margins and profitability remain lower than those of its peers in the Nigerian cement market. In the nine months to date, Ashaka Cement s profitability has been weak which may indicate a swing back to 29 margins and returns. One of the key challenges which remain for Ashaka Cement is how it can reduce the volatility of its returns to shareholders and improve its liquidity and earnings profile. Valuation and Recommendation Ashaka is currently trading on a TTM PER of 49.4x and a P/BV of.9x. Using a DCF valuation, we obtain a value of NGN 15.6 per share, indicating potential downside of 25.6% from the current share price of NGN Furthermore, Ashaka has lower operating margins and a weaker liquidity profile than other larger cement companies in Nigeria, coupled with a relatively low market share of the high growth cement market; as a result we assign a SELL recommendation on the stock Source: Company Reports 1.2x 1.x.8x.6x.4x.2x.x Shareholder's Equity Retained Earnings Liquidity (1 ) (2 ) (3 ) (4 ) (5 ) Working capital Current ratio Quick Ratio Source: Company Reports As of 212, Ashaka Cement held slightly over 3.62% of the total cement production capacity in Nigeria. Ashaka 3.59% CCNN 1.8% Est FY 212 Production Capacity Purchem.54% Edo Cement Ukpilla.9% UNICEM 7.9% Lafarge Wapco 16.16% Dangote 69.12% Source: 27

30 Financial Summary NGN Millions E 214 E Revenues Y-o-Y % -1.8% 29.8% -19.6% 11.4% 8.5% 5.% 2.% 3.5% Gross Profit Y-o-Y % -29.7% 3.9% -26.1% 33.5% 3.7% 1.9% -14.4% 13.1% EBITDA Y-o-Y % -39.4% 4.3% -59.5% 12.2% 78.1% 5.5% -28.% 26.9% EBIT/Operating Profit, exlc exceptionals Y-o-Y % -45.6% 49.6% -69.2% 27.8% 19.6% 6.% -49.1% 55.% Attributable Net Income/Profit After Tax Y-o-Y % -65.9% 118.7% -13.9% % -4.% 8.3% -38.5% 4.5% Per Share data Attributable Diluted EPS Y-o-Y % -65.9% 118.7% -13.9% % -4.% 8.3% -38.5% 4.5% Dividend Per share (DPS) Y-o-Y % NA NA NA NA NA NA NA NA NAV/Basic Share Y-o-Y % -7.6% 19.3% 2.8% 15.4% 28.2% 6.% 3.9% 5.3% Margin Performance E 214 E Gross Margin 47.6% 34.% 34.3% 31.5% 37.8% 36.1% 38.1% 32.% 35.% EBITDA margin % 26.5% 16.4% 17.7% 8.9% 16.2% 26.6% 26.7% 18.8% 23.1% EBIT margin% 23.9% 13.3% 15.3% 5.9% 16.2% 17.8% 18.% 9.% 13.5% Net Income Margin % 2.1% 7.% 11.8% -.6% 15.7% 13.9% 14.3% 8.6% 11.7% Ratios ROaA 21.8% 1.7% 13.8% 4.% 11.5% 7.9% 5.9% 3.% 4.6% ROaE 29.1% 1.3% 21.4% -.8% 21.2% 9.3% 6.5% 3.8% 5.1% Earning yield on current price 7.8% 2.7% 5.8% -.2% 6.9% 6.7% 7.2% 4.4% 6.2% Dividend yield current price.%.%.%.%.%.%.%.%.% Cash Flow Cash Flow from Operating Activities (816) 4 25 Net Cash in Investing Activities (3 545) (4 951) (4 315) (2 921) 288 (464) 22 (15 889) (1 147) Net Cash in Financing Activities (3 48) (1 11) (1 123) (615) 156 (7) (927) - - Cash at the end of the period (3 349) (292) 28

31 Equity Research Nigeria January 214 Cement Cement Company of Northern Nigeria Plc (CCNN) commenced production in 1967 with a capacity of 1, tonnes per annum at its Kalambaina plant. This was subsequently increased to 5, tonnes p.a. through the addition of a second line in In 21 BUA International Limited indirectly became the key investor after acquiring Damnaz Cement Company Limited, Sokoto Cement s majority shareholder. Well established as a niche / regional cement player CCNN s cement plant is located in North Western Nigeria, a region that has few cement plants and the company is able to benefit from being the major cement supplier for the Kebbi, Sokoto and Katsina states. This regional dominance is reinforced by the poor transport infrastructure in the Northern parts of Nigeria which have hitherto prevented some of the other large cement companies such as Dangote and Lafarge from establishing themselves in this market. High cement demand has resulted in most cement companies in Nigeria increasing their capacity over the past three years with the exception of CCNN. Demand for cement in Nigeria has risen at a double digit CAGR of over 1.2% in the past six years. As a result, cement manufacturers have increased capacity with the exception of CCNN whose capacity at its Kalambaina plant in Sokoto has remained stagnant at c5,mt/p.a. for the past few years. This places the company at risk of losing market share to more aggressive competitors such as Dangote and Lafarge should they decide to expand into North Western Nigeria. Valuation Using a DCF valuation, we value CCNN at NGN 1.1, indicating a downside of 14.3%. Although it currently trades on a low TTM PER of 8.9x and P/BV of 2.5x, we see better value in other cement stocks in Nigeria and recommend that investor REDUCE their exposure to the stock Jun Jul Aug-12 CCNN vs. S & P Africa Frontier Index (Rebased) 26-Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov-13 Recommendation REDUCE Bloomberg Code CCNN NL Equity Current Price (NGN) Current Price (USc) 7.29 Target Price (NGN) 1.1 Target Price (USc) 6.27 Upside (%) -14.3% Liquidity Market Cap (NGN m) Market Cap (USD m) 95.6 Shares (m) Free Float (%) 64.7% Ave. daily vol (') 537 Price Performance Price, 12 months ago 38.2 Change (%) Price, 6 months ago 1.8 Change (%) 9.2 Financials (NGN m) 31 Dec F F 214F Turnover EBITDA Net Finance Income (196) (152) (13) Attributable Earnings EPS (NGN) DPS (NGN) NAV/Share (NGN) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) * NB: TTM STRENGTHS WEAKNESSES Dominates the North Western Small plant relative to peers Nigeria market Located in North West Nigeria, a region Has pricing power as there are that has a history of political instability fewer competing cement plants Fund raising initiatives yet to be announced OPPORTUNITIES THREATS Located in a low per capita Competition from more efficient consumption region producers e.g. Dangote Expansion and improved efficiencies Uses LPFO and as such vulnerable to can add value fuel price fluctuations CCNN STEIAFDP Index 29

32 % Return NGN NGN 's FY 12 & 9M 13 Financial & Operational Review For the full year to December 212, CCNN posted an 8.7% growth in total revenues to NGN 15.1bn (from NGN 13.9bn in FY 11) driven by higher demand for cement in CCNN s target market. The cost of sales for FY 12 however, grew by 31.66% y-o-y to NGN 1.9bn. This resulted in a decline in the gross profit margin to 29.6% (vs. 4.61% in FY 11). Resultantly, gross profits fell to NGN 4.24bn in FY 12 from NGN 5.7bn in FY 11. Selling & distribution costs rose by 12.26% y-o-y to NGN 1.6bn (FY 1.4bn) whilst admin costs were up by 6.71% y-o-y to NGN 1.8bn (FY 11 NGN 1.7bn). In contrast, finance costs shrank by 22.22% y-o-y to NGN 151.9bn from NGN 195.3bn in FY 11. Consequently, PBT almost halved to NGN 1.7bn (FY 11: NGN 3.3bn) and the PBT margin was down to 1.93% vs % in FY 11. PAT also followed the general trend lower to NGN 1.2bn (FY 11: NGN 2.3bn), whilst PAT margin fell to 7.91% from 16.56%. EPS was thus down 48.9% y-o-y to NGN.95. As a result of the weaker profitability no dividend was declared. On the balance sheet, the working capital position remained rather static at NGN 2.53bn (FY 11: NGN 2.68bn). Leverage continued at a subdued level with the gearing ratio standing at 5.77% as at the end of FY 12. Net cash generated from operating activities fell by 35.8% y-o-y to NGN 1.9bn, while net cash used in investing activities increased 74.27% to NGN 1.9bn. Net cash outflows from financing activities more than quadrupled to NGN 427.5m and as a result, cash & cash equivalents stood at NGN 17.78m as at the end of FY 12, a significant decrease from NGN 68.5m as at the end of the previous period. CCNN posted a turnover of NGN 12.1bn, (up 5.83% y- o-y) for the first nine months of 213. Cost of sales for the period was up a marginal 1.8% y-o-y to NGN 8.bn as increased efficiency and effective cost management reduced production expenses. The GP margin was up 312 basis points y-o-y to 33.69% and EBIT margins for 9M 13 rose by 273 basis points to 14.81% (9M 12: 12.9%), as a result of cost containment strategies. EBIT thus grew by 29.7% y-o-y to NGN 1.8bn from NGN 1.4bn the previous year. Finance charges grew by 2.79% to NGN 16.7m in 9M 13. PBT for the period increased by 3.61% to NGN 1.7bn as the PBT margin improved slightly by 262 basis points to 13.93% from 1.31% in 9M 12. The tax charge for 9M 13 rose by 41.75% to NGN 578.m resulting in a PAT of NGN 1.1bn, up 25.2% y-o-y from NGN 882.6m in 9M 12. Earnings 16, 14, 12, 1, 8, 6, 4, 2, -2, Revenues EBITDA Profit After Tax 5.% Margins 4.% 3.% 2.% 1.%.% % EBIT margin% Net Income Margin % Gross Margin Profitability 5% 6 4% 5 3% 4 2% 3 1% 2 % 1-1% Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Reports 3

33 NGN Millions NGN millions Total assets put on 5.22% from FY 12 at NGN 15.bn from NGN 14.2bn at FY 12. Net working capital for the nine months was also up, rising by 52.1% to NGN 3.9bn from NGN 2.5bn as at FY 12, whilst the current ratio improved to 1.84x vs 1.49x in 9M 12, indicative of the improved liquidity of the business. Cash generated from operating activities grew by 2.79% to NGN 1.3bn over the nine months whilst cash used in investments fell to NGN 41.6m from NGN 1.1bn in FY 12. Cash outflows from financing rose 14.57% to a negative NGN 489.8m at 9M 13 from NGN 427.5m the previous year. This lead to a net increase in cash and cash equivalents of 15.3% to NGN 24.5m (vs. NGN 177.9M as at FY 12). Outlook 12.x 1.x 8.x 6.x 4.x 2.x.x Liquidity 6, 5, 4, 3, 2, 1, Working capital Current ratio Quick Ratio Margins set to remain weaker than industry leaders; Dangote & Wapco CCNN s margins have been volatile in the recent past between 29 and 212 with management struggling to control fluctuating production costs e.g. the cost of LPFO. In the past 9M, the company has stabilised its cost of production somewhat with the cost of goods sold rising by a mere 1.8% to NGN 8bn as at 9M 13. Whilst we find this as commendable in the short run, we believe that CCNN s margins and returns will remain lower and less than those of the other cement manufacturers such as Dangote and Wapco particularly as the competing firms are eligible for pioneer tax status whilst CCNN is not. Lack of capacity may hinder revenue growth in the medium term CCNN is a relatively small cement producer in Nigeria with a capacity of 5, Mt/p.a. This places it in a position of weakness in relation to other Nigerian producers such as Dangote which have over ten times the capacity after under-going several expansion programs in the past few years. Given the growth rate of the cement market in Nigeria, CCNN may soon find itself losing market share as the market grows leaving it vulnerable to competition from other producers shown in the table below CCNN s plant has one of the lowest production capacities for cement in Nigeria Nigeria est.212 Cement Capacity ('s Mt /pa) 7, 6, 5, 4, 3, 2, 1, - (1,) Shareholder's Equity Source: Company annual financial reports. Retained Earnings Valuation and Recommendation CCNN is currently trading on a TTM PER of 8.9x and P/BV of 2.5x. Using a DCF valuation, we value CCNN at NGN 1.1, indicating a downside of 14.3%. In our opinion, due to its relatively lower margins and low installed capacity, CCNN is one of the more vulnerable cement producers should there be a pricing war amongst the Nigerian cement companies. As a result of its weaker balance sheet and low investment into production capacity, we believe that there are better alternatives in terms of national producers such as Dangote and Lafarge. As a result we recommend that investors REDUCE their exposure to the stock. Purchem 15 Edo Cement Ukpilla 25 CCNN 5 UNICEM 2,2 Lafarge 5,3 Dangote 19,25 Source: Dangote.com 31

