imara african cement report - feb 2011

sd

Imara African Cement Report

Africa, the last cement frontier

February 2011

Analysts Nontando Zunga +263 772 772 755 [email protected] Anthony Lopes-Pinto +244 921 647 045 [email protected]

mailto:[email protected]

mailto:[email protected]

2

CONTENTS PAGE

African Cement Companies - Fast facts................................................................................................... 3

The cement production process............................................................................................................ 5

Global Executive Summary.................................................................................................................. 7

African Cement Companies Valuation Matrix............................................................................................. 10

West Africa

West Africa Cement Industry Overview................................................................................................. 11

Nigeria

Ashaka Cement Plc................................................................................................................... 12

CCNN................................................................................................................................... 15

Dangote Cement...................................................................................................................... 18

Lafarge WAPCO....................................................................................................................... 21

Angola - Overview of the Cement Industry....................................................................................... 24

East Africa

East Africa Cement Industry Overview................................................................................................. 25

Kenya

Athi River Mining...................................................................................................................... 26

Bamburi Cement (Lafarge).......................................................................................................... 29

East African Portland Cement Ltd................................................................................................. 32

Tanzania

Tanga Cement......................................................................................................................... 35

Tanzania Portland Cement Company.............................................................................................. 38

Southern Africa

Southern Africa Cement Industry Overview............................................................................................ 41

South Africa

Pretoria Portland Cement........................................................................................................... 42

Zimbabwe

Lafarge Cement....................................................................................................................... 45

Zambia

Lafarge Zambia....................................................................................................................... 48

North Africa

North Africa Cement Industry Overview................................................................................................ 51

Morocco

Ciments du Maroc.................................................................................................................... 52

Holcim Maroc.......................................................................................................................... 55

Lafarge Ciments Maroc.............................................................................................................. 58

ACRONYMSAMC Asset Management Company JSE Johannesburg Stock Exchange TANESCO Tanzania Electricity Supply Company

BCC Benue Cement Company KES Kenyan Shilling TPA Tonnnes per annum

CASE Cairo and Alexandria Stock Exchange LIC Low Income Countries TPD Tonnes per day

CASE Casablanca Stock Exchange LPFO Low Pour Fuel Oil TSE Tanzania Stock Exchange

CCNN Cement Company of Northern Nigeria LuSE Lusaka Stock Exchange TSE Tunisia Stock Exchange

COMESA Common Market for Eastern and Southern Africa MT Metric Tonnes TZS Tanzania Shilling

DCP Dangote Cement plc NSE Nigerian Stock Exchange WAEMU West African Economic and Monetary Union

EAC East Africa Community NSE Nairobi Stock Exchange ZESA Zimbabwe Electricity Supply Authority

EAC CET East African Community Common External Tariff PPC Pretoria Portland Cement ZISCO Zimbabwe Iron and Steel Company

GDP Gross Domestic Product SSA Sub Sahara Africa ZSE Zimbabwe Stock Exchange

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African Cement Companies – Fast Facts

Table 1:West Africa: Cement sector in Boom mode

Nigeria

2011 Capacity

(Mt)

Market Cap

(US$m)

Market Cap/

tonne (US$)

Ashaka Cement 0.85 427 502

CCNN 0.70 114 163

Dangote 20.00 12,842 642

Lafarge WAPCO 4.20 847 202

25.75 14,231 553

Angola

2011 Capacity

(Mt)

Market Cap

(US$m)

Market Cap/

tonne (US$)

Nova Cimangola 1.30 718 1 553

Secil Lobito 0.70 2 387 1 553

2.00 1,105 553

1

2

Valuation estimate based on Nigerian weighted

average market valution per tonne of installed

The Secil plant in Lobito is currently under

construction.

Table 2: East Africa purged by Asias surpluses, but resilient still

Kenya

2011 Capacity

(Mt)

Market Cap

(US$m)

Market Cap/

tonne (US$)

Athi River 0.65 227 350

Bamburi Cement 2.00 878 439

East African Portand 1.30 121 93

3.95 1,226 388

Tanzania

2011 Capacity

(Mt)

Market Cap

(US$m)

Market Cap/

tonne (US$)

Tanga Cement 1.25 83 66

Tanzania Portland 1.12 222 199

2.37 305 163

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African Cement Companies – Fast Facts (cont.) c

Table 3: SA battling recession, balanced by strong growth regionally

South Africa

2011 Capacity

(Mt)

Market Cap

(US$m)

Market Cap/

tonne (US$)

PPC 8.00 2,535 317

Zambia

Lafarge Zambia 1.30 290 223

Zimbabwe

Lafarge Zimbabwe 0.45 72 160

South Africa's domestic construction slump has been balanced by strong

exports into Angola and Mozambique. Botswana continues to focus on

infrastructural developments and Zimbawean consumption has rebounded to

over 600,000 MT after troughing at 100,000 MT in 2008

Egypt

2011 Capacity

(Mt)

Market Cap

(US$m)

Market

Cap/tonne

(US$)

Alexandria Cement 1.70 365 214

Misr Beni Suef 1.50 276 184

Qena Cement 1.90 350 184

National Cement 3.50 231 66

Sinai Cement 3.00 367 122

South Valley 1.50 214 143

Suez Cement 4.20 1,071 255

Tourah Cement 3.20 233 73

20.50 3,106 152

Morocco

Ciments du Maroc 5.90 1,901 322

Holcim Maroc 4.50 1,306 290

Lafarge Maroc 6.60 4,115 623

17.00 7,322 431

Tunisia

Carthage Cement 2.30 1 243 106

1 Carthage plant is currently under construction and

expected to start production in July 2012.

Table 4: North Africa, Mostly saturated with overcapacity in Egypt

and Morocco

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The cement production process At a glance Cement is a man-made powder that, when mixed with water and aggregates, produces concrete. The cement-making process can be divided into a few basic steps:

Mining limestone Proportioning and grinding limestone with

other „corrective‟ raw materials Manufacturing clinker in a kiln at

temperatures of 1,450˚C Grinding clinker and other minerals to

produce the powder known as cement Distributing cement to clients

A more detailed explanation of the process in the

diagram is included below:

Cement Production process in detail 1 Quarrying raw materials Naturally occurring limestone deposits, normally located close to a cement plant, provide calcium carbonate (CaCO3), the main raw material for cement manufacture. It is generally necessary to liberate this material in the quarry by drilling and blasting. 2 Crushing The raw material is loaded into trucks in the quarry and hauled to the primary and secondary crushers in which the maximum stone size is reduced to some 25mm. 3 Prehomogenising, proportioning and raw meal grinding Prehomogenisation of the crushed limestone takes place in blending beds to improve its chemical consistency. The limestone is then proportioned and milled to a fine powder, together with relatively small amounts of „corrective‟ materials such as iron ore, shale, clay or sand to produce raw meal. This process is very carefully controlled to ensure the correct chemical composition of the raw mix is obtained. The chemistry of the mix also plays an important role in the downstream burning process. The mills used can be ball mills although more efficient vertical roller mills are generally the first choice in modern plants. The raw meal powder is further blended in silos to produce kiln feed. 4 Preheating A preheater is a series of cyclones housed in a tower through which the kiln feed flows, from top to bottom, in counter-current flow to the hot kiln exhaust gas which is being drawn up through the tower by a fan. In the cyclone tower, thermal energy is transferred from the hot exhaust gas to the kiln feed, which then enters the kiln preheated, so the necessary chemical reactions occur faster and more efficiently. The exhaust gas leaves the tower at a much lower temperature and is then used further for drying raw materials and fuel. Depending on the raw material moisture content, a kiln may have up to six cyclone stages with increasing system thermal efficiency at each additional stage. 5 Precalcining Calcination is the process of decomposing limestone to lime and CO2. In modern kiln systems, most of this reaction takes place in a precalciner, which is a static combustion chamber

located at the bottom of the preheater, above the kiln. It is necessary to burn fuel in the precalciner to supply the required energy for this reaction and typically 60% of the total fuel requirement for the burning process is added at the precalciner, and 40% in the rotary kiln. In older systems or smaller plants, calcination takes place in the rotary kiln itself (in which 100% of the fuel is burned). 6 Clinker production in the rotary kiln The preheated or precalcined feed material then enters the kiln which is slightly inclined to the horizontal. Fuel is fired directly into the kiln at the opposite (lower) end. As the kiln rotates, between two and five times per minute, the material slides and tumbles down through progressively hotter zones towards the flame. The intense heat causes chemical and physical reactions that partially melt the feed, and finally the clinker minerals form at a temperature of around 1 450°C. 7 Cooling and storing From the kiln, the hot clinker falls into a cooler where it is cooled by ambient air. In modern plants, air is blown through a bed of the clinker in a grate cooler and the heated air is then used for combusting the fuel in the kiln. Many older or smaller plants have satellite coolers where the cooling air is simply drawn through cooler tubes, which are attached to and rotate with the kiln, in the opposite direction to the flow of hot clinker. The cooling air is heated up as it recovers thermal energy from the clinker and it is also used for combustion of the kiln fuel. This process reduces the overall energy loss from the system. A typical cement plant has clinker storage silos between clinker production and grinding. Although clinker is an intermediate product, it is commonly traded. 8 Blending Clinker is proportioned with other materials at the clinker grinding stage where the final cement product is produced. All cement types contain around 4–5% gypsum to control the setting time. If significant amounts of slag, fly ash, limestone or other extender materials (or a mixture of these materials) are used to replace clinker, the product is called

a blended cement.