34 Financial Summary NGN Millions E 214 E Revenues Y-o-Y % 26.2% 22.8% 2.2% -5.8% 24.5% 8.7% 4.8% 7.5% Gross Profit Y-o-Y % 29.8% 82.5% 23.9% -2.4% 52.8% -32.5% 23.2% 17.1% EBITDA Y-o-Y % 456.% 158.3% 45.% -26.8% 71.9% -55.9% 46.% 45.3% EBIT/Operating Profit, exlc exceptionals Y-o-Y % -17.6% % 55.2% -31.4% 88.6% -66.7% 68.5% 58.9% Attributable Net Income/Profit After Tax Y-o-Y % % 11.4% 18.4% -3.% 81.6% -48.1% 38.6% 34.4% Per Share data Attributable Diluted EPS Y-o-Y % % 11.4% 18.4% -3.% 81.5% -49.5% 34.9% 34.4% Dividend Per share (DPS) Y-o-Y % NA 797.6%.% -1.% NA NA NA NA NAV/Basic Share Y-o-Y % 13.9% 26.3% 6.1% 15.% 27.7% -2.6% 23.4% 28.4% Margin Performance E 214 E Gross Margin 27.6% 28.4% 42.2% 43.5% 36.8% 45.2% 28.1% 33.% 36.% EBITDA margin %.4% 1.7% 16.3% 19.7% 15.3% 21.1% 8.6% 11.9% 16.1% EBIT margin% -3.5% -2.3% 12.8% 16.6% 12.1% 18.3% 5.6% 9.% 13.3% Net Income Margin % -.5% 1.7% 15.5% 15.3% 11.3% 16.6% 7.9% 1.5% 13.1% Ratios ROaA -2.7% -2.1% 14.1% 21.1% 13.1% 22.6% 6.5% 1.% 14.4% ROaE -2.3% 5.9% 43.% 44.2% 28.% 41.7% 19.3% 23.6% 24.8% Earning yield on current price -.2% 1.% 1.5% 12.4% 8.7% 15.8% 8.% 1.8% 14.5% Dividend yield current price.%.9% 7.8% 7.8%.%.%.%.%.% Cashflow Cash from Operations (84) Cash from Investing (1 93) (635) (526) (721) - (627) (1 93) (238) (244) Cash from Financing (373) 1 68 (595) (2 43) (618) (112) (427) Net cash (618) (269) (692)

35 Equity Research Nigeria January 214 Cement Dangote is the largest cement producer in Nigeria, and is Sub-Saharan Africa s largest cement market. As at the end of 212, Dangote Cement had the capacity to produce up to 19.25m metric tonnes of cement and controlled more than 6% of the Nigerian cement market. Dangote is in the process of a rapid expansion programme designed to make it one of the top producers of cement in the world by 216 with the capacity to produce over 55m metric tonnes of cement per annum. Strong and aggressive pan African expansion underway funded most by profits from Nigerian business Dangote is currently under a massive expansion drive in SSA and is set to commit over USD 4bn towards creating a pan African footprint over the next four years. This should see the company deliver nearly 55mta integrated/grinding/import capacity in 14 countries across the African continent by 216. Some of the countries it intends to expand to include: Senegal, Cote d Ivoire, Sierra Leone, Liberia, Ghana, Cameroon, Rep. Congo, Ethiopia, South Sudan, Kenya, Tanzania, Zambia and South Africa. High operating margins likely to remain in the medium term Due to its relatively new & efficient plants coupled with pioneer tax status in Nigeria, Dangote has been able to post net profit margins above 5% for the past few years aided by increasing sales volumes on the back of additional capacity and the rise in demand for cement in Nigeria. Whilst the tax status of older plants such as Obajana (lines 1+2), and Gboko are set to normalise, other newly constructed plants and lines will continue with the low tax regime. Consequently we project the high margins to persist over the next three years particularly as plants from other countries come on line as well. Valuation Dangote cement is currently trading on a TTM PER of 17.9x, P/BV of 8.9x and dividend yield of 1.6%. Using a DCF valuation, we currently value Dangote at NGN 234 indicating an upside of 6.8% to the current share price. The company s expansion plans provide it with a strong base from which to grow revenues over the medium term. Consequently we retain a HOLD recommendation on the stock Jun Jul-12 Dangote vs. S & P Africa Frontier Index (Rebased) 26-Aug Sep Oct Nov-12 DANGCEM 26-Dec Jan Feb Mar Apr May Jun Jul Aug-13 STEIAFDP Index 26-Sep Oct Nov-13 Recommendation Bloomberg Code HOLD DANGCEM NL Equity Current Price (NGN) 219. Current Price (USc) Target Price (NGN) Target Price (USc) Upside (%) 6.8 Liquidity Market Cap (NGN m) Market Cap (USD m) Shares (m) Free Float (%) 64.7% Ave. daily vol (') Price Performance Price, 12 months ago Change (%) 71. Price, 6 months ago Change (%) 14.2 Financials (NGN m) 31 Dec F F 214F Turnover EBITDA Net Finance Income (1 844) (3 819) (3 56) Attributable Earnings EPS (NGN) DPS (NGN) NAV/Share (NGN) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) *N B : T T M STRENGTHS The most aggressive expansion plan in SSA WEAKNESSES Expansion is aggressive and can lead to costly mistakes Newer and more efficient plants Tightly held shares. DHL owns c96% Strong backing from anchor shareholder Exposure to borrowing can lead to Improving corporate governance OPPORTUNITIES SSA has lowest per capita consumption in the world. Nigerian coonsumption is rising at a CAGR earnings fluctuation. THREATS Expansion in its target markets -East Huge volume additions may see prices decline in major Nigerian market in excess of 1% spurring higher consumption Gas supply instability 33

36 % Return NGN NGN m's FY 12 & 9M 13 Financial & Operational Review Dangote Cement posted a good set of results for FY 12 with revenues rising by 23.6% y-o-y from NGN 241.5bn in FY 11 to NGN 298.5bn at FY 12. The revenue growth was mostly driven by rising volumes as Nigeria s cement market grew. As a result, Dangote s cement sales were up by 19.86% y-o-y to 1.38 million tonnes with the additional capacity installed at plants such as Obajana and Ibese coming in handy. The continued capacity expansion and high efficiencies at existing plants led to rising economies of scale with the cost of sales rising by 21.1% y-o-y to NGN 118.3bn in FY 12 from NGN 97.7bn in FY 11. Resultantly, gross profit margins were up by 9bps y-o-y from 59.5% in FY 11 to 6.4% in FY 12 leading to a 25.4% y-o-y growth in gross profits to NGN 177.7bn. Earnings 35, 3, 25, 2, 15, 1, 5, Revenues EBITDA Profit After Tax Source: Company Financial Reports Operating expenses grew by 4.48% y-o-y to NGN 31.bn in FY 12, resulting in an EBITDA margin of 3.1%. Net interest costs rose by 173.7% y-o-y to NGN 1.8bn from NGN 4.bn in FY 11. Consequently, PBT grew by over 19% y-o-y to NGN 135.6bn (FY 11: NGN 113.8bn). Net profit margin grew by 6 basis points from 5.2% in FY 11 to 5.8% in FY 12 resulting in a net profit of NGN 151.9bn (FY 11: NGN 121.4bn). 7.% 6.% 5.% 4.% 3.% Margins On the balance sheet, the working capital position improved from (-NGN 49.2bn) in FY 11 to (-NGN 12.1bn) at the end of FY 12. Leverage also improved slightly during FY 12 with the gearing ratio standing at 27.25% as at the end of FY 12 following steps taken in FY 12 to reduce debt, as compared with 41.43% as at the end of FY 11. The net cash position improved from NGN 22.8bn at FY 11 to NGN 44.5bn as at FY 12. This was mostly due to a rise in short term deposits which grew to NGN 29.1bn from NGN 9.7bn in the previous year. Total shareholders equity rose 44.63% y-o-y to NGN 42bn in FY 12 from NGN 29.4bn in FY 11. During 9M 13, revenues grew by 28.73% to NGN 289.bn (from NGN 224.5bn in 9M 12). Cost of sales rose by 12.31% y-o-y to NGN 99.6bn leading to a gross profit of NGN 189.4bn (+39.45% y-o-y) with the GP margin improving slightly to 65.53% in 9M 13 from 6.5% in 9M 12. Operating expenses increased by 56.77% y-o-y to NGN 33.6bn (9M 12: NGN 21.4bn), on the back of a 67.47% y-o-y increase in selling and distribution costs to NGN 17.8bn as at 9M 13. Net operating income thus rose to NGN 156.9bn (+36.42% y-o-y) from NGN 115.bn. The EBIT margin improved slightly to 54.29% vs % at 9M 12. Finance charges were lower y-o-y by 5.38% whilst finance income rose by % to NGN 4.bn. 2.% 1.%.% EBIT margin% Net Income Margin % Gross Margin Source: Company Financial Reports Profitability 9% 12 8% 7% 1 6% 8 5% 4% 6 3% 4 2% 1% 2 % Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Reports 34

37 NGN Millions This led to a PAT of NGN 156.1bn, up 42.83% y-o-y from NGN 117.1bn in 9M 12 on the back of the awarding of pioneer tax status to Dangote s new plant and lines. Total assets grew by 4.6% to NGN 158.1bn from NGN 151.9bn at FY 12. Working capital for the 9 months fell from a positive NGN 67.5bn to a negative NGN 12.1bn at 9M 13 as the company ramped up production across its businesses. Dangote Cement s cash generated from operations increased by 57.9% y-o-y to NGN 2.8bn (vs. NGN 127.2bn at 9M 12), whilst cash from investing was a negative NGN 17.5bn (vs. NGN 84.5bn in 9M 12). Cash from financing activities was a negative NGN 71.2bn in 9M 13 (vs. NGN 35.8bn in 9M 12). This lead to a 95.71% y-o-y increase in cash and cash equivalents to NGN 17.4bn in 9M 13 from a balance of NGN 8.9bn as at 9M 12. Outlook On-going expansion projects place Dangote on track to become one of the largest cement companies in Africa Dangote currently owns three state-of-the-art plants capable of serving most of Nigeria as its capacity alone of over million metric tonnes as of FY 12, is able to satisfy over 9% of the current cement demand in the country. Dangote s massive expansion into SSA will deliver nearly 55mta integrated / grinding / import capacity in 14 countries by the end of 216. According to management, this expansion project will cost over USD 4bn. Management s current plan is to fund the expansion plan using 4% debt and 6% equity. Countries included in the expansion plan include: Senegal, Cote d Ivoire, Sierra Leone, Liberia, Ghana, Cameroon, Rep. Congo, Ethiopia, South Sudan, Kenya, Tanzania, Zambia and South Africa. Liquidity 2.x 12, 1.8x 1, 1.6x 1.4x 8, 1.2x 6, 1.x 4,.8x 2,.6x.4x -.2x (2,).x (4,) Working capital Current ratio Quick Ratio Source: Company Financial Reports Nigeria est.212 Cement Capacity ('s Mt /pa) Dangote 19,25 Lafarge Wapco 4,3 UNICEM 2,2 Ashaka 1, CCNN 5 Edo Cement Ukpilla 25 Purchem 15 Source: Dangote.com We expect current profit margins to be maintained over the next few years as the expansion of the company continues Dangote has managed to earn margins in excess of 5% for the past 4 years since listing due to its relatively new & efficient plants, pioneer tax status in Nigeria and aided by increasing sales volumes on the back of additional capacity and the rise in demand for cement in its primary market. 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, - Shareholder's Equity Retained Earnings Source: Company Financial Reports 35