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UgandaZambia

Kenya

Nigeria

Angola

TanzaniaZimbabweMalawi

-

20

40

60

80

100

120

140

160

180

- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

Per

capit

a C

em

en

t con

supm

tipn

(kgs)

GDP Per capita (US$)

Figure 1: Consumption vs GDP per capita

Source: Lafarge SA, IES, IMF

Egypt

Morocco

South Africa

Brazil

India

China

Russia

Tunisia

0

200

400

600

800

1000

1200

1400

- 2,000 4,000 6,000 8,000 10,000 12,000

Cem

en

t C

on

sum

pti

on

(kg)

GDP Per Capita (US$)

Figure 2: Consumption vs GDP per capita

Source: Lafarge SA, IES, IMF

African Cement Companies - Relative Graphs

-

50

100

150

200

250

Seci

l Angola

CCN

N

PPC

WAPCO

Bam

buri

Dangote

Tw

iga

Ash

aka

EAPC

Lafa

rge Z

am

bia

Holc

im M

aro

c

Tanga

Lafa

rge M

aro

c

Cim

ents

du M

aro

c

Lafa

rge Z

imbabw

e

ARM

L

Avera

ge P

rice (U

s$)

Figure 3: Ave Price/tonne

Source: IES

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Ch

ina

MEN

A

We

ste

rn

Eu

rope

Ind

ia

Lati

n A

me

rica

No

rth

Am

eri

ca

Ru

ssia

Sub-S

ah

ara

n

Afr

ica

Capacit

y, D

em

an

d (M

illion

s of

Ton

nes)

Figure 4: Global demand vs capacity

Capacity Demand

Source: Dangote Cement

0%

10%

20%

30%

40%

50%

60%

70%

Dan

gote

Lafa

rge

M

aro

c

Cim

en

ts

du

Maro

c

Lafa

rge

Zam

bia

PPC

Tw

iga

Tan

ga

Ho

lcim

M

aro

c

Bam

bu

ri

CC

NN

WA

PC

O

ARM

L

Ash

aka

EA

PC

Lafa

rge

Zim

babw

e

EB

ITD

A m

arg

in (%

)

Figure 5: EBITDA by company

-

100

200

300

400

500

600

700

Dan

gote

PPC

Lafa

rge

M

aro

c

Ash

aka

Ath

i Riv

er

Min

e

Cim

en

ts

du

Maro

c

Ho

lcim

M

aro

c

Bam

bu

ri

Lafa

rge

W

APC

O

Lafa

rge

Zam

bia

CC

NN

Tw

iga

EA

PC

Lafa

rge

Zim

babw

e

Cath

arg

e

Tan

ga

EV

/Ton

ne (

US$)

Figure 6: 2011 EV/tonne by company

Average

NB: We have excluded Dangote

from the weighted average for reasons of weighting; Including Dangote the average increases to US$ 555/tonne

Dangote

37%

PPC

13%

Lafarge

Maroc11%

Ciments

du Maroc10%

Holcim

Maroc7%

Lafarge

WAPCO7%

Bamburi

3%

EAPC

2%

Lafarge

2%

Tanga

2%

Twiga

2%

Ashaka

1%

Athi River

Mine1%CCNN

1%

Lafarge Zim

1%

Figure 7: Capacity by company

-20%

0%

20%

40%

60%

80%

100%

120%

Ash

aka

CC

NN

Dan

gote

Wap

co

AR

ML

Bam

bu

ri

EAP

C

Tan

ga

Twig

a

PP

C

Lafa

rge

Zam

Lafa

ge Z

im

Cim

en

ts

du

Mar

oc

Ho

lcim

Larf

arge

Mar

oc

Figure 8: Common Size Income statements

PAT PBT EBITDA Costs

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Global Executive Summary Top down Perspective: Africa, the world’s last cement frontier SSA is the world‟s last cement frontier, currently with a supply deficit of some 5m MT pa. With stronger economic growth and the world‟s highest cement prices, this gap is rapidly being filled and by 2013, we believe the sub continent‟s requirements will be fully satisfied, on the completion of significant investment into capacity expansion, which we calculate to be in the region of 16m MT. It must be noted, however, that the demand/supply balance is intrinsically related to the level of development of the financial markets, hence, while proposed investment more than adequately cover the estimated current deficit, the latter is a moving target. Also, cement prices in SSA are, at the top end, some 200% higher than emerging and developed countries. The expected drop in prices resulting from the eradication of supply bottlenecks should significantly impact on demand. Importantly, a lower cement price will reduce of the cost implications addressing SSA‟s infrastructural deficit. Expansion projects underway Current Capacity 2013 Capacity % ch Dangote Cement Industries 8m MT 20m MT 150% Lafarge WAPCO 2m MT 4.2m MT 110% Ashaka Cement 0.9m MT 1.3m MT 44% CCNN 0.5m MT 0.7m MT 40% Athi River Mine 0.7m MT 2.2m MT 214% Lafarge Zimbabwe 0.5m MT 0.8m MT 60% Sub Total 12.8m MT 29.2m MT 128% Ciments du Maroc 3.7m MT 5.9m MT 59% Holcim 3.7m MT 5.2m MT 41% Lafarge Maroc 6.5m MT 8.2m MT 26% Sub Total 13.9m MT 19.3m MT 39% The demand side too is looking positive. Improved political stability, fiscal management and lower sovereign debt levels have availed funds for capital investment, and post the 2008 commodity price shock, economic fundamentals, for the larger part, are improving. According to the IMF, in the last five years, real GDP growth in Sub-Saharan Africa has grown by an average rate of 5.8% while population growth has averaged 1.75% over the same period. In effect, per capita incomes are increasing, and Africans, on the whole are getting wealthier, albeit from a low base. Rising per capita incomes can clearly be seen in increasing mobile penetration rates, beverage and FMCG consumption patterns. Governments have been prioritising increasingly larger portions of their budgets on growing their infrastructural capacity in order to increase trade and ease unemployment, and donors too have played an important role. This is clearly visible in Angola, Botswana, Nigeria, Rwanda, South Africa and Uganda, where government sponsorship has been the main catalyst for infrastructural development. In Morocco, Tunisia, Algeria and Egypt, modelled on similar projects in the Arab Emirates, the creation of new multi-million dollar cities has been the focus. Also to play an increasingly important role, will be Africa‟s newest oil producing countries, Ghana and Uganda. Not to mention the creation of a 54th African state on the secession of Southern Sudan, which marked the end of Africa‟s longest running civil war. In the latter for example, a whole new country has to be built, all to be funded by its share of the oil revenues. Geo-political forces have also been at play with China‟s strategic focus to dominate Africa‟s resources in exchange for long term financing packages, being the predominant driving force. Across the continent and in exchange for resource wealth, the Chinese Dragon has blazed a trail of infrastructure projects including roads, bridges, dams, airports, skyscrapers, and by a wide margin, Sinoma is the largest cement plant builder on the continent (currently installing around 15m MT by 2013). Deepening banking penetration rates, increasing disintermediation and greater access to bond markets and international credit lines are also having a positive role on the construction industry. South Africa and North Africa remain the most developed financial blocs, however, up and coming financial markets are clearly visible in East Africa with some bright spots in Southern African (Botswana and Namibia). Largely, SSA remains essentially a cash economy and access to long term consumer mortgage products has yet to develop meaningfully. The proposed introduction of a common monetary union in East Africa, and possibly Southern Africa adopting the Rand, will have a significant impact on the development of financial markets and particularly on the cost of funding. Figures 1 and 2 imply a distinct relationship between financial market development and per capita consumption statistics.

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Bottom up perspective: Anticipated capacity increases largely not priced in Valuation Methodology In our analysis we have valued companies using our forecast Free Cash Flows for 2 years, post the latest set of financials. We have then valued cashflows into the future as a perpetuity, using four or five year compound growth rates as our best guide to future sustainable free cash flow growth. A minimum discount rate of 10% has been used to discount free cash flows, however, we have included a matrix of rates with higher discount rates for investor information purposes. As many of the companies are in a state of growth and expansion, with internal cashflows being a primary source of capital expenditure, required maintenance capex is largely obscured. Consequently we have ignored this requirement, and would use our derived DCF valuations as a proxy for a counter‟s upper limit valuation. We have complemented the first valuation method with the EV/tonne relative valuation method, which more clearly takes into account any planned capacity increases and debt levels. Most of SSA’s cement consumption growing ahead of GDP With the exception of South Africa, whose construction sector is still being affected by a weak housing market and high energy costs, selective opportunities abound in the SSA space. Kenya, Zambia, Zimbabwe and Tanzania offer some of the cheapest cement factories. As a region, East Africa is particularly interesting, as its financial markets are deeper and more sophisticated than West Africa‟s ones, and valuations (particularly in Tanzania-albeit illiquid) are undemanding. Proximity to rapidly developing Rwanda, Burundi and newly formed, Southern Sudan is a bonus. Zimbawe‟s cement market has recovered strongly and demand has rebounded strongly to 600,000 MT in 2010 from a low of 100,000 MT in 2008. This is still roughly half the level of national consumption in the 90‟s which averaged 1.2m MT. Dollarisation of the economy has been the major fundamental for the growth and huge investments into platinum, gold, coal and now, diamonds should grow demand. The recapitalisation of the banking sector and re-introduction of mortgage products will contribute a broader based grass roots level push, however this will be in the medium term, and certainly post presidential elections. Summary of the Bull case for Africa

GDP growth outpacing population growth-> GDP per capita‟s are growing Double digit growth in cement consumption outpacing GDP growth Massive infrastructure and housing deficit; Robust demand has been driven by cash and not credit. Increasing financial disintermediation across the continent will continue to drive up cement

consumption. Opening up of bond markets is a pre-cursor to large scale infrastructure projects. (Kenya, Ghana,

Nigeria) Cement capacity in SSA to go up by between 13-16m MT by 2013 and an anticipated reduction in prices

will stimulate quantities demanded Summary of the bear case for Africa

Energy constraints: High Low Pour Fuel Oil (LPFO) prices; rising coal demand and prices. Electricity deficit in SSA; need to generate own power leading to higher operational costs Importation of clinker creates susceptibility to exchange losses Stiff competition from China and Pakistan particularly in East Africa High cost of capital stifles investment and mortgage extension. SSA susceptible to commodity price shocks

Having identified this investment opportunity from the macro perspective, we have honed into the subject, studying 24 listed cement groups, with a total market capitalisation of over US$30 bn. Our conclusions are as follows: Recommendations and Conclusions Our report indicates that, by and large, Africa‟s cement companies are cheap, and current valuations have not yet taken the 2012/3 capacity increases into account. Exceptions to this would be Dangote, which we believe to be overpriced, Morocco, which already is in a state of oversupply (and fully priced) and EAPC, which is poorly run. Although the markets in Tunisia and Egypt are closed, valuations indicate upside potential, especially in the latter where the market fell significantly due to the ongoing political tensions.

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Table 5: Relative Valuation Metrics for SSA Cement Companies

Company Ashaka CCNN Dangote

Lafarge

WAPCO

Athi River

Mine Bamburi EAPC Tanga Twiga PPC Lafarge Lafarge

Weighted

Average

Country Nigeria Nigeria Nigeria Nigeria Kenya Kenya Kenya Tanzania Tanzania South Africa Zambia Zimbabwe

Parent Shareholder Lafarge CCNN Dangote Lafarge Paunrana's Lafarge NSSF Holcim Heidelberg PPC Lafarge Lafarge

Population (m) 156.0 156.0 156.0 156.0 40.0 40.0 40.0 42.5 42.5 49.1 12.0 12.0

Capacity (MT) 0.85 0.70 20.00 4.20 0.65 2.00 1.30 1.25 1.12 8.00 1.30 0.45 42

Per capita consumption (kg) 94.9 94.9 94.9 94.9 69.0 69.0 69.0 56.0 56.0 163.1 44.0 50.0 101

Per capita GDP (US$) 1,111.5 1,111.5 1,111.5 1,111.5 818.0 818.0 818.0 502.6 502.6 5,855.0 1,283.9 666.7 1,728

Market Cap (US$m) 427.1 114.4 12,842.3 846.7 227.2 878.1 120.6 83.1 221.9 2,534.9 290.0 72.0 18,658

EV/Capacity (US$/tonne) 491.3 159.9 628.6 242.6 418.7 326.2 118.0 74.2 125.9 528.1 226.1 112.1 555

Sales Growth (%)

(Hist) -19.6% 20.2% 206.3% 5.4% 11.4% 9.2% 16.1% -1.2% 20.4% 8.6% 71.5% n/a 145.1%

(T+1) 10.0% 14.6% 19.1% 3.9% 11.4% 11.2% 9.2% 7.9% 14.4% 0.4% 5.0% 45.0% 14.9%

(T+2) 10.0% 54.0% 76.2% 55.6% 11.4% 11.2% 9.2% 9.5% 14.4% 5.0% 5.0% 50.0% 57.4%

PBV

(Hist) 4.9 4.1 10.6 3.0 4.2 3.6 1.7 1.3 2.3 19.9 2.4 19.9 10.6

(T+1) 4.3 3.5 8.6 2.5 5.5 3.2 1.6 1.3 1.8 20.3 2.0 20.3 9.3

(T+2) 3.8 2.9 6.4 2.0 4.6 2.8 1.5 1.1 1.4 20.8 1.7 20.8 7.7

EV/EBITDA

(Hist) 41.8 5.7 14.8 18.2 17.6 7.9 7.7 2.3 4.0 8.3 3.6 55.2 14.1

(T+1) 31.9 4.2 7.5 18.0 15.2 7.2 25.7 2.8 2.9 8.1 4.4 6.4 8.7

(T+2) 12.2 2.7 5.5 11.6 13.4 6.2 8.5 2.6 2.2 7.4 4.1 3.2 6.3

Dividend Yield

(Hist) 0.0% 6.4% 3.4% 0.2% 0.8% 2.8% 0.0% 9.4% 7.1% 6.0% 1.4% 0.0% 3.5%

(T+1) 1.2% 6.6% 6.4% 0.6% 0.9% 2.6% 1.6% 9.2% 9.6% 6.5% 1.4% -1.0% 5.7%

(T+2) 1.3% 10.1% 12.2% 1.2% 1.0% 2.8% 1.8% 10.1% 10.9% 7.2% 1.5% -1.4% 9.9%

EBITDA margin

(Hist) 8.9% 25.5% 59.5% 18.2% 15.3% 28.6% 5.1% 35.5% 36.0% 36.2% 41.8% 4.7% 49.9%

(T+1) 10.9% 30.4% 66.0% 18.2% 14.6% 28.8% 14.1% 28.6% 41.1% 35.9% 31.9% 27.7% 54.4%

(T+2) 25.1% 29.6% 67.7% 18.2% 13.8% 28.5% 14.0% 28.7% 41.3% 35.7% 31.9% 37.2% 55.9%

Weights 2.3% 0.6% 68.8% 4.5% 1.2% 4.7% 0.6% 0.4% 1.2% 13.6% 1.6% 0.4%

Table 6: Relative Valuation Metrics for North African Cement Companies

Company

Ciments

du Maroc

Holcim

MarocLafarge Maroc Catharge

Alexandria

Cement

Misr Beni

Suef

Qena

Cement

National

Cement

Sinai

Cement

South

Valley

Suez

Cement

Torah

Cement

Weighted

Ave

Country Morocco Morocco Morocco Tunisia Egypt Egypt Egypt Egypt Egypt Egypt Egypt Egypt

Parent Shareholder Holcim Lafarge Titan Titan OCI Vicat Italcementi Italcementi

Population (m) 34.9 34.9 34.9 10.5 83.1 83.1 83.1 83.1 83.1 83.1 83.1 83.1

Capacity (MT) 5.90 4.50 6.60 2.30 1.70 1.50 1.90 3.50 3.00 1.50 4.20 3.20 39.80

Per capita consumption (kg) 416 416.0 416 564.5 601.8 601.8 601.81 601.8 601.81 601.8 601.81 601.8 473.44

Per capita GDP (US$) 2,605 2,605.3 2,605 4,150.2 2,263 2,262.8 2,263 2,262.8 2,263 2,262.8 2,263 2,262.8 1,309

Market Cap (US$m) 1,901 1,306.0 4,115 243.4 365 275.6 350 230.8 367 214.5 1,071 233.0 10,671

EV/Capacity (US$/tonne) 371.7 335.4 521.1 105.8 322 137.7 138 98.8 138 214.3 255 109.1 288

Sales Growth (%)

(Hist) 4.4% 12.4% 10.7% 85.3% n/a 1307.1% 0.0%

(T+1) 30.2% 5.0% 6.6% 110.7% n/a 1.6% 9.5% 29.0% 6.7% 5.0% 3.1% 5.0% 12.8%

(T+2) 20.0% 5.0% 16.0% 215.0% n/a 34.2% -5.3% 5.0% -18.1% 5.0% -11.6% 5.0% 14.5%

PBV

(Hist) 3.7 5.6 5.9 1.6 n/a 1.7 3.2 3.9 1.7 0.7 0.9 0.9 4.1

(T+1) 3.4 4.8 5.2 1.5 n/a 1.5 2.9 3.5 1.4 0.7 0.9 0.9 3.6

(T+2) 3.0 4.2 4.5 1.3 n/a 1.4 2.7 3.2 1.2 0.6 1.1 1.1 3.2

EV/EBITDA

(Hist) 13.0 11.3 12.1 679.2 12.3 4.3 4.3 5.1 3.9 n/a 2.3 14.7 25.3

(T+1) 10.9 10.9 11.4 833.1 11.7 4.1 4.1 5.7 3.9 23.7 2.1 14.0 28.6

(T+2) 9.1 10.5 9.9 922.6 11.1 3.1 3.1 5.4 4.7 23.7 2.6 13.3 29.6

Dividend Yield

(Hist) 4.8% 3.2% 0.0 0.0% 10.8% 10.0% 9.8% 10.3% 10.8% 5.3% 9.5% 7.6% 5.3%

(T+1) 5.8% 3.4% 0.0 0.0% 11.0% 8.6% 10.6% 10.3% 11.0% 5.4% 9.8% 8.2% 5.6%

(T+2) 6.9% 3.6% 0.0 0.0% 11.2% 12.3% 11.5% 10.8% 11.2% 5.6% 8.0% 8.8% 6.0%

EBITDA margin

(Hist) 48.1% 34.3% 56.1% 79.5% 31.0% 59.5% 53.0% 59.5% 49.5% 19.2% 34.1% 34.0% 48.1%

(T+1) 48.1% 34.3% 56.1% 69.0% 31.0% 58.3% 50.7% 58.3% 51.1% 19.2% 37.3% 34.0% 48.1%

(T+2) 48.1% 34.3% 56.1% 64.7% 31.0% 55.0% 47.8% 55.0% 50.9% 19.2% 33.9% 34.0% 47.4%

10

3.3

Table 7: Discounted Free Cashflow Valuation Model

2011F GDP

Company Currency 2009 2010F 2011F 5% 6% 7% 8% 9% Growth

Ashaka Cement NGN 0.52 1.59 1.88 37.67 31.39 26.91 23.55 20.93 7.3%

CCNN NGN 1.69 2.08 3.12 62.41 52.01 44.58 39.01 34.67 7.3%

Dangote Cement NGN 8.13 16.07 21.22 424.37 353.64 303.12 265.23 235.76 7.3%

Lafarge WAPCO NGN 1.59 3.53 7.10 141.99 118.32 101.42 88.74 78.88 7.3%

Athi River Mine KES 8.50 9.78 11.28 225.64 188.03 161.17 141.02 125.36 5.8%

Bamburi Cement KES 20.87 19.37 21.36 427.26 356.05 305.19 267.04 237.37 5.8%

East African Portland Cement KES N/A N/A N/A N/A N/A N/A N/A N/A 5.8%

Tanga Cement TZS 504 525 575 11,500 9,583 8,214 7,187 6,389 6.7%

Twiga Cement TZS 296 388 442 8,847 7,373 6,319 5,530 4,915 6.7%

Pretoria Portland Cement ZAR 1.72 1.86 2.07 41.35 34.46 29.54 25.85 22.97 3.6%

Lafarge Zimbabwe USD 0.04 0.05 0.07 1.45 1.21 1.04 0.91 0.81 8.0%

Lafarge Zambia ZMK 948 928 979 19,580 16,317 13,986 12,238 10,878 6.0%

Ciments du Maroc MAD 53.99 69.64 89.78 1,796 1,496 1,283 1,122 998 4.2%

Holcim MAD 185.41 194.68 204.41 4,088 3,407 2,920 2,555 2,271 4.2%

Lafarge Ciments Maroc MAD 106.10 113.12 131.17 2,623 2,186 1,874 1,640 1,457 4.2%

Alexandria Cement EGP 1.89 1.93 1.97 39.35 32.79 28.11 24.59 21.86 5.3%

Misr Beni Suef EGP 9.78 8.43 11.98 239.50 199.58 171.07 149.69 133.06 5.3%

National Cement EGP 2.59 2.59 2.72 54.47 45.39 38.90 34.04 30.26 5.3%

Qena Cement EGP 11.77 12.71 13.72 274.48 228.73 196.06 171.55 152.49 5.3%

Sinai Cement EGP 9.59 10.66 10.69 213.71 178.10 152.65 133.57 118.73 5.3%

South Valley Cement EGP 0.31 0.32 0.33 6.54 5.45 4.67 4.08 3.63 5.3%

Suez Cement EGP 7.15 7.33 6.01 120.20 100.17 85.86 75.13 66.78 5.3%

Tourah Cement EGP 3.88 4.19 4.53 90.51 75.43 64.65 56.57 50.28 5.3%

Carthage Cement TND - 0.19 0.26 5.23 4.35 3.73 3.27 2.90

Company 5.0% 7.5% 10.0% 12.5% 15.0% 17.50% Price

Recomm-

endation

2011 CPI

Inflation

Ashaka Cement 26.47 33.44 23.22 21.80 20.50 19.31 28.98 -29% SELL 9.5%

CCNN 43.32 40.52 37.96 35.62 33.48 31.51 14.00 139% BUY 9.5%

Dangote Cement 296.40 277.31 259.89 243.95 229.33 215.90 128.00 79% N/A 9.5%

Lafarge WAPCO 97.41 91.06 85.27 79.97 75.12 70.66 43.00 75% BUY 9.5%

Athi River Mine 181.97 170.22 159.48 149.67 140.67 132.40 185.00 -24% HOLD 5.0%

Bamburi Cement 345.40 323.12 302.78 284.17 267.11 251.44 195.00 37% BUY 5.0%

East African Portland Cement N/A N/A N/A N/A N/A N/A 108.00 N/A SELL 5.0%

Tanga Cement 8,117 7,598 7,124 6,690 6,292 5,926 1,900.00 231% BUY 5.0%

Twiga Cement 6,230 5,831 5,467 5,133 4,827 4,546 1,820.00 165% BUY 5.0%

Pretoria Portland Cement 39.37 36.81 34.47 32.33 30.37 28.57 29.19 18.1% HOLD 5.8%