38 Whilst the tax status of older plants such as Obajana (lines 1+2), and Gboko is set to normalise, other newly constructed plants and lines are due to come online in Nigeria, its main profit centre, in the next few years and the company will thus continue to be exposed to a low tax regime. Consequently we project the high margins to persist over the next three years. Nigeria to remain the main revenue and profit driver for the group At present Nigeria is the main profit driver for Dangote Cement supplying over 9% of its total revenues and 8% of its operational profits. Despite planned expansion to East, West and Southern Africa, over 7% of company s total cement capacity will remain in Nigeria by the end of 216. Valuation and Recommendation Dangote cement is currently trading on a TTM PER of 17.9x, P/BV of 8.9x and dividend yield of 1.6%. Using a DCF valuation, we currently value it at NGN 234 indicating an upside of 6.8% to the current share price. The company s expansion plans provide it with a strong base from which to grow revenues over the medium term and consequently we retain a HOLD recommendation on the stock. Nigerian cement sales have been rising at a CAGR of around 1.2% since 24 as show below: This will be in line with the company s revenue split and with the high returns that the company has been able to generate from the Nigerian market. Furthermore, Nigeria currently has some of the highest prices for cement in the world with Dangote able to generate an average sales price of over USD 17 per tonne in FY 12, vs. less than USD 1 for USA, Spain, Germany and other developed nations. We remain bullish in the medium term on Dangote Cement based on our expectations for rising cement consumption in key SSA markets however risks remain On the whole, our outlook for Dangote cement remains positive given its Pan African strategy and the current low consumption rates for cement in SSA. However, key risks remain such as the potential for over capacity should demand for cement slow-down in SSA. Furthermore, Dangote has increased the level of debt in the business and the potential for higher finance charges in the wake of increased rates remains. Other key risks which may affect the performance of the company include flooding such as that experienced in 212 and also political instability within some of the regions that the company operate. For example, regarding the latter, the instability in the Northern part of Nigeria has at times slowed down commercial transactions, building projects and distribution of cement in to the affected regions. Nigeria currently provides over 9% of Dangote s total revenues and profits as seen in the chart below West & Cdntral Africa 4.1% Nigeria 95.7% FY 212 Revenue East and Southern Africa.19% Source: Company financials 36

39 Financial Summary NGN Millions E 214 E Revenues Y-o-Y % NA 6.8% 19.2% 23.6% 35.2% 37.2% Gross Profit Y-o-Y % NA 44.8% 18.5% 25.4% 37.3% 39.% EBITDA Y-o-Y % NA 5.5% 7.7% 23.8% 55.5% 37.3% EBIT/Operating Profit, exlc exceptionals Y-o-Y % NA 55.2% 18.2% 22.6% 53.5% 39.2% Attributable Net Income/Profit After Tax Y-o-Y % NA 71.6% 15.1% 25.1% 46.7% 39.4% Per Share data Attributable Diluted EPS Y-o-Y % NA -11.5% 15.1% 19.2% 4.% 39.4% Dividend Per share (DPS) Y-o-Y % NA NA -7.6% 185.1% 46.7% 39.4% NAV/Basic Share Y-o-Y % NA -3.8% 33.2% 39.5% 32.9% 38.6% Margin Performanc e E 214 E Gross Margin 44.2% 59.9% 59.5% 6.4% 61.3% 62.1% EBITDA margin % 41.1% 57.9% 52.3% 52.4% 6.2% 6.3% EBIT margin% 35.% 5.8% 5.4% 5.% 56.7% 57.5% Net Income Margin % 32.4% 52.% 5.2% 5.8% 55.2% 56.1% Ratios ROaA 45.5% 29.8% 26.3% 24.9% 3.4% 33.1% ROaE 77.9% 57.1% 49.2% 43.7% 45.1% 45.3% Earning yield on current price 3.5% 3.1% 3.6% 4.3% 6.% 8.3% Dividend yield current price.% 1.9%.6% 1.6% 2.4% 3.3% Cash Flow Cash Flow from Operating Activities Net Cash in Investing Activities (11 818) (53 166) (116 18) (51 739) (66 552) Net Cash in Financing Activities (54 47) (1 75) (76 69) (12 996) Cash at the end of the period

40 Equity Research Nigeria January 214 Cement Lafarge Cement WAPCO Nigeria Plc. is a subsidiary of Lafarge SA and owns three plants - one in Sagamu and two in Ewekoro with a current production capacity of 4.5 million metric tonnes. Wapco has grown sustainably since the take-over by Lafarge SA of France in July 21 which supplies technical expertise and management support. Second largest cement manufacturer in Nigeria, one of Africa s largest markets Lafarge Wapco has grown to become the second largest cement manufacturer in Nigeria with an estimated 16% of the total production capacity for cement in the country. Its base in the Southern region of Nigeria offers it exposure to fast growing urban regions such as Lagos which have rising demand for cement and cement products. Rising financial performance on the back of improved profitability. Lafarge Wapco has posted improved financial results for the past three years with revenues rising by over 1% whilst Ebitda and profits after tax have tripled. Critical to this performance has been tighter cost control, increased capacity and rising sales volumes on the back of increased demand. Wapco will also benefit from being granted pioneer tax status on the back of its investment into new capacity. As a result we forecast that the company will continue to post double digit growth in profits for the next 3-5 years. Valuation Lafarge Wapco is currently trading on a TTM PER of 14.2x, P/BV of 5.x and a dividend yield of 1.%. Using a DCF valuation, we value Wapco at NGN indicating a potential upside of 1.3% from the present share price of NGN 115. Although the share price has risen by over 9% over the past 12 months, we believe that investors should continue to ACCUMULATE the stock as it is a good play on Nigeria s Infrastructure demand Jun Jul-12 Lafarge Wapco vs. S & P Africa Frontier index (Rebased) 26-Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov-13 Recommendation Bloomberg Code STRENGTHS Second largest cement manufacturer in Nigeria with a 16.16% share of total mkt production capacity. Increased cement capacity at Ewekoro will help drive expansion in market share. Strong parent company with formidable technical expertise. OPPORTUNITIES Low per capita consumption in Nigeria coupled with high growth cement market, c1.2% CAGR. Relatively new & efficient plants Access to national rail grid for lower distribution costs. Plants located to high growth urban areas such as Lagos. WEAKNESSES DCP well ahead in terms of capacity expansion. Regional expansion limited due to holding company influence. THREATS Capacity expansion has potential to lead to price war. Susceptible to fuel price hikes ACCUMULATE WAPCO NL Equity Current Price (NGN) 115. Current Price (USc) 71.3 Target Price (NGN) Target Price (USc) 78.7 Upside (%) 1.3 Liquidity Market Cap (NGN m) Market Cap (USD m) Shares (m) 3 2 Free Float (%) 39.9% Ave. daily vol (') Price Performance Price, 12 months ago 58.5 Change (%) 96.5 Price, 6 months ago 98. Change (%) 17.3 Financials (NGN m) 31 Dec F F 214F Turnover EBITDA Net Finance Income (5 393) (4 187) (3 87) Attributable Earnings EPS (NGN) DPS (NGN) NAV/Share (NGN) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F Earnings Yield (%)* Dividend Yield (%) PE (x)* PBV (x) EV/EBITDA (x) *NB: TTM Lafarge Wapco STEIAFDP Index 38

41 % Return NGN NGN millions FY 12 & 9M 13 Financial & Operational Review Lafarge Wapco released an impressive set of FY 12 results driven by the ramp up of production of the New Ewekoro Plant and commensurate increase in market share. The top-line jumped by 4.74% y-o-y to NGN 87.97bn while cost-of sales grew at a slower pace of 28.67% to NGN 55.57bn. As a result gross profit went up by over 66% to NGN 32.4bn with GP margins expanding to 36.83% from the 3.91% recorded in FY 11. Selling & admin expenses were well contained, falling by a marginal.95% to NGN 6.24bn. In contrast however, finance costs significantly increased by 78.2% to NGN 5.39bn. This saw PBT more than double to NGN 21.26bn whilst attributable profit leapt by 7.29% y-o-y to NGN 14.71bn, having been dampened by a higher effective tax rate of 3.82% as opposed to 16.52% in FY 11. EPS came in at NGN 4.9 in comparison to NGN 2.88 in FY 11 while a DPS of NGN 1.2 was declared. The company s gearing significantly improved to 41.57% from 73.66% as at the end of FY 11. However, the working capital position remained largely unchanged at a negative NGN 8.4bn in comparison to a similarly negative value of NGN 7.56bn as at the end of the previous financial year. In terms of the cash flow statement, net inflows from operating activities contracted by 2.33% to NGN 24.97bn. The net outflows from investing activities of NGN 5.12bn were approximately a fifth of the corresponding figure in FY 11. There were large net outflows from financing activities of NGN 22.37bn in contrast to an inflow of NGN 1.18bn in the previous financial year. Consequently, cash & cash equivalents at the end of the period declined to NGN 8.89bn from NGN 11.42bn at the beginning of the financial year. At the end of September 213, Lafarge Wapco released a positive set of 9M 13 results wherein group revenues grew by 6.35% y-o-y to NGN 74.3bn (from NGN 64.8bn in 9M 12) whilst cost of sales fell marginally by.5% y-o-y to -NGN 45.1bn. The GP margin consequently improved to 39.29% in 9M 13 from 35.41% in 9M 12 resulting in a GP of NGN 29.2bn, (up 18.2% y-o-y). Operating expenses were up 39.28% y-o-y to NGN 6.1bn in 9M 13, leading to an operating income of NGN 23.1bn, (up 13.65% from NGN 2.3bn in 9M 12), with the EBIT margin improving slightly to 31.12% vs % in 9M 12. Finance charges were lower by 38.33% y-o-y in the aftermath of the deleveraging process begun in 212. This led to a PAT of NGN 2.5bn, up 88.63% y-o-y from NGN 1.8bn in 9M 12 on the back of a of pioneer tax status granted during the course of the year. Total assets grew by 4.6% to NGN 158.1bn from NGN 151.9bn at FY 12. Working capital improved to a positive NGN 6.6bn from a negative NGN 7.5bn as at the end of FY 12. Wapco saw its cash generated from operations rise by 3.2% y-o-y to NGN 25.7bn (9M 12:NGN 25bn), whilst cash from investing was a negative NGN 1.1bn (9M 12: NGN 5.1bn). Cash from financing activities was a negative NGN 16.1bn in 9M 13 (vs. NGN 22.4bn in 9M 12). This lead to a 95.71% y-o-y increase in cash and cash equivalents to NGN 17.4bn in 9M 13 from a balance of NGN 8.9bn as at 9M % 4.% 35.% 3.% 25.% 2.% 15.% 1.% %.% 35% 3% 25% 2% 15% 1% 5% % Source: Company Reports Earnings Revenues EBITDA Profit After Tax Source: Company Reports Margins EBIT margin% Net Income Margin % Gross Margin Profitability Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Reports 39