Lafarge Zimbabwe 1.01 1.28 0.88 1.12 1.05 0.99 0.90 -2% HOLD 3.0%

Lafarge Zambia 15,867 14,845 13,912 13,058 12,276 11,557 6,900 67% BUY 7.5%

Ciments du Maroc 1,699 1,588 1,487 1,394 1,309 1,231 1,146 30% BUY 2.5%

Holcim 3,902 3,649 3,417 3,206 3,012 2,834 2,701 27% BUY 2.5%

Lafarge Ciments Maroc 2,493 2,331 2,182 2,047 1,923 1,808 2,051 6% HOLD 2.5%

Alexandria Cement 37.61 35.17 32.94 30.90 29.04 27.32 12.35 167% BUY 12.8%

Misr Beni Suef 225.77 210.99 197.50 185.16 173.86 163.48 59.99 229% BUY 12.8%

National Cement 51.99 48.61 45.53 42.71 40.13 37.75 19.47 134% BUY 12.8%

Qena Cement 261.65 244.64 229.11 214.91 201.90 189.95 101.53 126% BUY 12.8%

Sinai Cement 204.46 191.19 179.09 168.01 157.87 148.55 45.60 293% BUY 12.8%

South Valley Cement 6.24 5.84 5.47 5.13 4.82 4.54 3.79 44% HOLD 12.8%

Suez Cement 116.27 108.78 101.94 95.68 89.95 84.69 34.21 198% BUY 12.8%

Tourah Cement 86.28 80.67 75.55 70.87 66.58 62.64 28.36 166% BUY 12.8%

Carthage Cement 4.93 4.61 3.19 4.04 3.80 3.57 28.36 -89% N/A 4.5%

Earnings per share

Discount rate

(Prem)/

Disc

Sustainable growth rate

11

West Africa Cement Industry Overview Top Down looking good From a top down perspective Nigeria‟s case for investors to seek exposure to the cement sector (albeit selectively) is positive. The brief SWOT analysis for Nigeria is as follows: STRENGTHS Firm oil prices ensuring Naira stability Strong grassroots demand (low per capita consumption of 95kg) Demographic dividend – most populous country in Africa at 156m Massive infrastructure deficit (calculated as 919m MT in cement

over the next 10 years) Recovery of the local banking sector through the acquisition of

NGN 2.04bn in Non Performing Loans (NPLs) by the creation of the Asset Management Corporation of Nigeria (AMCON) on 31/12/2010.

Government commitment to increasing capital expenditure. FY2011 budget allocation is for NGN1,005bn (US$6.7bn)

35% import tarrifs to stimulate local production WEAKNESSES Reliance on LFPO, which is more expensive than solid fuels Power and gas shortages Oil price crash reduced momentum of economic activity and oil

revenues Margin lending bubble burst and created one of the largest

banking crises in Africa (total NPL‟s of US$16.6bn). Financial sector is still edgy, though on the road to recovery.

No large scale mortgage products available and low credit extension; deep seated cash economy.

OPPORTUNITIES Deepening and increasing intermediation in the banking sector

post the recapitalisation Development of the mortgage sector New entrants into the banking sector to buy failed banks Commitment to invest NGN500bn (US$3.3bn) into developing

energy projects. Government commitment to economic growth Massive investment into expansion capex projects by Dangote and

Lafarge Potential to export into region. THREATS Short term oversupply; By the end of 2012 national production

capacity will be 6m MT more than total consumption in 2010. This is excluding capacity to bag imported cement which for Dangote amounts to 6m MT (about 8m MT in total).

Continued electricity shortages Spike in LPFO prices Spike in coal prices Downward price pressures resulting from over-capacity Margin shrinkage as price wars trim margins Political instability, presidential elections in April 2011 Instability in the Niger delta Local currency weakness related to developments in oil markets Comment on valuation and pricing Nigeria offers selective value for investors in the Cement sector. CCNN and Lafarge WAPCO present the best priced entry points. Dangote is overpriced relative to peers, while Ashaka is fully priced.

0

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4

6

8

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12

14

16

2004 2005 2006 2007 2008 2009

Mil

lio

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of

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s

Figure: National Cement Consumption

0

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30000

2004 2005 2006 2007 2008

Average cement prices (NGN/tonne)

Figure 11: Exchange rate Naira vs US$

Figure 10: Average Cement prices (NGN)

Figure 9: National Cement Consumption

12

ASHAKA CEMENT COMPANY Looking rather grey Ashaka Cement has maintained market leadership in its isolated market in the North-East of Nigeria. The increased use of thermal energy (as opposed to LPFO) will result in lower energy costs and fatter margins, which will bring EBITDA margins in line with peers. Despite some expansion, Ashaka will remain an underdog. Valuations are now full to slightly overdone; after a strong run in 2010, take profits at these levels.

Planned capacity expansion to the tune of an additional 400,000 MT pa is expected to boost Ashaka‟s capacity to 1.25m MT pa. After expansion, the EV/tonne equates to US$304.

With Dangote and WAPCO significantly increasing capacity in the short term (<3 years), competition and downward pressure on cement prices is anticipated. This may negatively affect Ashaka considering it has one of the lowest operating efficiencies in the sector (EBITDA at 9%) and prices are already some of the highest in the Africa (See fig 3, page 6).

Our DCF model ascribes Ashaka a target price of NGN23.22, indicating full valuation. On a relative valuation basis, the counter is trading at a 2011 EV/tonne ratio of US$491 (US$304 at 2012 capacity) significantly higher than our SSA weighted average EV/tonne of US$122/tonne (excluding Dangote).

In FY2010 the counter performed superbly, gaining some 90%. YTD the counter has gained a further 9.4%. We would not be against some profit taking.

BLOOMBERG: ASHAKACE: NL SELL

Current price (NGN) 28.98

Current price (US$) 0.19

Target price (NGN) 23.22

Upside/Downside -19.87%

12 month High/Low (NGN) 12.15-30.10

Liquidity

Market Cap (NGNm) 64,899.3

Market Cap (US$m) 427.1

Shares (m) 2,239.5

Free Float (%)

Ave monthly value traded (US$m) 5.4

Ave monthly volume traded (m) 28.4

Share Price Performance

6 months (%) 56.2

Relative Change (%)* 48.8

Relative Change (%)** 40.7

12 months (%) 135.8



*Relative to NSE index **Relative to MSCI EM index

Financials 2009 2010F 2011F

Fully Diluted EPS (NGN) 0.42 1.15 1.26

Free Cashflow per share (NGN) 0.52 1.59 1.88

DPS (NGN) - 0.34 0.38

NAV/share (NGN) 5.87 6.67 7.56

EBITDA Margin 8.92% 10.89% 25.09%

EQUITY RESEARCH

NIGERIA

FEBRUARY 2011

CEMENT

STRENGTHS WEAKNESSES

Sustainable market leadership High energy costs

Operations in an isolated market Low EBITDA margin

(N.E Nigeria) Market approaching near term

Robust technical and brand support saturation

from parent co-Lafarge S.A

OPPORTUNITIES THREATS

Plans for additional capacity of Increasing competition from local

350k tpa to raise total capacity to and foreign cement companies

1.2m tpa by 2012 Short term political risk

Focus on cost cutting

Increase in bank lending

FINANCIAL SUMMARY (NGNm) 2009 2010F 2011F

Revenue 17,194.0 18,913.4 20,804.7

EBITDA 1,533.0 2,060.0 5,220.0

Attributable Profit 943.6 2,572.2 2,829.4

RATIOS

RoAE 7.3% 18.3% 17.8%

RoAA 3.7% 9.5% 9.4%

VALUATION RATIOS

PBV(x) 4.9 4.3 3.8

PER(x) 68.8 25.2 22.9

EV/EBITDA 41.8 31.9 12.2

EV/Tonne (US$) 495.9 508.5 491.3

Dividend yield 0.0% 1.2% 1.3%

13

Nature of business Ashaka Cement began operating in 1979 as a joint venture between the Nigerian government and Blue Circle of the UK. In 1990 the government reduced its shareholding, although it remains a significant shareholder. The company is 51% owned by Lafarge S.A. Management and plans to add 400,000 MT pa will increase total capacity to 1.25m MT by FY2012. Current capacity is 850,000 MT.

Q2 Financial Performance Overview In Q2 2010, turnover went up 12.7% to NGN 10.1bn while PBT went up 41.7% to NGN 2.3bn. The depressed profit performance was attributed to the fluctuating LPFO (Low Pour Fuel Oil) prices as the company only managed a 30% substitution of its fuel usage through the use of coal. In the next 12 months, the company intends to use coal as a principal source of fuel, its target being to achieve a 90% substitution of LPFO in favour of coal. We expect the EBITDA margin to improve from 11.9% in FY2009 to 25.2% in FY 2010 in line with the regional EBITDA margin level of 39%. Operational Review The company‟s cement sales have been increasing steadily from circa 650,000 MT in 2004 to 850,000 MT in 2008. Ashaka‟s installed coal capacity utilisation is 300,000 MT p.a. and management targets to increase coal usage to represent 90% of its fuel requirements. In 2009, the company completed exploration in the Maiganga area in Akko Local government of Gombe State which has an estimated proven reserve of 4.5m MT of coal which will satisfy the company‟s requirements for more than 25 years.

Outlook The major gross margin booster for Ashaka would be if the company managed to achieve, the targeted 90% substitution rate of using coal instead of LPFO. Management estimates that it will save up to 60% in operating costs if they manage to run 100% on coal. The operating costs that would accrue from running the coal mine would however lower this saving. The long term outlook still remains positive, because of the likely increase in efficiencies. Operating margins and ROI are thus likely to improve in the long term, though the underlying risk could be the operational efficiency of the coal mine. Valuation and Recommendation Ashaka is currently trading on an EV/tonne ratio of US$491/tonne (US$304 at 2012 capacity) significantly higher than our SSA weighted average EV/tonne of US$122/tonne (excluding Dangote). Our DCF valuation is NGN23.22, indicating downside risk. We recommend investors reduce exposure.

Table 8: Nigeria Relative Metrics

Ashaka CCNN Dangote WAPCO

Gross Margin 31.5% 43.5% 44.2% 29.6%

EBITDA margin 8.9% 25.5% 59.5% 18.2%

RoAE 7% 44% 52% 3%

RoAA 4% 19% 22% 2%

2010 PER (x) 25.2 9.4 11.6 15.4

2011 PER (x) 22.9 6.1 6.1 2.0

2010 PBV (x) 4.3 3.5 8.6 2.5

2011 PBV (x) 3.8 2.9 6.4 2.0

2010 EV/EBITDA (x) 31.9 4.2 14.8 18.0

2011 EV/EBITDA (x) 12.2 2.7 7.5 11.6

2010 Div yield (%) 1.2% 6.6% 3.4% 0.6%

2011 Div yield (%) 1.3% 10.1% 6.4% 1.2%

Gearing (%) -6.5% 18.0% 0.0% 48.4%

2011 EV/Tonne (US$) 491 160 629 243

9 month Interim Financial Statements

Income Statement Q3 2009 Q3 2010 % ch

Revenue 12.7 13.6 6.8%

PBT 1.8 2.7 53.4%

PAT 1.2 1.9 60.5%

PBT margin 14% 20% 43.7%

PAT Margin 9% 14% 50.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%


Figure 12: Nigerian EBITDA margins

-

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500

600

700


EV

/Ton

ne

(U

S$

)Figure 13: 2011 Nigerian EV/tonne (US$)

14

ASHAKA CEMENT COMPANY - 4 CGR and Forecasts

31 DEC (NGNm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 15,815 16,772 16,474 21,378 17,194 18,913 20,805 2.11%

EBITDA 5,948 4,452 2,697 3,784 1,533 2,060 5,220 -28.75%

PBT 6,519 4,016 2,184 3,264 1,534 3,737 4,637 -30.35%

PAT 4,430 3,377 1,101 2,068 944 2,489 2,830 -32.06%

Dividend (3,393) (2,194) (915) (672) - (772) (849)

Weighted shares (m) 2,240 2,240 2,240 2,240 2,240 2,240 2,240 0.00%

EPS (NGN) 1.98 1.51 0.72 0.92 0.42 1.15 1.26 -32.06%

DPS (NGN) 1.52 0.35 0.41 0.30 - 0.34 0.38 -100.00%

NAV (NGN) 5.2 5.2 4.8 5.7 5.9 6.7 7.6 3.09%

Balance Sheet

Fixed Assets 4,077 8,071 12,732 16,597 19,066 24,347 27,810 47.05%

Current Assets 13,224 10,403 9,528 8,441 6,553 11,852 20,292 -16.10%

Total Assets 17,301 18,474 22,260 25,038 25,619 36,199 48,103 10.31%

Shareholders' equity 8,233 11,618 10,725 12,795 13,141 20,851 28,438 12.40%

Interest Bearing Debt - - - - - (1,013) (1,031)

Current Liabilities 5,130 5,670 9,081 9,434 8,654 6,953 9,271 13.97%

Total Liabilities and equity 17,301 18,474 22,260 25,038 25,619 36,199 48,103 10.31%

2009 2010F 2011F 2012F

Enterprise Value (US$m) 422 432 418 380

EV/EBITDA (x) 41.8 31.9 12.2 6.8

Capacity (MT) 0.9 0.9 0.9 1.3

Enterprise Value/tonne (US$) 495.9 508.5 491.3 303.8

Net debt/equity ratio (0.06) 0.05 (0.09) (0.36)

NOTES

15

CEMENT COMPANY OF NORTHERN NIGERIA Unfairly Bucking the Cement Bulls Despite solid fundamentals and attractive valuations, CCNN’s performance in 2010 was rather lacklustre, significantly underperforming both the NSE and emerging markets. This was largely attributable to the change in control and management teams and subsequent legal disputes that had an unsettling effect. Post the structural changes, CCNN looks on a more stable footing and will be better able to improve operational efficiency and capacity. Looking attractive relative to the sector. Buy.

Under new management, CCNN is on a solid footing to undertake the necessary plant conversions and upgrades to ensure that it grows margins and volumes in Nigeria‟s north eastern corner. Primarily a kiln fuel conversion process is necessary, which will enable the plant to use coal as opposed to Low Pour Fuel Oil (LPFO) and is expected to reduce energy costs by about a third.

Despite the operational challenges, the financial performance has been solid. 4-year CGRs for revenue, EBITDA and distributable earnings are 19%, 57% and 22% respectively. Cash flows have been strong, with annual dividend payments of around US$7m (6% yield).

Valuations too look attractive. On current capacity of 500,000 MT, CCNN is priced at a low 2011 EV/tonne of US$160, taking into account the intended increase in capacity to 700,000 MT. Compared to the simple average for the region of US$381/tonne, CCNN is cheap. We see the integration into Bua International as a positive development, creating depth and greater strategic

focus. All is looking good. BUY.

EQUITY RESEARCH

NIGERIA

FEBRUARY 2011

CEMENT


Strong fundamentals, good margins High energy costs

Solid new majority shareholder Weak investor sentiment

Increasing capacity, margins Massive investment in new plants

Synergies with other group businesses Downward pressure on cement prices

Strong cashflow, healthy dividends Political uncertainty


Increased exports into Niger Oversupply in the future

Change from LPFO to coal Oil driven economy suject to oil price

Nigerian banking sector stabilised shocks

post the AMC was set up Electricity shortages


Revenue 11,868.8 13,600.6 20,944.8

EBITDA 3,031.8 4,128.6 6,208.4

Attributable Profit 1,812.3 1,849.7 2,848.5

RATIOS

RoAE 44.2% 40.5% 52.0%

RoAA 19.5% 9.7% 9.5%

VALUATION RATIOS

PBV(x) 4.1 3.5 2.9

PER(x) 9.6 9.4 6.1

EV/EBITDA 5.7 4.2 2.7

EV/Tonne (US$) 227.2 227.3 159.9


BLOOMBERG: CCNN: NL BUY




Upside/Downside 171.16%


Liquidity



Shares (m) 1,241.5

Free Float (%) 19.4%




6 months (%) (25.1)

Relative Change (%)* (32.5)

Relative Change (%)** (40.5)

12 months (%) 7.7







DPS (NGN) 0.9 0.9 1.4

NAV/share (NGN) 3.40 3.97 4.85

EBITDA Margin 25.54% 30.36% 29.64%

16

Nature of business Founded by Alhaji Sir Ahmadu Bello, Sardauna of Sokoto, Cement Company of Northern Nigeria Plc (CCNN) was incorporated in 1962 and started operating in 1967 with an initial installed capacity of 100,000 MT, at the Kalambaina operation. The second plant with an installed capacity of 500,000 MT per annum was commissioned in 1985 although in 1986, the first line was shut down due to its uneconomic mode of operation, leaving the plant with a rated output of 500k MT. In July 2000 a public bidding for the company was concluded and Scancem International ANS of Norway, a member of Heidelberg Cement group was elected as the core investor and technical partner of the Company. Heidelberg disinvested from CCNN in March 2008 and Damnaz Cement Company Limited (Nigerian company) then became CCNN‟s major investor. With effect from 14 January 2010 Bua International Ltd, a diversified Nigerian conglomerate, purchased Damnaz with consequent management changes. Overview of interim results to June 2010 Post take over, the interim financial performance has been less than inspiring. The top line contracted by 3.3% while the bottom line halved for the interim period. We anticipate a recovery in the financial performance once the plant conversion exercise has been completed. Operational Review CCNN‟s limestone plant has over 200m MT of limestone reserves, large enough to sustain its operations for more than 100 years. The company‟s cement production capacity currently stands at 500,000 MT although plans are in place to add a second line which will add 750,000 MT per annum, taking total cement production capacity to 1.25m MT. Cement production for 2009 of 408,000 MT resulted in an average capacity utilisation rate of 82%. With more efficient production systems and the conversion of the plant to use solid fuels, we expect an increase in utilisation levels. The company is now using less expensive biomass to replace 30% of its LPFO consumption. A rights issue to be done this year is expected to raise funds to improve efficiency and expansion at the company‟s plants. Outlook Brighter economic prospects post the oil price crash of 2008 which induced the NSE market crash and demise of several players in the financial sector, the economy is now in come back mode. We estimate cement consumption in the north eastern corner of Sokoto to be about 133kg per capita, which is higher than the Nigerian average of 95kg but nowhere close to emerging markets consumption that is 3-4x higher. Fundamentally, still a sound sector. Valuation and Recommendation At US$160/tonne, CCNN is the cheapest cement company in Nigeria, trading at some 60% discount to the Nigerian average of US$ 381/tonne. Fundamentally strong and now part of a Nigerian conglomerate we anticipate a rerating in 2011. Buy.

Table 9: Top 10 Shareholders' list %

Damnaz Cement Company Limited 50.7%

Nigerian Public 19.4%

Nasdal Bap Nigeria Limited 13.3%

Dantata Investment & Security Company limited 5.0%

Kebbi State Government 5.6%

Sokoto State Government 1.8%

Kaduna state Government 1.5%

Kano State Investment & Properties Limited 0.8%

Jigawa State Investment & Properties Limited 0.9%

Katsina State Investment & properties Limited 0.9%

Ferrostal A. G. Germany 0.1%

Total 100%



Gross Margin 31.5% 43.5% 44.2% 29.6%

EBITDA margin 8.9% 25.5% 59.5% 18.2%

RoAE 7% 44% 52% 3%

RoAA 4% 19% 22% 2%

2010 PER (x) 25.2 9.4 11.6 15.4

2011 PER (x) 22.9 6.1 6.1 2.0

2010 PBV (x) 4.3 3.5 8.6 2.5

2011 PBV (x) 3.8 2.9 6.4 2.0

2010 EV/EBITDA (x) 31.9 4.2 14.8 18.0

2011 EV/EBITDA (x) 12.2 2.7 7.5 11.6

2010 Div yield (%) 1.2% 6.6% 3.4% 0.6%

2011 Div yield (%) 1.3% 10.1% 6.4% 1.2%

Gearing (%) -6.5% 18.0% 0.0% 48.4%

2011 EV/Tonne (US$) 491.3 159.9 628.6 242.6


Income Statement H1 2009 H1 2010 % ch

Revenue 6,592 6,374 -3.3%

Profit before tax 1,386 829 -40.2%

Attributable earnings 1,172 519 -55.7%

HEPS (NGN) 0.94 0.42 -55.7%

Balance Sheet (NGNm)