42 NGN Millions Outlook Wapco well placed to benefit from rising cement demand in Nigeria with increasing cement capacity enabling it to maintain its market share... Cement consumption in Nigeria is estimated to have risen to 18.3 million metric tonnes pa in 212 from around 8 million metric tonnes in 24 (CAGR - 1.2%). This is mostly due to demand drivers identified earlier such as rising infrastructure spend, urbanisation, population growth and rising per capita income. Lafarge is currently the second largest cement manufacturer in Nigeria in terms of capacity and in December 211, Wapco s new Ewekoro plant came online increasing Wapco s total capacity to 4.3m metric tonnes. This puts it in a good position to benefit from high demand for cement in Nigeria and maintain its market share as the country tries to fill its significant infrastructure and housing gap. Improved financial performance and rising profitability Lafarge Wapco has posted improved financial results for the past three years with revenues rising by over 1% whilst Ebitda and profits after tax have tripled. Critical to this performance has been tighter cost control, increased capacity and rising sales volumes on the back of increased demand. Wapco will also benefit from being granted pioneer tax status on the back of its investment into new capacity. As a result we forecast that the company will continue to post double digit growth in profits for the next 3-5 years. However, some downside risks remain Although Lafarge Wapco has been increasing its capacity, some of its main rivals have also been doing the same. Chief amongst them is Dangote Cement which currently has plans to increase its capacity in Nigeria to 32.75m mt by FY 15. Whilst we expect any increased supply to be absorbed in the long-run due to the growing cement demand as well as export opportunities into West Africa, risks for short term over capacity remain should cement demand growth become sluggish which can affect margins in the medium term Shareholder's Equity CAGR % Retained Earnings Source: Company Financial Reports Lafarge Wapco s cement production capacity is second only to Dangote s which can produce up to million metric tonnes pa 1.8x 1.6x 1.4x 1.2x 1.x.8x.6x.4x.2x.x Dangote Lafarge Wapco Source: Dangote.com Source: Company Financial reports est. FY 12 Production Capacity UNICEM Ashaka CCNN Edo Cement Ukpilla Liquidity Working capital Current ratio Quick Ratio Valuation and Recommendation 1 (1 ) (2 ) (3 ) (4 ) (5 ) Lafarge Wapco is currently trading on a TTM PER of 14.2, P/BV of 5.x and a dividend yield of 1.%. Using a DCF valuation, we value Wapco at NGN indicating a potential upside downside of 1.3% from the present share price of NGN 115. Although the share price has risen by over 9% over the past 12 months, we believe that investors should continue to ACCUMULATE Lafarge Wapco so as to get exposure to Nigeria s on-going infrastructure and construction boom. - Purch 4

43 Financial Summary NGN Millions E 214 E Revenues Y-o-Y % 11.9% 5.4% -3.8% 42.6% 4.7% 1.% 12.5% Gross Profit Y-o-Y % 8.6% -19.% -11.3% 61.2% 67.7% 22.4% 15.7% EBITDA Y-o-Y % 12.3% -3.4%.% 63.4% 9.% 27.7% 16.6% EBIT/Operating Profit, exlc exceptionals Y-o-Y % 15.5% -31.7% -.5% 59.7% 98.% 26.% 16.4% Attributable Net Income/Profit After Tax Y-o-Y % 5.4% -55.1% -3.4% 77.% 7.3% 97.1% 18.5% Per Share data Attributable Diluted EPS Y-o-Y % 5.4% -55.1% -3.4% 77.% 7.3% 97.1% 18.5% Dividend Per share (DPS) Y-o-Y % -5.% -83.3% 15.% 2.% 6.% 97.1% 18.5% NAV/Basic Share Y-o-Y % 23.3% 8.% 1.5% 16.2% 21.9% 47.7% 27.% Margin Performance E 214 E Gross Margin 39.7% 38.5% 29.6% 27.3% 3.9% 36.8% 41.% 42.2% EBITDA margin % 27.9% 28.% 18.5% 19.2% 22.% 29.8% 34.6% 35.8% EBIT margin% 27.2% 28.% 18.2% 18.8% 21.% 29.6% 33.9% 35.1% Net Income Margin % 27.6% 26.% 11.1% 11.1% 13.8% 16.7% 3.% 31.6% Ratios ROaA 2.8% 21.6% 11.1% 8.% 9.7% 17.1% 18.9% 17.5% ROaE 32.6% 3.7% 12.% 1.6% 16.6% 23.6% 34.3% 3.% Earning yield on current price 3.1% 3.3% 1.5% 1.4% 2.5% 4.3% 8.4% 1.% Dividend yield current price 1.%.5%.1%.2%.7% 1.% 2.1% 2.4% Cashflows Cash Flow from Operating Activities Net Cash in Investing Activities (1 221) (1 591) (26 765) (28 799) (24 941) (5 123) (7 741) (2 93) Net Cash in Financing Activities (9 66) (1 43) (22 373) (753) (7 549) Cash at the end of the period

44 Equity Research Tanzania January 214 Cement Tanga Cement Company Ltd is a Tanzania-based company engaged in the manufacture, sale and distribution of clinker and Portland Composite cement, which is mostly used in construction of bridges, roads, structural work, as well as with soil stabilisation, high-strength pavement blocks and roof tiles, among other uses. The company also offers technical support to its customers, comprising the selection of aggregates materials for concrete mix design, concrete mix design for different applications and general technical information on cement and concrete. Tanga Cement Co Ltd's major shareholder is Afrisam (Mauritius) Investment Holdings Limited. Historic sales volumes Tanga marked a significant milestone in achieving sales volumes above a million tonnes for the first time in 212. The increase in sales was driven by mixture of higher domestic and regional demand for cement. Export sales to regional markets in Rwanda and Burundi were key to the 55% rise in export sales volumes. Tanga is planning to increase its production capacity by up to 6, metric tonnes and this is expected to help drive sales growth once it comes online in the next two years. Increased competition vs. macro-economic activity There has been increasing competition from other cement producers and large cement imports from Asia contesting the Tanzanian cement market which has proved to be a headache for Tanga as seen in the interim performance. The Tanzanian government s spend on infrastructure is growing, but whether this will be sufficient enough for all to benefit remains to be seen. Valuation Tanga cement is currently trading on a TTM PER of 4.4x, P/BV of.8x and dividend yield of 5.%. Using a DCF valuation we obtain a price target of TZS , providing an 8.6% upside to the current price of TZS 22. HOLD Jul-12 2-Aug-12 2-Sep-12 Simba TZ vs. S&P Africa Frontier Index (Rebased) 2-Oct-12 2-Nov-12 2-Dec-12 2-Jan-13 2-Feb-13 2-Mar-13 2-Apr-13 2-May-13 2-Jun-13 2-Jul-13 2-Aug-13 2-Sep-13 2-Oct-13 2-Nov-13 Recommendation HOLD Bloomberg Code SIMBA TZ Equity Current Price (TZS) 2 2. Current Price (USc) Target Price (TZS) Target Price (USc) Upside (%) 8.6 Liquidity Market Cap (TZS bn) Market Cap (USD m) 8.74 Shares (m) Free Float (%) 24.7% Ave. daily vol (') 3.32 Price Performance Price, 12 months ago 2 4. Change (%) Price, 6 months ago 2 4. Change (%) Financials (TZS m) 31 Dec FY F 214F Turnover EBITDA Net Finance Income (1 128) (1 2) (2 83) Attributable Earnings EPS (TZS) DPS (TZS) NAV/Share (TZS) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F *Earnings Yield (%) Dividend Yield (%) *PE (x) PBV (x) EV/EBITDA (x) *NB: TTM STRENGTHS WEAKNESSES Strong Balance sheet with healthy Current expansion drive may nt be aggressive enough liquidity and cash generation. assumption may turnout otherwise High operating margins due to operating regional expansion may be hampered by strength efficiencies and management of distribution network. International support from parent company OPPORTUNITIES THREATS High growth in East African cement market Entrance of new aggressive competitors into market Refurbished and newer plants. could result in excess capacity & lower margins Asian imports remain a significant threat for cement manufacturers in East Africa SIMBA STEIAFDP Index 42

45 % Return TZS TZS 's FY 12 & H1 13 Financial & Operational Review Tanga Cement reached a milestone in FY 12 where it managed to sell over one million tonnes of cement in one year. Revenue for the FY 12 period improved 1.% y-o-y to TZS 257.9bn as a result of a 21.% increase in export sales volumes within the region. Cost of sales increased by 4.9% to TZS 178.5bn, and the gross profit margin reached 3.7% at FY 12 resulting in GP of TZS 79.3bn compared to 27.2% at FY 11, (i.e. TZS 63.7bn in profits in the previous period). Selling and administrative expenses declined 8.9% y-o-y to TZS 17.bn in FY 12 from TZS 18.6bn in FY 11. This was due to low maintenance costs, reduction in electricity power use and control of general overhead costs, culminating in operating profits rising 43.1% y-o-y to TZS 57.bn for the full year Earnings Revenues EBITDA Profit After Tax Finance costs more than halved y-o-y, recording a decline of 51.8% to TZS 354.1m from TZS 741m in FY 11. As there were no long term borrowings in FY 12, the interest costs incurred of TZS 354.1m were mostly from bank overdrafts. Finance income for the period increased 9.6 times y-o-y from TZS 52.4m in FY 11 to TZS 57.3m in FY 12. Foreign exchange losses were 38.8% lower at TZS 1.3m, and PBT increased by 5.8% y-o-y to TZS 55.9bn in FY 12. Income tax expense came to TZS 18.8bn resulting in a PAT of TZS 37.1bn at FY 12, (up 66.5% y-o-y from TZS 22.3bn in FY 11. Attributable income after accounting for minorities came to TZS 35.3m, up 66.1% y-o-y from TZS 21.3m in FY 11. As at FY 12, the balance sheet reflected a 3.11% y-o-y increase in non-current assets to TZS 111.8bn, driven mostly by a 3.7% y-o-y rise in PPE to TZS 18.5bn with PPE making up 97% of non-current assets. Liquidity levels of the business remained relatively high with the current ratio improving y-oy to 2.98x in FY 13 vs 1.82x in FY 11. This was reflected in a rise in net working capital to TZS 54.6bn in FY 13 from TZS 26.1bn in FY 12. Shareholder s equity was up 26.62% to TZs 144.5bn as retained earnings rose by 25.9% to TZS 143.2bn. In terms of current liabilities, repayments reduced interest bearing loans to zero from TZS 2.5bn in FY 11. During H1-13, revenue slid 8.% to TZS 112.8bn from TZS 122.6bn in the previous year. The performance was somewhat subdued due to an increase in competition which resulted in reduced sales volumes and lower selling prices for Tanga Cement s products. Cost of sales shed 3.4% y-o-y to TZS 84.4bn also as a result of the lower sales volume. Gross profit margin thus weakened to 25.2% for H1 13 from the 28.7% achieved previously in H1 12 resulting in a GP of TZS 28.4bn for the half year. Selling and administrative expenses for the period increased by 23.9% to TZS 8.6bn as a result of inflation, increased use of external consultants and unexpected redundancy costs which caused operating profit to plummet by 34.9% y-o-y to TZS 16.bn, leading to a PBT margin of 14.22% (vs. normalised margins of around 2%). Source: Company Financial Reports 5.% Margins 45.% 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% EBIT margin% Net Income Margin % Gross Margin Source: Company Financial Reports Profitability 6% 6 5% 5 4% 4 3% 3 2% 2 1% 1 % Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Financial Reports 43