Total Assets 9,736 9,988 2.6%

NAV 4,217 4,417 4.7%

Net debt 45 474 959.9%

Gearing 1% 11% 911.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%



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100

200

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EV

/Ton

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)

Figure 15: 2011 Nigerian EV/tonne (US$)

17

NOTES

CEMENT COMPANY OF NORTHERN NIGERIA plc - 4 CGR and Forecasts

31 DEC (NGNm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 5,916 6,374 8,043 9,878 11,869 13,601 20,945 19.01%

EBITDA 494 25 140 1,610 3,032 4,129 6,208 57.40%

PBT 845 380 (11) 174 2,317 2,720 4,189 28.69%

PAT 827 224 (35) 1,531 1,812 1,850 2,848 21.67%

Dividend 1,131 1,131 1,140 1,756

Weighted shares (m) 1,242 1,242 1,242 1,242 1,242 1,242 1,242

EPS (NGN) 0.18 (0.03) 0.11 1.23 1.46 1.49 2.29 68.66%

DPS (NGN) 0.09 - 0.10 0.90 0.90 0.92 1.41 79.35%

NAV (NGN) 1.3 1.2 2.5 3.2 3.4 4.0 4.8 27.28%

Balance Sheet

Fixed Assets 2,715 4,142 4,456 4,658 5,017 22,821 23,292 16.59%

Current Assets 3,605 3,924 4,663 4,137 4,787 5,485 8,447 7.35%

Total Assets 6,320 8,066 9,119 8,795 9,804 28,306 31,739 11.60%


Interest Bearing Debt 45 - - 1,725 1,178 608 730 126.18%



2009 2010F 2011F 2012F


EV/EBITDA (x) 5.7 4.2 2.7 2.5

Capacity (MT) 0.5 0.5 0.7 0.7


Net debt/equity ratio 18% 5% 3% 4%

18

DANGOTE CEMENT Gargantuan growth ambitions In one fell swoop, the merger of listed Benue Cement and Dangote Cement Plc in October 2010 created the single largest corporate entity in Nigeria, and now accounts for a massive 23% stake of the Nigerian Stock Exchange. While Nigeria’s cement fundamentals are solid we believe the short term growth assumptions to be over-aggressive and would recommend that investors tread with caution.

Production capacity at 8m MT in 2010 is expected to increase to 20m MT, following capacity duplication at Obajana from 5 to 10m MT; Newly merged Benue will increase to 4m MT in 2011 and the Ibese factory at 6m MT will start firing its kilns in the same year. To put this into perspective, DCP‟s intends to add double

PPC‟s capacity to existing operations in 2011/2.

This growth in capacity is to be funded by Global Depository Receipts that will be listed on the London Stock Exchange where about 20% of the equivalent issued share capital will be offered to international

portfolio investors.

In this way the group will comply with the 25% minimum free float requirement stipulated by the Nigeria Stock Exchange. The regulators have given the group 24 months to sell down the additional 20% worth US$ 2.8b

at the listing price of NGN 135 per share.

Even after the most bullish volume growth assumptions: sales of 15.7m MT and 20.2m MT in 2012, DCP is still the most expensive cement company in Africa at over US$ 629/tonne for FY2011. We believe there to be better

value elsewhere and would AVOID this stock for now.

EQUITY RESEARCH

NIGERIA

FEBRUARY 2011

CEMENT


Revenue 189,621 225,874 397,939

EBITDA 77,853 134,454 262,590

Attributable Profit 61,392 90,974 170,327

RATIOS

RoAE 51.7% 51.6% 81.5%

RoAA 22.2% 26.2% 41.7%

VALUATION RATIOS

PBV(x) 10.6 8.6 6.4

PER(x) 21.8 11.6 6.1

EV/EBITDA 26.1 14.8 7.5

EV/Tonne (US$) 1,640 666 629



Strong brand loyalty One major shareholder

pioneer tax exempt status till 2017 Very expensive; High downside risk

Balance sheet size and conglomerate Cement prices at a peak

structure = stability and clout Increased capacity may create oversupply

Regional dominance


Further geographical footprint Fluctuations in energy costs

Strong gvt spending on infrastructure Inconsistent energy supply

Recovery in Nigerian banking sector Political risk

will stimulate liquidity

Developing bond market

BLOOMBERG: DANGCEM:NL AVOID

Current price (NGN) 128


Target price (NGN) 128


12 month High/Low (NGN) 121-135

Liquidity

Market Cap (NGNm) 1,983,235

Market Cap (US$m) 12,842.3

Shares (m) 15,494.0

Free Float (%) 5%




6 months (%) (0.7)



12 months (%) 0.0







DPS (NGN) 4.4 8.2 15.6

NAV/share (NGN) 12.1 14.9 20.1

EBITDA Margin 59.53% 65.99% 67.70%

19

Nature of business By 2012, should all projects be commissioned by their due dates, Dangote Cement will have a total cement production capacity of 20m

broken down as follows: Obajana (Kogi State) 10m MT Ibese (Ogun State) 6m MT Benue Cement Company 4m MT The group also has bulk cement terminals with a bagging capacity of 6m MT at its depots in Port Harcourt, Onne, Apapa, Aliko and Tincan.

Financial overview for the 9months in FY2010 Dangote‟s 9 months results for FY2010 showed impressive growth with volumes increasing by 64% to 5.8m MT, though less than management‟s expected 6.3m MT. Revenue was up 61% to NGN 146.6bn on the back of a softening in the cement price especially in the South Eastern region. Gross profit margins went down to 60% (9M FY2009: 64%) mainly fueled by higher energy costs after the Obajana plant used LPFO for most of Q1 2010 as gas supply was cut owing to militancy in the Niger Delta. The operating profit was NGN 77.4bn, up 86%, despite margins being negatively affected by an increase in marketing and distribution expenses. Interest costs were contained at NGN 449m and attributable earnings for the period closed at NGN

75.3bn.

Comment on Management forecasts Although the cement industry in West Africa remains in boom mode, it is still difficult to swallow the assumptions made by DCP in arriving at their revenue and profit expectations going forward. Despite an increasing trend in GDP per capita and government spending on infrastructure, we have concerns regarding management‟s cement sales forecasts of 15.7m MT in 2011 and 20.1m MT, at constant US$ prices. While, much of the new production will replace tonnages imported, we anticipate a short to medium term period of oversupply. In total, Nigeria consumed 14.8m MT of cement in 2010 and the industry is expected to increase its capacity to 28.6m MT by the end of 2012. Globally, cement consumption is correlated to GDP growth, and we don‟t believe that average nominal GDP growth expectations of circa 7% will be sufficient to absorb the 93% increase in national capacity. The 2011 budget shows a 9.5% growth in Capex commitments and while the recovery in the banking sector is positive

we believe management forecast to be overcooked. Valuation and Recommendation Being unsatisfied with the overly aggressive revenue and profit forecasts, we have totally disregarded DCF valuations for Dangote, and would rather revisit our models once further information is

available. On a relative basis DCP is the most expensive cement counter in Africa and is currently trading on a 2011 EV/tonne value of US$628, which is way above the Nigerian and African averages of US$ 297/tonne (excl. DCP) and US$ 122/tonne respectively. This valuation is based on a capacity of 19.5m MT as per management guidance.

Expensive pricing should act to dampen any prospects of future price appreciation, at least for the 24 month duration during which shares will be sold into the global market. Consequently, for the time being,

we would avoid this counter.

Table 11: Post Merger Shareholders' list %

Dangote Industries Limited 95.9%

Sheme Shareholders 3.2%

Other shareholders 0.8%

Total 100%

-

5

10

15

20

25

30

2009 2010 2011F

Cap

acit

y M

illio

ns

of

MT

Figure 16: Nigeria installed capacity

Ashaka CCNN WAPCO Dangote

Dangote20%

Africa80%

Figure 17: Dangote market share of African capacity

Source: IES



Gross Margin 31.5% 43.5% 44.2% 29.6%

EBITDA margin 8.9% 25.5% 59.5% 18.2%

RoAE 7% 44% 52% 3%

RoAA 4% 19% 22% 2%

2010 PER (x) 25.2 9.4 11.6 15.4

2011 PER (x) 22.9 6.1 6.1 2.0

2010 PBV (x) 4.3 3.5 8.6 2.5

2011 PBV (x) 3.8 2.9 6.4 2.0

2010 EV/EBITDA (x) 31.9 4.2 14.8 18.0

2011 EV/EBITDA (x) 12.2 2.7 7.5 11.6

2010 Div yield (%) 1.2% 6.6% 3.4% 0.6%

2011 Div yield (%) 1.3% 10.1% 6.4% 1.2%

Gearing (%) -6.5% 18.0% 0.0% 48.4%

2010 EV/Tonne (US$) 491.3 159.9 628.6 242.6

20

NOTES NB: These forecasts have been prepared by management of Dangote Cement PLC and not by the Imara group. The rationale and basis for these forecasts has been outlined in Scheme of Merger information memorandum

that was published prior to the group’s listing in October 2010.

DANGOTE CEMENT PLC - 4 CGR and Forecasts

31 DEC (NGNm) 2007 2008 2009 2010F 2011F 2012F 4 Yr CGR

Income Statement

Revenue 34,596 61,906 189,621 225,874 397,939 510,803 86.90%

EBITDA 21,420 38,382 77,853 134,454 262,590 345,788 84.47%

PBT 12,253 26,625 63,776 118,827 246,006 328,181 113.25%

PAT 11,622 17,960 61,392 90,974 170,327 322,693 98.55%

Dividend 0 0 3,915 68,231 127,745 242,020

Weighted shares (m) 15,500 15,500 15,500 15,500 15,500 15,500

EPS (NGN) 0.75 1.16 3.98 2.53 2.05 14.58 49.97%

DPS (NGN) 0.00 0.00 0.26 5.75 11.98 15.57

NAV (NGN) 3.75 4.68 10.57 12.5 15.9 20.2 49.56%

Balance Sheet

Fixed Assets 130,519 135,622 186,393 195,713 205,499 215,774 14.46%

Current Assets 168,482 236,720 316,339 377,548 439,357 536,872 30.86%

Total Assets 299,001 372,341 502,732 573,261 644,856 752,646 24.23%

Shareholders' equity 58,071 72,512 164,915 187,659 230,241 310,914 47.84%

Interest Bearing Debt 77,245 64,926 60,076 65,610 71,673 78,318 -5.30%

Current Liabilities 33,166 99,281 91,347 124,279 137,443 147,640 55.32%

Total Liabilities and equity 299,001 372,341 502,732 573,261 644,856 752,646 24.23%

2009 2010F 2011F 2012F

Enterprise Value (US$m) 13,364.5 13,122.4 12,980.6

EV/EBITDA (x) 14.8 7.5 5.5

Capacity (MT) 8.0 19.5 20.0

Enterprise Value/tonne (US$) 1,640.3 665.7 628.6

Net debt/equity ratio 31% 24% 19%

21

LAFARGE WAPCO NIGERIA Consolidating in West Africa 2012 marks the doubling in capacity of Lafarge’s Nigerian subsidiary to position the company for a rebound in the economy, post the 2009/10 economic slowdown. With stiff import tarrifs now in place, like DCP, Lafarge will experience a gain in market share as imported cement is substituted. Valuations for the company are undemanding relative to peers, especially as EV/tonne halves post the planned capacity expansion. Buy.

Lafarge WAPCO‟s expansion programme is expected to double production capacity to 4.2m MT by FY2011 from the current 2m MT. An additional €225m will be needed to complete the project.

Margins are on an upward trend as the company‟s cost savings initiatives bear fruit. We expect the energy cost component to slowly decline in the future as the company increases the use of coal and gas. From an EBITDA margin of 21.6% for FY2009, we expect a steady increase to 31.9% for 2012F.

While 2010 revenues are expected to be in line with 2009, there has been a marked improvement in operating margins from 23% to 28% as LPFO has been substituted by coal. The new Lakatabu plant will have its own power plant, that can use either gas/coal, which should provide a measure of protection against any energy price fluctuations.

WAPCO is trading on a 2011 EV/tonne of US$243/tonne on the expanded capacity augmentation. The low valuation is corroborated by 2011 relative PBV and PER ratings. Our DCF model using cash flows unadjusted for maintenance capex sets a high upper limit of NGN 75. Buy.

EQUITY RESEARCH

NIGERIA

FEBRUARY 2011

CEMENT


Strong brand name Exchange rate risk for Yen denominated debt

Monopoly in South Western part of Nigeria Increase in tax liabilities due to

New production line 'Lakatabu' to be expiration of pioneer tax status

operational by 2011 Insufficient energy production; high costs

Technical and brand support from Lafarge Inc. Shortage of mortgage financing


Strong demographics; low consumption Massive increase in capacity by Dangote

NGN 1 trillion capex spend in 2011 budget Oil price shocks affecting GDP

Recovering financial sector and increased Devaluation and currency instability

capacity to lend for mortgages Political risk due to election in 2011

Increasing GDP/capita Downwards pressure on cement price


Revenue 45,589.8 47,362.7 73,718.7

EBITDA 8,276.6 8,598.5 13,383.3


RATIOS

RoAE 3.0% 4.4% 6.6%

RoAA 1.7% 2.2% 2.9%

VALUATION RATIOS

PBV(x) 3.0 2.5 2.0

PER(x) 25.5 15.4 8.4

EV/EBITDA 18.2 18.0 11.6

EV/Tonne (US$) 494 508 243


BLOOMBERG: WAPCO: NL BUY






Liquidity



Shares (m) 3,001.6





6 months (%) (6.7)



12 months (%) 35.3







DPS (NGN) 0.10 0.28 0.51

NAV/share (NGN) 14.56 17.08 21.69

EBITDA Margin 18.15% 18.15% 18.15%

22

Nature of business Lafarge Cement WAPCO Plc was established in 1960 when its first plant at Ewekoro, Ogun State was commissioned. The company‟s second factory in Sagamu was commissioned in 1978. The company has the capacity to produce 2m MT, and is the leading supplier of cement to the S.W region of Nigeria. Lafarge S.A became the majority shareholder in 2001 after acquiring Blue Circle Industries Plc in 2001. The name was changed to Lafarge Cement WAPCO in February 2008. Q3 2010 Interim Results Overview Third quarter top line declined slightly, however improved operational efficiencies, emanating primarily from the increased substitution with more expensive LPFO fuel with coal and gas. Back at a healthy 28%, operating margins should further be augmented once the 2.2m MT Lakatabu plant is fired up in August 2011. The new plant has its own onsite power station a variable coal/gas/LPFO combustion capability. Operational Review Current capacity utilisation stands at 75% at both plants on the back of electricity shortages and disruptions in power supply. The company‟s management is thus investing in dual firing options for the two operational plants so that (Low Pour Fuel Oil) LPFO is used in the event of disruption to gas supplies. We have modelled for 75% capacity utilisation in 2012 on the expanded capacity on operating margins of 21%. While there are several risks specific to this project, one of the most significant external risks relates to Dangote‟s massive investment in increasing their capacity by 12m MT which will significantly impact on pricing and demand. While the cement demand has been resilient, even accounting for the comeback of credit extension as the Nigerian banking sector recovers post the successful introduction of the AMCON, we believe there will be a lagged market response which could result in lower than expected capacity utilisation rates. Valuation and recommendation WAPCO remains the most attractive play in the Nigerian cement sector for several reasons. First of all their growth ambitions are more attainable than Dangote‟s, by mere virtue of its scale i.e. a capacity increase of 2.2m MT is more deliverable than an increase of 12m MT. Secondly and more importantly, an EV/Tonne of US$ 243 on expanded capacity compares well to both Ashaka (US$ 491) and Dangote (US$ 629). Nigeria‟s gargantuan infrastructural deficit provides a massive backlog of rehabilitation and expansion projects and, while the price of oil is high and stable, as it is, government‟s continued strategic investment into investment capital should provide sustainable demand. With the top down looking good, the challenge ahead will be to protect and grow market share and margins as we expect medium term over-capacity in the domestic market. WAPCO is a more formidable punt on Nigeria‟s growth story, with no share potential share overhang and significant upside.



Gross Margin 31.5% 43.5% 44.2% 29.6%

EBITDA margin 8.9% 25.5% 59.5% 18.2%

RoAE 7% 44% 52% 3%

RoAA 4% 19% 22% 2%

2010 PER (x) 25.2 9.4 11.6 15.4

2011 PER (x) 22.9 6.1 6.1 2.0

2010 PBV (x) 4.3 3.5 8.6 2.5

2011 PBV (x) 3.8 2.9 6.4 2.0

2010 EV/EBITDA (x) 31.9 4.2 14.8 18.0

2011 EV/EBITDA (x) 12.2 2.7 7.5 11.6

2010 Div yield (%) 1.2% 6.6% 3.4% 0.6%

2011 Div yield (%) 1.3% 10.1% 6.4% 1.2%

Gearing (%) -6.5% 18.0% 0.0% 48.4%

2010 EV/Tonne (US$) 491.3 159.9 628.6 242.6


Income Statement Q3 2009 Q3 2010 % ch

Revenues 35,099 33,046 -6%

Operating profit 8,156 9,276 14%

Exceptional items 214 - -100%

Financial charges (1,055) (248) -76%

PBT 7,315 9,028 23%

PAT 4,023 5,687 41%

Table 13: Top Shareholders' list %

Lafarge 60.0%

Odua Group of companies 10.0%

Public shareholders 30.0%

Total 100%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%



-

100

200

300

400

500

600

700


EV

/Ton

ne

(U

S$

)

Figure 19: Nigerian EV/tonne (US$)

23

NOTES

LAFARGE WAPCO - - 4 CGR and Forecasts

31 DEC (NGNm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 26,626 39,518 38,665 43,274 45,590 51,061 72,762 14.39%

EBITDA 7,243 14,263 11,877 13,673 9,853 20,879 28,786 8.00%

PBT 3,195 12,119 12,536 13,033 9,238 16,456 24,823 30.40%

PAT 1,864 10,946 10,678 11,252 5,056 12,342 18,618 28.33%

Dividend

Weighted shares (m) 3,002 3,002 3,002 3,002 3,002 3,002 3,002 0.00%

EPS (NGN) 0.62 3.65 3.56 3.75 1.68 2.96 3.79 28.33%

DPS (NGN) 0.3 1.0 1.2 0.6 0.1 1.1 1.4 -24.02%

NAV (NGN) 4.8 8.5 10.9 13.5 14.6 18.1 20.8 32.14%

Balance Sheet

Fixed Assets 30,960 32,425 33,416 43,181 69,741 77,006 82,381 22.51%

Current Assets 11,614 16,329 17,180 18,587 17,422 26,780 36,521 10.67%

Total Assets 42,574 48,754 50,596 61,768 87,163 103,786 118,902 19.62%


Interest Bearing Debt 14,923 7,234 2,536 3,955 33,500 35,063 35,873 22.40%

Current Liabilities 13,313 15,973 15,254 17,357 9,952 14,426 20,646 -7.02%


2009 2010F 2011F 2012F


EV/EBITDA (x) 13.7 8.3 7.0 7.0

Capacity (MT) 2.00 2.00 4.20 4.20



24

Overview of the Angolan Cement Industry Angola consumed in the region of 3m MT of cement in 2010 and while growth was sluggish (+4% on 2009) this was as a result of the tail end effects of the global crisis. Recent increases in local capacity, particularly by Nova Cimangol, have reduced the local supply deficit to under 1m MT, however with the oil price now firmly back in the black, demand is increasing and the gap is likely to rise further. The backlog for infrastructure projects runs into the billions of dollars and includes new roads, airports, oil and gas refineries and a commitment to build 1m houses among many others. Thus far about a tenth of the target has been delivered. Angola‟s increasing oil fortune, growing middle class and a commitment to developing the non-oil economy will ensure that cement demand keeps growing. Overview of Nova Cimangola Nova Cimangola is the largest cement company in Angola, located on the outskirts of Luanda. After a successful plant expansion, cement capacity has been increased to 1.8m MT of Portland cement and the company expects to produce 1.2m MT in 2011 entirely devoted to the Angolan market. Capacity expansion is ongoing and Nova Cimangola is projected to reach a production capacity of 3m MT per year by 2013 to meet rising domestic consumption.

Over view of Secil Angola (Lobito) Secil Angola which is based in the port city of Lobito is the second cement factory in the country jointly owned by Secil of Portugal and the Angolan government in the ratio 51:49 respectively. Having expanded its capacity in recent years, the factory made sales of 307,000 MT in 2009, which increased slightly due to the hangover effects of the local slump in construction activities. EBITDA margins improved significantly, due primarily to lower clinker import costs and the EBITDA margin increased to 18%. A memorandum of understanding was signed with the Angolan government to increase capacity further by building a new cement plant, which will have a production capacity of 700,000 MT. This will increase Secil‟s capacity to over a 1m MT, probably by 2013. Outlook for the Cement Sector The oil boom and oil backed loans ushered in a new era of growth for Angola, which has registered the highest GDP CGR of all the SSA countries in the last decade, at over 10% p.a. After a slowdown following the oil price crash in 2008, the economy has now stabilised and the momentum is building for a second wave of frantic expansion. The major stumbling block to date has been the government debt, primarily to the construction sector that is estimated at some US$6bn (≈7.5% of nominal GDP). The government has, however, pledged to clear these areas by the end of H1 FY2011. With the oil price back in the black and the global capital markets on the mend, construction and infrastructural development should recover strongly and we are likely to see the entry of more players into the cement industry.