46 TZS Millions TZS millions Net finance income declined by 5.6x y-o-y from TZS 219m to TZS 39m whilst the income tax expense of TZS 5.4bn,(34.3% of PBT), resulted in a PAT of TZS 1.5bn (down 36.9% from TZS 16.6bn achieved in H1 12). Total Assets in the balance sheet grew by a marginal 3.2% to TZS 2.1bn at H1 13 from TZS 193.9bn as at FY 12. Liquidity remained relatively high with the current ratio standing at 3.14x in 9M 13 vs 2.98x in 9M 12. Net working capital was also positive, up 8.61% y-o-y to TZS 59.3bn. Shareholder s equity was up 4.8% in the half year to TZS 152.9bn as retained earnings rose to TZS 15.1bn (+4.85% from FY 12). Cash flow from operating activities dipped 25.5% to TZS 17.4bn (from TZS 23.4bn in H1 12), as receivables increased 97.% to TZS 1.8bn from TZS 179.3m in H1 12 due to higher credit sales. Cash from investing activities rose to TZS 4.1bn (+13.34% y-o-y) and cash from financing activities fell 21.4% y-o-y to TZS 4.6bn as there were no loan repayments in H1 13. The net result of this was a 9.27% y-o-y increase in cash and cash equivalents to TZS 48.6bn at the end of H1 13. Outlook Full year margins showing rising trend Tanga managed to do exceptionally well, achieving its highest volume sales of one million tonnes in a single year in 212 as demand grew in line with macro-economic growth and rising demand for road and residential infrastructure development domestically and regionally. This translated directly into increased sales revenues for Tanga....however, headwinds from competition remain TCC s main challenge going forward In 213 however, the attractiveness of the market has seen the business face rising competition from Asian cement imports especially from Pakistan, which have resulted in low prices and lower sales volumes in H1 13. Furthermore, various competitors have announced new initiatives to increase their productive capacity. In response, Tanga s management has indicated that it intends to streamline and lower distribution & production costs to mitigate against the rising threat to its profit margins. Chief amongst the costs it intends to address is the need for a more reliable energy source for Tanga as hiring of generators has proved to be an expensive option whenever there are power failures. Capacity increase also on the cards The board of directors has also approved the building of a 6, tonne capacity kiln which is intended to be completed by end of 215. This will help raise the company s cement and clinker production capacity, which will lead to a reduced reliance on costly imported clinker, and thus increases gross margins. 3.5x 3.x 2.5x 2.x 1.5x 1.x.5x.x Source: Company annual reports Liquidity We remain bullish on the Tanzanian cement markets prospects Tanzania s macro-economic environment is inherently supportive of the cement sector with the Tanzanian government increasing infrastructure spend whilst housing and residential infrastructure demand remains high. Tanzania s per capita cement consumption is still very low at 5Kg vs. global average consumption at 513kg per capita, which leaves room for improvement in this regard. With the country still experiencing a cement deficit of around 1.m tonnes per annum, we believe that Tanga Cement will be able to compete and maintain a double digit market share. Valuation and Recommendation Working capital Current ratio Quick Ratio Shareholder's Equity Whilst competition in its home and regional markets is rising, we forecast that the company will be able to maintain its EBITDA margins around 22-23% over the next few years. Using a DCF valuation we obtain a price target of TZS and this provides an 8.6% upside to the current price of TZS 22. Tanga cement is currently trading on a PER of 4.4x, P/BV of.8x and dividend yield of 5.%. This makes it one of the relatively cheaper cement stocks in our stock universe. Part of the reason for this may be traced to limits placed on foreign shareholding of 6% on listed Tanzanian companies. With Afrisam owning up to 62% of the shares in issue, trading opportunites for foreign shareholders are limited and this may have negatively affected demand. HOLD. - 44

47 Financial Summary TZS Millions E 214 E Revenues Y-o-Y % 29.4% -1.2% 66.3% 17.3% 1.3% -7.2% -6.3% Gross Profit Y-o-Y % 22.8% 6.8% 2.5% -5.7% 24.6% -18.6% -2.8% EBITDA Y-o-Y % 25.2% 7.3% 11.8% -14.7% 38.5% -15.6% -2.9% EBIT/Operating Profit, exlc exceptionals Y-o-Y % 26.2% 7.1% 5.2% -15.8% 43.4% -18.% -3.9% Attributable Net Income/Profit After Tax Y-o-Y % 28.2%.6% 4.1% -32.9% 66.1% -16.6% -8.1% Per Share data Attributable Diluted EPS Y-o-Y % 28.2%.6% 4.1% -33.% 65.8% -16.5% -7.9% Dividend Per share (DPS) Y-o-Y % NA 49.2% 38.% -65.1% 16.5% -17.7% -8.1% NAV/Basic Share Y-o-Y % 21.6% 49.6% 16.1% 7.8% 25.6% 17.8% 13.9% Margin Performance E 214 E Gross Margin 45.6% 43.2% 46.8% 33.9% 27.3% 3.8% 27.% 28.% EBITDA margin % 37.5% 36.3% 39.4% 26.5% 19.3% 24.2% 22.% 22.8% EBIT margin% 35.3% 34.4% 37.4% 23.6% 17.% 22.1% 19.5% 2.% Net Income Margin % 25.2% 24.9% 25.4% 15.9% 9.1% 13.7% 12.3% 12.1% Ratios ROaA 48.1% 53.% 43.7% 34.9% 24.8% 31.6% 22.4% 18.4% ROaE 46.7% 54.1% 39.7% 31.9% 19.2% 27.2% 18.7% 14.9% Earning yield on current price 18.3% 23.5% 23.7% 24.6% 16.5% 27.4% 22.8% 21.% Dividend yield current price.% 5.9% 8.9% 12.2% 4.3% 5.% 4.1% 3.8% Cashflow Cash Flow from Operating Activities Net Cash in Investing Activities (17 19) (2 131) (28 384) (22 647) (8 75) (8 643) (6 621) (6 168) Net Cash in Financing Activities (379) (1 74) (19 26) (9 664) (5 522) Cash at the end of the period (2 274)

48 Equity Research Tanzania January 214 Cement Tanzania Portland Cement Company Limited (Twiga) was established in The company manufactures, sells and distributes high quality construction cement in Tanzania. It remains the market leader in the country. Demand for cement in Tanzania is currently rising at a CAGR of 1% p.a. and Twiga is currently the leading manufacturer with a market share of over c4%... Twiga is well established with a distribution network of over 35 outlets within Tanzania and in neighbouring countries. Twiga s main shareholder, the Heidelberg Cement group (69% stake in Twiga), provides a strong technical partner which has enabled Twiga to capture a significant share of Tanzania s cement market. The steady growth of the Tanzanian market has been sustained by road infrastructure, construction and housing demand. With the outlook on these remaining positive, we foresee further growth in demand especially as the Tanzanian government has announced plans to increase its infrastructure spend over the next few years. Competitive pressures however, are rising as the market s growth has attracted investment from other international players The sustained steady growth of the Tanzanian cement market has proved attractive to several local and international companies, with several announcing plans to either increase existing capacity or build new plants. Examples include Dangote Cement (building a USD 5m plant), Athi River Mining (1.2m mt plant under construction) and Lake Cement Company (5, mt plant under construction). In response, Twiga is building additional capacity (+7, mt plant) and diversifying its product range to include aggregates. Valuation Twiga currently trades on a TTM PER of 9.8x, P/BV of 1.6x and dividend yield of 7.1%. Using a DCF valuation we arrive at a target price of TZS 25.6, representing a downside of 24.6% to the current share price. Despite Twiga being the leading cement manufacturer in Tanzania, we currently see better value elsewhere as the competitive environment evolves. SELL Jun Jul Aug-12 Twiga vs. S & P Africa Frontier Index (Rebased) 27-Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov-13 Recommendation SELL Bloomberg Code TWIGA TZ EQUITY Current Price (TZS) Current Price (USc) 167. Target Price (TZS) Target Price (USc) Upside (%) (24.6) Liquidity Market Cap (TZS m) Market Cap (USD m) 3.44 Shares (m) Free Float (%) 31.% Ave. daily vol (') Price Performance Price, 12 months ago 2 4. Change (%) 1.8 Price, 6 months ago 2 4. Change (%) 1.8 Financials (TZS m) 31 Dec F F 214F Turnover EBITDA Net Finance Income Attributable Earnings EPS (TZS) DPS (TZS) NAV/Share (TZS) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F *Earnings Yield (%) Dividend Yield (%) *PE (x) PBV (x) EV/EBITDA (x) *NB:TTM STRENGTHS WEAKNESSES The most aggressive expansion Expansion is too aggressive and some k Very high prifitability ratios and earn assumption may turnout otherwise margings owing to more efficient plants Pan African expansion may shrowd $ management focus Strong cash generation OPPORTUNITIES THREATS Cash generation capacity places it ah Fall in consumption will leave it with of international competition excess capacity High growth in SSA Trade embagos in West african region Newer and more efficient plants affest export from Nigeria Twiga STEIAFDP Index 46

49 % Return TZS TZS 's FY 12 & H1 13 Financial & Operational Review In FY 12 Tanzania Portland Cement Company managed to maintain its market leadership position in Tanzania as it grew its dispatch volumes by 5% y-o-y. This lead to a double digit increase in gross revenues of 14.66% to TZS 249.1bn from TZS 217.3bn in the previous year. Cost of sales rose by 7.64% mostly due to rising energy costs and inflation. This lead to a y-o-y increase in gross profits of 22.96% to TZS 122.4bn. Gross profit margins for the year also showed growth rising by 332 basis points to 49.1% in FY 12 from 45.8% in FY 11. 3, 25, 2, 15, 1, Earnings Operating expenses for the year were higher by 11.81% y-o-y to TZS 19.62bn from TZS 17.6bn on the back of a TZS 2.bn rise in administrative expenses leading to an EBITDA of TZS 13.1bn, up 24.36% y-o-y from TZS 82.9bn. EBITDA margin was up 323 basis points to 41.39% from 38.17% in FY 11, while profit before tax was up 26.89% to TZS 92.3bn from TZS 72.8bn, after accounting for gains from foreign currency translation and net finance income. The tax charge for the year was up 38.77% to TZS 3.8bn from TZS 22.2bn and led to a net profit of TZS 61.6bn, up 21.68% from TZS 5.6bn with the net profit margin rising by 143 basis points to 24.72%. Twiga s total assets grew by 9.96% y-o-y to TZS 277.8bn from TZS 252.7bn in FY 11. This was mostly due to a 5.93% increase in working capital as inventories and trade receivables grew by 16.12% and 113.6%, respectively. Cash and cash equivalents grew by 18% y-oy to TZS 54.6bn from TZs 46.2bn in the previous year whilst shareholders equity rose by 14% y-o-y, driven by a % y-o-y rise in retained earnings. Twiga recorded H1 13 revenue of TZS 12.2bn, down 2% y-o-y when compared to TZS 127.bn achieved in H1 12. This decline in revenue was mainly caused by a decrease in sales volumes due to competition from large quantities of imported cement from Pakistan. The company s cost of sales declined by 12% y-o-y during H1 13 to TZS 58.2bn compared to TZS 66.1bn in H1 12 on the back of tighter cost control and improved efficiencies. As a consequence of the fall in revenues, gross profit margins eased by 5 basis points to 43% in H1 13 (vs. the 48% achieved in H1 12). Operating expenses for the half year rose by 18% y-o-y to TZS 1.7bn. The higher costs were mostly due to operational disturbances such as the fire breakouts in the main plant experienced in the first half. To cope with the disruptions, Twiga resorted to the importation of clinker and rental of electricity generators which led to higher costs. 5, Source: Company Financial Reports 6.% 5.% 4.% 3.% 2.% 1.%.% Revenues EBITDA Profit After Tax Margins EBIT margin% Net Income Margin % Gross Margin Source: Company Financial Reports 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % Profitability Attributable Diluted EPS ROaA Source: Company Financial Reports Dividend Per share (DPS) ROaE 47

50 TZS Millions TZS millions Other operating income earned rose to TZS 153m in H1 13 from a negative TZS 773.m in H1 12. Despite this improvement, the EBITDA margin still fell y-o-y by 752 basis points to 32.65% leading to an EBITDA of TZS 33.4bn, down 34.65%. Depreciation and amortisation rose by 19% y-o-y to TZS 6.3bn, leading to operating profit plummeting 41% to TZS 26.9bn compared to TZS 45.6bn in H1 12. Finance income improved from TZS 54m in H1 12 to TZS 788m on the back of higher interest income from short-term deposits and other investments. A lower tax charge for the half year (down 39% y-o-y) led to a profit after tax of TZS 19.3bn for H1 13 (down 4% y-o-y from TZS 31.9bn in H1 12) with the profit margin falling by only 624 basis points to 18.85% from 25.8% in the previous year. 4.5x 4.x 3.5x 3.x 2.5x 2.x 1.5x 1.x.5x.x Liquidity (2.) Working capital Current ratio Quick Ratio Total assets in the balance sheet fell by a marginal 1.23% to TZS 274.4bn at H 1 13 from TZS 277.8bn as at FY 12. The current ratio fell slightly y-o-y to 3.34x at H 1 13 (vs. 3.91x at FY 12), whilst the net working capital remained a positive TZS 82.1bn as at H1 13 despite falling 1.38% from TZS 91.6bn at FY 12. Interest bearing borrowings fell by 37.5% to TZS 44.1m from TZS 7.5m at FY 12 as the company reduced its debt levels whilst shareholder s equity declined marginally by 2.67% to TZS 27.3bn from TZS 213.bn at FY 12. In the cash flow statement, cash flow from operating activities declined 79.24% to TZS 6.4bn from TZS 29.7bn in H1 12 largely as a result of reduced profitability. Cash flows from investing were marginally down by 1.21% y-o-y to TZS 8.9bn whilst cash flows from financing were a negative TZS 24.3bn in H1 13, down 5.31% from TZS 23.1bn in H1 12. As a result of the weaker cash flows, cash and cash equivalents at H1 13 were down 37.32% y-o-y to TZS 27.6bn from TZS 44.bn at H1 12. Outlook Tanzanian market for cement remains strong with per capita consumption estimated at 52kg (vs. the global average of 513kg per capita), leaving Twiga / TPCC room for future growth Overall, Tanzania still has a country wide cement deficit estimated at.5m tonnes as total production capacity is running at 3.5m tonnes, whilst annual demand is estimated to be around 4.m tonnes. Despite this gap between supply and demand being filled at present by imports from Pakistan and neighbouring Kenya, it has the potential to expand further as the market growth rate is estimated to be around 1.% per annum due to rising demand for housing, road and other infrastructure in the country. 25, 2, 15, 1, 5, - Source: Company annual reports Shareholder's Equity The above is backed up by the fact that Tanzania is presently consuming cement at an estimated per capita rate of 52kgs which is very low when compared to the global average consumption of 513kg per capita. Tanzania s construction sector currently contributes roughly 7.9% to the country s GDP and with the IMF forecasting a GDP growth rate of 7.% - 7.2% for the next two years, we foresee a continued surge in demand for cement throughout the country. However, headwinds from competition are rising affecting the company s prospects in the short term Twiga Cement has seen rising competition during the past few years as a result of increased cement imports from Pakistan and following the reduction of tariffs for cement from neighbouring countries such as Kenya, where competitors such as Bamburi and Athi-River Mining have been ramping up exports to neighbouring countries 48

51 In response Twiga has ramped up its investment programme increasing capacity by up to 54% Twiga is currently the leading manufacturer of cement in Tanzania with a market share of over c4% as of the end of FY 212. The reduction of import tariffs for cement in Tanzania as a result of EAC & COMESA reforms has seen Twiga s management move to try and shore up its market share by increasing capacity in order to cater for the anticipated higher cement demand. Twiga, assisted by Tianjin Cement Industry Design & Research Institute Co. of China is currently building a fifth plant worth USD 31m in Dar es Salaam which is expected to boost the company s capacity to 2 million metric tonnes of cement from the present 1.3 million metric tonnes. The investment programme entered into by Twiga is essential for the company to keep up with the rising demand for cement which is growing in response to the construction boom in Tanzania that has seen the building & construction industry grow at an average 8% p.a. over the past five years. With competition set to intensify in the Tanzanian market following investments by other cement companies such as Dangote, Twiga will be able to better defend its market share. The East African cement market has attracted regional and international players such as Dangote Cement which has invested up to USD 5m into a 3 million metric tonne a year plant in Mtwara, Tanzania, where construction is expected to be completed by March 215. Other regional cement companies such as Kenya s Athi River Mining have also jumped into the fray, investing in additional capacity within the Tanzanian market. Other investment programmes entered into by the company include: Upgrading a clinker line at its Wazo Hill plant which will reduce the company s reliance on expensive imported clinker, increasing profitability. Twiga is also expected to diversify its product line further and will begin to produce aggregates including gravel and sand to bring additional revenue streams into the business. With over 35 distributors throughout the country and beyond, Twiga remains well placed and is also able to export to neighbouring Malawi, DRC, Rwanda, Mozambique and Burundi. This key competitive advantage will ensure that the company is able to take advantage of regional trade agreements within EAC and COMESA, ensuring a wider market for its products. TPCC s wide distribution network in Tanzania Source: Company Financial Reports. Valuation and Recommendation Twiga currently trades on a TTM PER of 9.8x, P/BV of 1.6x and dividend yield of 7.1%. Using a DCF valuation we arrive at a target price of TZS 25.6, representing a downside of 24.6%. With the tougher competitive environment being experiencing in Tanzania, Twiga will need to vigourously defend its position as the leading cement manufacturer aided by its established distribution network illustrated above. Imports from Asian countries such as Pakistan have already made a significant impact on the local market with Twiga s sales volumes falling by up to 2% in H1 13. As a result, despite Twiga being the market leader in the Tanzanian cement industry, we are currently seeing value elsewhere at the present share price. SELL. Twiga s strong distribution network will be key to the company s ability to retain a meaningful market share in a tougher competitive environment. Twiga s distribution networks is one of the widest in Tanzania and has enabled the company to compete effectively in the past, establishing it as the leading cement manufacturer in Tanzania. 49

52 Financial Summary TZS Millions E 214 E Revenues Y-o-Y % 24.2% 2.4% 11.5% 8.8% 14.7% -7.% -2.% Gross Profit Y-o-Y % 16.1% 34.6% 1.1% -1.7% 22.3% -9.2% -2.% EBITDA Y-o-Y % 13.7% 41.7% 1.1% -4.4% 23.4% -7.3% -2.% EBIT/Operating Profit, exlc exceptionals Y-o-Y % 16.6% 35.8% 5.7% -4.6% 25.3% -8.2% -2.5% Attributable Net Income/Profit After Tax Y-o-Y % 16.1% 37.3% 4.6%.8% 21.7% -7.3% -2.4% Per Share data Attributable Diluted EPS Y-o-Y % 16.1% 37.3% 4.6%.7% 21.6% -7.2% -2.3% Dividend Per share (DPS) Y-o-Y % 62.8% 85.7% 6.9% 29.6% 4.5% -15.7% -2.4% NAV/Basic Share Y-o-Y % 34.5% 33.4% 18.9% 11.% 14.4% 42.6% 27.7% Margin Performance E 214 E Gross Margin 49.4% 46.2% 51.6% 51.% 46.1% 49.1% 48.% 48.% EBITDA margin % 4.7% 37.3% 43.9% 43.4% 38.1% 4.9% 4.8% 4.8% EBIT margin% 37.6% 35.3% 39.8% 37.7% 33.1% 36.1% 35.7% 35.5% Net Income Margin % 25.1% 23.5% 26.8% 25.2% 23.3% 24.7% 24.7% 24.6% Ratios ROaA 43.7% 38.6% 39.5% 36.8% 3.6% 33.9% 25.8% 19.7% ROaE 38.2% 37.8% 38.8% 32.4% 28.5% 3.7% 22.% 16.1% Earning yield on current price 6.3% 7.3% 1.% 1.5% 1.6% 12.8% 11.9% 11.7% Dividend yield current price 1.6% 2.6% 4.9% 5.2% 6.8% 7.1% 6.% 5.8% Cash Flow Cash Flow from Operating Activities Net Cash in Investing Activities (32 41) (65 32) (26 88) (5 856) (23 743) (14 252) (3 635) (3 557) Net Cash in Financing Activities (38 369) (23 441) (24 816) (32 464) (33 945) (28 67) Cash at the end of the period (3 984) (9 497) (3 375)

53 Equity Research Zambia January 214 Cement The Zambian Government in the last few years has demonstrated strong commitment to infrastructure development and has further cemented this commitment by pledging a substantial percentage of the proceeds from the USD 75m Eurobond to infrastructure projects. The domestic cement market grew by 13.2% in 212 and we expect it to continue to grow by more than 1% until 218. Over the past 5 years, domestic cement demand has grown steadily, accounting for 73.52% of cement sold. Cement produced by Lafarge has risen from.58mt in FY 211 to 1.7mt pa in FY 212, with sales revenues growing at a 5-year CAGR of 18.2%, whilst net profits have grown at a 5-year CAGR of 31.9%. Dominant cement producer The company remains the dominant cement producer in Zambia despite its market share dropping from 8% in 211 to 68% and has a production capacity of 1.23mt pa. In FY 12, 24% of its total production was exported, which combined with 32, tonnes of clinker exports, accounted for 27% of total revenue. The company exceeded production levels from FY 11 by 8.81% to 1.7mt pa, representing 87% capacity utilisation. The company continues to operate close to full capacity, which has been the case since mid-211. Strong financial performance LCZ continues to demonstrate strong financial performance. Total revenue recorded in FY 12 was ZMW 992.4m, while net profit after tax was ZMW 295.8mn (USD 45m). Following the successful introduction of a new cement product dubbed SupaSet cement targeted at Zambian concrete and block consumers in 211, LCZ has further launched the Extra Mile Programme which is aimed at introducing new products and services. Valuation LCZ is currently trading on a TTM PER of 13.2x, P/BV of 3.3x and dividend yield of 4.1%. Using a DCF valuation we obtain a price target of ZMW 18.6 leaving an upside of 17.8%. With the cement market set to continue growing at double digit rates and despite the increased competition following the entry of Dangote into the market, we continue to remain positive on Lafarge Zambia s prospects, BUY Jun Jul-12 Lafarge Zam vs. S & P Africa Frontier Index (Rebased) 26-Aug Sep Oct Nov Dec Jan-13 LAFARGE Zam 26-Feb Mar Apr May Jun Jul Aug-13 STEIAFDP Index 26-Sep Oct Nov-13 Recommendation Bloomberg code BUY LAFA ZL Equity Current Price (ZMW) Current Price (USc) 285 Target Price (ZMW) 18.6 Target Price (USc) 336 Upside (%) 17.8% Liquidity Market Cap (ZMW m) Market Cap (USD m) 571 Shares (m) 2 Free Float (%) 64.7% Ave. daily vol (') 8.61 Price Performance Price, 12 months ago 38.2 Change (%) Price, 6 months ago 1. Change (%) 57.5 Financials (ZMW m) 31 Dec F F 214F Turnover EBITDA Net Finance Income Attributable Earnings EPS (ZMW) DPS (ZMW) NAV/Share (ZMW) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios Current 213F 214F *Earnings Yield (%) Dividend Yield (%) *PE (x) PBV (x) EV/EBITDA (x) *NB: TTM STRENGTHS Zero debt & strong operating cashflows Minimal CAPEX requirements Dominant domestic market share Access to regional markets Broadest cement product range OPPORTUNITIES Increased regional Economic growth Growth from new product lines increased infrastructure projects Opening of new mines WEAKNESSES Possible medium-term capacity constraints Demand is largely driven by competing on pricing THREATS Entry of Zambezi Portland & Dangote Cement Govt. pressure on environmental impact New cement plants in export markets Kwacha strength to pressure exports Quality perceptions relative to competition 51

54 ZMK ZMK millions FY 12 & H1 13 Financial & Operational Review LCZ s revenue for FY 212 increased by 12.9% y-o-y from ZMW 879.m to ZMW 992.4m, largely driven by domestic sales which accounted for 73.5% of total revenue. Sales revenue and profitability levels were higher than the prior year due to increased volumes and improved cost control in 212. Domestic revenue grew by 18.13% y-o-y versus a 14.19% decline in export revenue. Key export markets remained DR Congo (66%), Burundi (16%) and Malawi (7%) for cement, and Malawi (1%) for clinker volumes and this trend is expected to be carried forward into FY 13. Total volumes sold for the year came in at 1.1 million tonnes, up 5.37% y-o-y from 1.5m tonnes sold in FY 11. 1,2, 1,, 8, 6, 4, 2, Revenues Distribution and administrative expenses decreased by 6.38% y-o-y to ZMW 77.m and 3.31% y-o-y to ZMW 18.9m, respectively. Employee remuneration accounted for 43% of overall operating expenses and decreased by 1% y-o-y, whilst the average number of employees fell by 3.62% y-o-y from 58 employees to 559 employees in FY 212. Marketing spending decreased sharply by 51.48% to ZMW 5.36m. Net finance costs came in at ZMW 1.2m, up 29.56% from.95m in FY 11. Investment income increased by 94% y-o-y to ZMW 16.7m from ZMW 8.3m in the previous year. PBT for FY 212 was ZMW 437.2m, up 34.92% from ZMW 324.1m achieved in FY 11. The tax charge for the year was up slightly by 235 basis points to 32.35% resulting in a PAT of ZMW 295.7m, up 3.3% y-o-y from ZMW 227.m in FY 11. Minority interest for the year rose by 3.3% resulting in an attributable income of ZMW m, (up 3% y-o-y from ZMW 19.8m in FY 11). H1 13 Results Review H1 13 saw continued strong growth in terms of revenue and profitability. Revenues grew 11.43% y-o-y to ZMW 482.m on the back of higher sales volumes, optimised product mix and higher investment income. Domestic demand for cement was stronger than that for H1 12 leading to a reduction in exports volumes. Regional demand grew slowly with the DRC remaining the largest market. Selling prices were adjusted in line with the increase in input costs during H1 13 as the company sought to remain profitable. Power supply remained a key risk compared with H1 11 with production being affected by the quality of power supply in H1 13. Given the slightly higher operating costs, the PBT margin for H1 13 came in at 35.88%, down 369 basis points from 39.57% at H1 12. PAT for H1 13 came in 8.17% lower y-o-y at ZMW 18.6 after accounting for a 1% surge in taxes whilst attributable income came to ZMW 91.2m, down 8.17% y-o-y from that achieved in H1 12. Balance sheet gearing remains low with equity providing the main source of funding. The current ratio for the half year came in at 2.92x vs 2.54x in H1 12, This is reflective of an improvement in working capital in the business which rose by 21.88% y-o-y to ZMW 442.7m. Revenues EBITDA Profit After Tax Source: Company Reports Margins 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% EBIT margin% Net Income Margin % Gross Margin Source: Company Reports Profitability 35.% 1,4 3.% 1,2 25.% 1, 2.% 8 15.% 6 1.% 4 5.% 2.% Attributable Diluted EPS Dividend Per share (DPS) ROaA ROaE Source: Company Reports 52

55 ZMK millions ZMK millions Cashflows from operating activities fell 14.29% y-o-y ZMW whilst cash from investing activities was a negative ZMW.6m vs. a positive ZMW 6.2m in H1 12. Net cash used in financing rose to ZMW 145 from ZMW 75.8 in H1 12. This lead to a cash and cash equivalent balance of ZMW 56.6, up 27.14% y-o-y from ZMW 441 in H1 12. Outlook The company is well positioned to benefit from the government s pledge to invest heavily in infrastructure development, and so demand is expected to remain strong. It is estimated by LCZ management that demand for cement in Zambia may double over the next 1 years and the average pace of growth will probably be more than 1% per year until 218. Competition In our last report we highlighted that they were 2 other operational cement producers in Zambia, namely Oriental Quarries and Zambezi Portland Cement ( ZPC ). LCZs closest competitor still remains ZPC, which has a daily production capacity of 1,4mt and is currently producing at over 95% of its installed capacity. ZPC earlier in the year announced that it would reduce its exports by 5% effective 1 August, 213 to cater for the increased demand for the product on the local market. Additionally, the Dangote Group ( Dangote ) of Nigeria is currently constructing a cement plant in the Masaiti region of Zambia. The plant is expected to cost USD 4m with a production capacity of 1.5mt pa, and is expected to be completed by mid-june 214. It is expected that a significant portion of supply from Dangote will be targeted towards regional markets. Continuous Innovation In mid-211, LCZ introduced a new Portland Composite Cement formulation called SuperSet, which is targeted at block-making and concrete. SupaSet has been very successful in the market in 212 and has become the cement of choice for block makers and concrete product manufactures. The launch in 213 of the Lafarge Extra Mile Programme aims at further developing new products and services. In addition to the company s strong base regarding values and principles, this type of innovation from LCZ will set it apart from current competition by developing home grown solutions for the local consumer, whilst leveraging the group s R&D capabilities. 3.5x 3.x 2.5x 2.x 1.5x 1.x.5x.x 1,2, 1,, 8, 6, 4, 2, - Liquidity , 5, 4, 3, 2, 1, - (1,) (2,) Working capital Current ratio Quick Ratio Equity Shareholder's Equity Retained Earnings Source: Company Annual Financials New Product Lines Following completion of the significant capacity expansion in 29, and the subsequent move to eliminate all debt owed by the company, Lafarge management has focussed on product depth. In FY 211, the CAPEX bill was largely due to an investment in aggregates crusher equipment, which will enable the company to foray into the aggregates and concrete business. Valuation and Recommendation LCZ is currently trading on a TTM PER of 13.2x, P/BV of 3.3x and dividend yield of 4.1%. Using a DCF valuation we obtain a price target of ZMW 18.6 leaving an upside of 17.8%. In 213, the Company will launch its Aggregates business for the benefit of the construction sector this is expected to enhance profitability. Lafarge Zambia is well positioned in the region and has further opportunities for growth in its export markets such as DRC. With the domestic cement market set to continue growing at double digit rates and despite the increased competition we remain positive on Lafarge Zambia s prospects. BUY. 53

56 Financial Summary ZMW Millions E 214 E Revenues Y-o-Y % NA 32.5% 71.5% -.5% 19.8% 12.9% -2.% 6.3% Gross Profit Y-o-Y % NA 4.9% 74.9% 6.5% 25.9% 18.1% -2.% 6.3% EBITDA Y-o-Y % NA 37.% 89.8% -18.2% 36.% 31.1% -1.3% 6.% EBIT/Operating Profit Y-o-Y % NA 35.9% 94.7% -22.5% 41.7% 34.7% -2.% 6.3% Attributable Net Income/PAT Y-o-Y % NA -1.7% 133.2% -17.9% 6.1% 3.3% 1.9% 1.5% Per Share data Attributable Diluted EPS Y-o-Y % NA -1.7% 133.2% -17.9% 6.1% 3.3% 1.9% 1.5% Dividend Per share (DPS) Y-o-Y % NA -58.% 566.7% -5.% 2.% 128.3% 21.1% 6.7% NAV/Basic Share Y-o-Y % NA 15.3% 41.2% 21.% 16.2% 19.8% 17.% 16.3% Margin Performance Gross Margin 48.4% 51.4% 52.4% 56.1% 59.% 61.7% 61.7% 61.7% EBITDA margin % 36.7% 37.9% 42.% 34.6% 39.2% 45.6% 45.9% 45.8% EBIT margin% 33.1% 34.% 38.6% 3.1% 35.6% 42.5% 42.5% 42.5% Net Income Margin % 19.5% 14.5% 19.7% 16.2% 21.7% 25.% 26.% 24.9% Ratios ROaA 31.% 19.5% 32.4% 22.6% 28.4% 32.5% 28.3% 27.% ROaE 18.% 16.5% 29.7% 18.9% 25.5% 28.2% 24.3% 21.1% Earning yield on current price 2.% 2.% 4.6% 3.8% 6.1% 7.9% 8.% 8.2% Dividend yield current price.4%.2% 1.1%.5% 1.6% 3.7% 4.4% 4.7% Cashflow Cash Flow from Operating Activities Net Cash in Investing Activities (266.3) (14.7) (9.6) (19.3) (17.7) (7.5) (2.7) (2.9) Net Cash in Financing Activities (.1) (12.1) (114.1) (114.4) (115.) (137.) (137.3) (137.4) Cash at the end of the period

57 Equity Research Zimbabwe January 214 Cement Lafarge Cement Zimbabwe Limited is a Harare-based manufacturer and distributor of cement and allied products. Its ideal location affords it the control of a lion s share of the nation s foremost cement market. Clinkering capacity stands at.35mtpa while grinding capacity stands at.45mtpa. The company has excess clinkering capacity and often exports clinker to Malawi. The cement industry in Zimbabwe is mainly controlled by Pretoria Portland Cement Company Limited (PPC) (.85mtpa) followed by Lafarge and finally Sino Cement (.25mtpa), for a total capacity of 1.6mtpa. PPC will be commissioning a kiln in December 213 which will ramp up production to 1m tonnes/annum and the company is doing feasibility studies on Rushinga Limestone deposits for another factory. Per capita consumption below 7kg GDP per capita has been proven to have a strong positive correlation with cement consumption per capita, with demand rising in line with economic development. In Zimbabwe, cement consumption per capita is below 7kg, lower than the 1kg average for developing countries and sharply contrasting with developed countries with averages of 45kg. National capacity increasing Lafarge s main competitor locally, PPC, is undertaking a feasibility study at the Rushinga limestone deposit with a view to building a USD 25m factory with total capacity of 1m tonnes per annum. PPC has just finished upgrading its Bulawayo factory increasing capacity from.85mtpa to 1mtpa. Lafarge however is targeting to increase its capacity to 1mtpa but there is currently no visible work on the ground to support that assertion. Valuation The restructuring exercise will reduce head count for Lafarge and we believe this will improve margins. Furthermore, the reduction in the average cost of borrowings will significantly improve pre-tax margins while gross margins are expected to improve on production efficiencies. However, the tight liquidity situation meant that Lafarge could not realise the full benefit of restructuring in H1 13 but we expect the second half to have improved. Ratings are demanding at an EV/EBITDA of 5.9x and PER of 19x compared to peers that are trading at an average EV/EBITDA of 1.15x and PER of 15. 5x. HOLD. Recommendation HOLD Bloomberg Code LAFARGE ZH EQUITY Current Price(USD) 1.1 Target Price (USD) 1.17 Upside (%) 6.5 Price Performance Price, 12 months ago 1. Change (%) 1. Price, 6 months ago 1.1 Change (%) 4.8 Liquidity Market Cap (USD') 88 Shares () 8 Free Float (%) 7.% Ave. daily vol (') 3.98 Financials (USD ) 31 Dec F 214F Turnover EBITDA Net Finance Income (539) (18) (564) Attributable Earnings EPS (USD) DPS (USD) NAV/Share (USD) Ratios RoaA (%) RoaE (%) EBITDA Margin (%) Valuation Ratios F 214F Earnings Yield (%) Dividend Yield (%) PE (x) PBV (x) EV/EBITDA (x) Jul-12 4-Aug-12 Lafarge Zim vs. S & P Africa Frontier Index (Rebased) 4-Oct-13 4-Sep-13 4-Aug-13 4-Jul-13 4-Jun-13 4-May-13 4-Apr-13 4-Mar-13 4-Feb-13 4-Jan-13 4-Dec-12 4-Nov-12 4-Oct-12 4-Sep-12 LAFARGE Zim STEIAFDP Index 4-Nov-13 STRENGTHS WEAKNESSES Located in the heart of the capital Harare Dependence on parent company for key decisions Strong brand equity Limited price adjustments due to excess Strong strategic alliances with Parent Compancapacity in SA Robust enviromental & health record Lean operation after restructuring OPPORTUNITIES THREATS Quintessential recovery play on Zimbabwe Slow down in GDP per capita Rehabilitation of the road networks Limited growth in mortagage finance Huge demand for infrastructure projects Uncertainity in the implementation of Indeginisation La A relatively stable environmemt Expansion by PPC in Ruchinga Mt Darwin close to Harar Aggressive competition from PPC 55

58 USD ('s) FY 12 & H1 13 Financial & Operational Reviews In its FY 12 results, Lafarge reported a solid set of numbers showing a 32% growth in net earnings to USD 4.6m despite the company having incurred USD 3.5m in once off restructuring costs. The solid revenue growth was on the back of a 48% growth in local sales volumes accompanied by a 44% decline in clicker export volumes as the company focused on satisfying domestic demand. 8, 7, 6, 5, 4, Revenue We estimate that adjusted EBITDA (excluding restructuring cost) margins widened to 21.2% from 2.5% on improved efficiencies post plant refurbishment resulting in a solid 46% growth in adjusted EBITDA. A 21% decrease in net finance costs coupled with a reduction in the effective tax rate to 28% from 31% boosted net income growth. Cash generated from operations was up 15% to USD 7.9m. Net cash inflow of USD 4.7m represented a cash interest cover of 8.8x. Net gearing improved from 2.8% to a negative 1.5% as borrowings were reduced by 28% to USD 2.4m. The current ratio was solid at 3.5x. Lafarge Zimbabwe implemented a successful restructuring programme in FY 12 when the company retrenched staff and upgraded its plant to enhance production capacity. This resulted in once off costs amounting to USD 3.5m charged to the income statement for that year. Refurbishments have allowed higher plant utilisation levels which brought about improved efficiency and profitability. Lafarge s H1 13 results were lacklustre reflecting a 12.% reduction in cement and clinker sales. The decline in cement sales was attributable to depressed domestic demand which was down 8.% to.16 mt (.17mt: June 212) as well as the prevailing liquidity crunch. Consequently, revenue generated for the period under review declined by 6.3% from USD 34.3m to USD 32.2m. Profit before tax of USD 3.7m was marginally down compared to the comparative period in view of the drop in sales volume. Retrenchment costs of USD.6m were incurred in the first half. 3, 2, 1, Revenues EBITDA PBT Source: Imara & Lafarge Zim Margins 35% 3% 25% 2% 15% 1% 5% % E EBIT margin% Net Income Margin % Gross Margin Source: Imara & Lafarge Zim Profitability 35% 3% An operating profit margin of 11.5% was achieved for the period compared to 11% for H1 12. Profitability is expected to improve in the second half of the year after a successful implementation of various cost reduction exercises. A USD 2.6m profit after tax was reported which was USD.1m lower than the prior period due to payments of retrenchment costs and lower sales volumes. Basic earnings per share did not change at US 3c. 25% 2% 15% 1% 5% % E ROaE Net Income Margin % ROaA Source: Imara & Lafarge Zim 56

59 USD ('s) USD ('s) The balance sheet reflected a USD 6.7m increase in current assets from USD 21.7m to USD 28.4m mainly as a result of an increase in the stock of cement. The increase in stock was due to the increased productivity post the plant refurbishment as well as the slowdown in sales in the first half due to a tight liquidity environment. Reflecting a slowdown in business was the decline in cash and cash equivalents from USD 2.9m to USD 1m. Long term assets slightly decreased from USD 34m to USD 33m. Current liabilities were maintained at the same level with the prior period at USD 17m. 14, 12, 1, 8, 6, 4, 2, Working Capital x 2.5x 2.x 1.5x 1.x.5x.x Outlook: Source: Imara & Lafarge Zim Working Capital Current ratio Quick ratio Cement sector in Zimbabwe The performance of the cement industry in Zimbabwe is symbiotically related to the fortunes of the construction industry, although manufactures of pipes and roofing sheets also play a role in affecting the direction for demand. The long run demand for cement bears a strong and positive correlation with economic growth and demographic effects. 4, 35, 3, 25, 2, Shareholder's Equity Thus projections from multilateral institutions indicate that GDP growth in Zimbabwe is not expected to breach the 4% mark in the next five years capping growth within the construction sector. Although inflation is in the ultralow category (.86%), the liquidity crunch currently being experienced in the economy continues to drive up interest rates and this has seen a freeze on the nascent growth registered on mortgages. Most companies are also suspending major capex projects due to the need to keep borrowings down and thereby avoid a high interest bill on financials. Although all these factors seem to point to a slowing in the construction sector, it should be noted that some of the major construction companies have order books strong enough to take them through the coming twelve months. Projects such as the Tokwe-Mukosi dam which have entered critically completion stages and the Plumtree- Mutare highway currently under construction represent projects which are on-going. Thus demand for cement should remain firm in the short term before slowing after the completion of major projects if there is no change in the macro-economic situation. 15, 1, 5, - Source: Imara & Lafarge Zim Where are we in the Cycle Zimbabwe is still to undertake a wholesome overhaul of her dilapidated infrastructure ranging from water reticulation, road resurfacing, hydro-electric generation and other new virgin projects that need significant capital investment. This provides room for improvement in the current consumption per capita of less than 7kg. Demand is presently being driven largely by retail buyers, but we envisage improved activity on bigger construction projects going forward as we are cautiously optimistic on the fortunes of the economy. We believe that large scale ventures in the mining and other sectors will take longer to implement given the fluid economic environment. As a result, we expect retail demand to continue to anchor demand fundamentals in the cement industry with isolated projects contributing as well. 57

60 The mining sector which is expected to be the anchor sector in the economy is facing significant headwinds locally due to the indigenisation and empowerment law. The indigenisation and empowerment law remain a handicap to a full capitalisation of the mining sector and international commodity prices remain soft in the face of weak demand from China. Irrespective of all this the long term fundamentals of the Zimbabwean cement industry remain very attractive. Shareholder Structure and Indigenisation Lafarge is majority-owned by the Lafarge Group, which currently controls 76% of its issued share capital. Lafarge Zim in 211 expressed an interest in increasing cement capacity to 1mtpa and placed a five year time frame on the programme. We however, believe that the indigenisation laws may impact that commitment negatively as the 76% control is well in excess of the 49% foreign ownership threshold. Valuation and Recommendation Management indicated that margin expansion will continue into the second half on enhanced efficiencies. The pace of construction activity remains muted and we believe this activity in the industry, by both government and private players and also from the mining sector, will support domestic cement sales growth at modest growth rate of 4% pa. Valuations on a tonnage basis are demanding at an EV/tonne of USD 259 compared to an average of USD 54 for regional peers, while financial indicators are also demanding at an EV/EBITDA of 5.9x and PER of 19x compared to peer averages of 1.15x and 15.5x respectively. HOLD. Our opinion is that, while full compliance will obviously hurt Lafarge, its listing provides a much better position than many other foreign owned companies in Zimbabwe. Lafarge Zim Shareholding Structure as of June 213 Shareholder % of Total Associated International Cement Limited 76% The Farlow Trust 3% Standard Chartered Nominees 3% Turner Roy 3% others 16% Total 1% Source: Imara Estimates In its FY 212 financials Lafarge reported that an agreement was reached with the relevant authorities on the indigenisation modalities to bring down foreign shareholding to 49% in line with the Indigenisation and Economic Empowerment (General) Regulations 21. Thus Lafarge s Indigenisation Plan was approved by the minister of Youth Development, indigenisation and Empowerment. Furthermore, the company reported in the first half numbers that the process of implementing the approved indigenisation policy is underway. Part of this process involves the establishment of a community share ownership trust with a seed capital of USD 3.m, whose disbursement plan is still under consideration. 58

61 Financial Summary USD Thousands E 214 E Revenues 28,333 41,661 49,691 69,927 69,28 72,663 Y-o-Y % NA 47.% 19.3% 4.7% -.9% 4.9% Gross Profit 5,213 1,24 11,752 19,448 2,784 21,799 Y-o-Y % NA 95.8% 15.2% 65.5% 6.9% 4.9% EBITDA 3,938 8,27 9,377 14,95 13,856 14,533 Y-o-Y % NA 18.4% 14.3% 59.4% -7.3% 4.9% EBIT/Operating Profit, exlc exceptionals 1,251 4,12 5,116 1,413 9,513 9,972 Y-o-Y % NA 22.6% 27.5% 13.5% -8.6% 4.8% Attributable Net Income/Profit After Tax 2,685 2,8 3,496 4,626 7,54 7,56 Y-o-Y % NA 4.3% 24.8% 32.3% 52.5%.% Per Share data Attributable Diluted EPS Y-o-Y % NA 4.3% 24.8% 32.3% 52.5%.% Dividend Per share (DPS) Y-o-Y % NA NA NA NA NA 262.1% NAV/Basic Share Y-o-Y % NA 15.6% 17.8% 42.1% 2.8% 15.5% Margin Performance E 214 E Gross Margin 18.4% 24.5% 23.6% 27.8% 3.% 3.% EBITDA margin % 13.9% 19.7% 18.9% 21.4% 2.% 2.% EBIT margin% 4.4% 9.6% 1.3% 14.9% 13.7% 13.7% Net Income Margin % 9.5% 6.7% 7.% 6.6% 1.2% 9.7% Ratios ROaA 6.6% 1.% 11.4% 19.6% 15.7% 15.3% ROaE 3.6% 14.8% 15.8% 16.% 18.8% 15.9% Earning yield on current price 2.9% 3.% 3.8% 5.% 7.7% 7.7% Dividend yield current price.%.%.%.%.8% 2.8% Cash Flow Cash Flow from Operating Activities 1,881 3,672 5,631 4,734 1,951 8,986 Cash Flow from Investing Activities (1,691) (2,413) (6,345) (3,557) (4,755) (4,75) Cash Flow from Financing Activities (913) (2,41) 1, Cash at the end of the period 62 2,476 2,588 2,852 6,647 11,882 59