Table 15: Secil Angola Financial details

2008 2009 % ch

Sales volume (MT) 295,000 307,000 4%

Revenues (€ 000) 45,576 48,504 6%

EBITDA (€ 000) 5,855 8,915 52%

EBITDA margin 13% 18% 43%

Capex (€ 000) 4,701 2,321 -51%

employees 284 302 6%

Price/tonne (€) 154 158 2%

Price/tonne (US$) 212 216 2%

Cimangola12%

Nova Cimangol

40%

Imports48%

Figure 20: Estimated Angola Market share

Source: Imara Securities Angola SCVM

-

20

40

60

80

100

120

140

160

180

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mala

wi

Uganda

Tanza

nia

Zim

babw

e

Kenya

Nig

eri

a

Zam

bia

Angola

South

Afr

ica

Con

sum

pti

on

Per

capit

a (U

S$)

GD

P p

er

capit

a (U

S$)

Figures 21: Per capita Cement Consumption by country

Per capita gdp Per capita Consumption

25

East Africa Cement Industry Overview

Infrastructural expansion driving EA cement sector The cement market in East Africa grew by 13.5% to 6m MT in 2009

compared to 11% growth in 2008 (East Africa Cement Producers Association, 2009). The growth was higher in the second half of the year indicating positive regional recovery from the effects of the global recession. The Kenyan market grew by 14.3% to 2.7m MT mainly due to increased government investment in infrastructure construction, rehabilitation activities and Constituency Development Fund (CDF) projects. In Uganda and Tanzania, the market grew by 9.5% to 1.3m MT and by 6.5% to 1.8m MT respectively. Ugandan growth was stimulated by the ongoing 250 MW Bujagali hydro power project. The Rwandan and Burundi cement markets grew by 43% to a combined supply of 0.25m MT. The brief SWOT analysis for Kenya is as follows:

STRENGTHS Increasing government investment in infrastructural expansion and

rehabilitation Increased economic integration under East African Community 300m strong catchment population Low cement consumption at under 60kg pp Strong population growth Stable top down fundamentals; region experiencing steady economic

growth Deepening financial sector encouraging mortgage lending Emerging middle class with ambition for better housing Large infrastructural investment deficit EA, darling of the donor community US ally in war against terror. Oil in South Sudan and emergence of a new country a positive for the

region.

WEAKNESSES Increasing competition from Asian imports that are heavily subsidised

Reduced import tarrifs are hurting local industry

High inflation due to weak currency fundamentals

Disposable incomes growing but from a low base Region prone to drought which has a negative impact on GDP growth Dumping by Asian countries stifling local cement firms and ensuring

that players are „price takers‟

OPPORTUNITIES Scope for increasing exports to fast developing heart of Africa:

Rwanda, Burundi, Uganda and South Sudan.

Further trade promotion on the creation of a monetary union

Improved clinker capacity could result in greater efficiencies Improved energy generation and better operating efficiencies Plant conversions from LPFO reducing energy costs

THREATS Local currency depreciation caused by commodity price shocks,

contagion, drought and high local inflation Increasing competition from cheap subsidised imports from Asian

countries with surplus capacity Political instability could affect region; Sudan and Kenya are the

main hot spots

Table 16: Kenya Relative Metrics

ARML Bamburi EAPC

Gross Margin 36.1% 45.2% 21.6%

EBITDA margin 15.3% 28.6% 5.1%

RoAE 21% 42% -5%

RoAA 10% 26% -3%

2010 PER (x) 24.2 11.8 19.2

2011 PER (x) 21.7 10.6 16.5

2010 PBV (x) 5.5 3.2 1.6

2011 PBV (x) 4.6 2.8 1.5

2010 EV/EBITDA (x) 15.2 6.2 8.5

2011 EV/EBITDA (x) 13.4 5.5 7.9

2010 Div yield (%) 0.9% 2.6% 1.6%

2011 Div yield (%) 1.0% 2.8% 1.8%

Gearing (%) 106.8% 43.8% 43.6%

2011 EV/Tonne (US$) 418.7 326.2 116.8

Capacity (MMT) 0.65 2.50 1.30

Figure 22: KES/USD exchange rate



26

ATHI RIVER MINING LIMITED Concrete solid performance

As the fulcrum to the East African hub, with a captive market of over 300m people, the prospects for the Kenyan cement industry are healthy. This is corroborated by aggressive expansion, by the three major players in the sector, underpinned by solid domestic fundamentals, low per capita consumption and a deepening financial sector. Valuations are full for now, HOLD for 2012 boost to capacity.

The new Tanzania plant will increase group cement capacity to 2.1m MT by Q1 2012 from the current 650,000 MT. The group has managed to secure funding for this project as reflected by the high gearing levels of 107%, and post completion, EV/tonne will decrease from US$418 presently to US$128.

Following the divisionalisation of the group‟s activities at the beginning of 2010, ARM is planning to spinoff the fertilizer unit, by selling about 30-50% to a private equity firm. This will further concentrate the group‟s activities in the cement segment, freeing up cash flow to expand the cement portfolio.

In 2010 the IMF has committed US$500m to Kenya for infrastructural developments. The continued development of Kenya as a regional hub, should result in higher cement consumption rates (currently at 56kg per capita).

Massive potential exists to export to neighbours, including oil booming Southern Sudan, Uganda and Rwanda.

Our DCF valuation of KES 141, indicates overvaluation, especially considering the 76% 12 mth appreciation. On an EV/tonne basis, the counter is again relatively overvalued relative to regional and African averages (US$ 221; US$122 respec. exc. Dangote). EV/tonne will drop to US$128 in 2012 following capacity expansion though. We recommend that shareholders HOLD.

EQUITY RESEARCH

KENYA

FEBRUARY 2011

CEMENT

FINANCIAL SUMMARY (KESm) 2009 2010F 2011F

Revenue 5,144.8 5,729.3 6,380.1

EBITDA 1,241.2 1,424.2 1,640.7

Attributable Profit 645.8 719.1 800.8

RATIOS

RoAE 20.6% 19.7% 22.9%

RoAA 9.7% 8.0% 8.4%

VALUATION RATIOS

PBV(x) 4.2 5.5 4.6

PER(x) 26.9 24.2 21.7

EV/EBITDA 15.2 13.4 11.7

EV/Tonne (US$) 415.6 412.6 418.7



Strong cashflow and balance sheet High debt levels leaves balance sheet iliquid

Strong demand locally and regionally Aggressive competition from China and

Diverse portfolio of products reduces concentra Pakistan that exert downward pressure on

tion risk prices

Excellent credit rating


New plant in Tanzania to add 1.3m tonnes Inconsistent energy supply

to group capacity Increasing competition

Unbundling of group to create value Foreign exchange risk as about half of debt

US$500m IMF commitment into infrastructure is US$ denominated.

Coal fired plant to lower operating costs and Political situation could increase uncertainty

increase margins and retard capital projects

BLOOMBERG: ARML: KN HOLD

Current price (KES) 185.00


Target price (KES) 140.67


12 month High/Low (KES) 90-185

Liquidity

Market Cap (KESm) 18,333.5


Shares (m) 99.1





6 months (%) 37.2



12 months (%) 84.6



*Relative to NSE20 index **Relative to MSCI EM index


Fully Diluted EPS (KES) 6.87 7.65 8.52

Free Cashflow per share (KES) 8.50 9.78 11.28

DPS (KES) 1.50 1.67 1.86

NAV/share (KES) 43.92 33.87 40.40

EBITDA Margin 15.35% 14.61% 13.76%

27

Overview of the company Athi River Mining Limited was formed in 1973 with the focus of extracting and processing mineral resources in Kenya for use as raw materials. The company began by mining limestone for use as agricultural lime. In the 1990's the company expanded its operations to include value added processing of minerals and manufacturing of lime and cement. Besides lime and cement, the company also trades in sodium silicate, minerals and fertiliser. The company is split into three divisions: ARM Cement Ltd, ARM Minerals and Chemicals Ltd and Athi River Mining Limited. ARM also has three subsidiaries in Tanzania, South Africa and Zambia which specialise in lime, sodium silicate and cement.

H1 2010 Results Overview Revenue went up 19% to KES 2.9bn from KES 2.4bn mainly driven by strong regional demand for cement and sodium silicate. The operating profit margin was maintained at 18%, as the company‟s use of coal to fire its kilns continues to give them an edge at the operating cost line. Distributable earnings amounted to KES 348m and dividends of KES 141m (US$ 1.75m) were paid out. Operational Review The pièce de resistance for the ARM group is twofold: Firstly the strategic positioning to unbundle the non cement businesses will generate cash for further investment into the cement sector. Secondly and more importantly, the group raised over US$ 20m in 2010 which will be invested into a new 1.5m MT pa cement plant in Tanzania which is scheduled for completion in early 2012. They have also commissioned a cement expansion plant in Mombasa, and intend to commission the Athi River plant in Q4 2010. Competition in the cement space domestically has been increasing, particularly from Pakistan and China, which has dampened prices. Outlook Improved cement sales in H2 2010 are expected to result in an even stronger performance for the full year. Export sales are also expected to go up whilst the local market share is on the increase. The company‟s cash flow is expected to remain healthy as a result of efficient working capital management and increased profitability. The business also intends to make use of cash received from the fertilizer unit spin off to build a new fertilizer plant that will increase annual fertilizer production to 150,000 MT. Management estimates the fertilizer market will grow at an average rate of 25% p.a. and that demand for fertilizer to double in 5 years. Valuation and recommendation On an EV/tonne basis, at US$ 418/tonne ARM is not cheap, particularly taking into account the strong share price performance (+78%) in 2010. Regardless, once the Tanzanian factory starts production in early 2012, this valuation will decrease to US$128/tonne. While there may be some profit taking in the short term, ARML is founded on solid fundamentals and has a definitive role to play in the infrastructural development of the EA economic bloc. We see the single largest risk for the group being their exposure to exchange rate risk, as about half of the debt taken on for the expansion is dollar denominated. With continued positive fundamentals, we would recommend that investors HOLD their

positions.


Amanat Investments 46%

Cfc Stanbic Nominees 8%

ARM Employee Share Option Scheme 6%

Barclays Nominees 2%

Orthodox Archbishopric of Kenya & Irinoupolis 2%

Wilfred Murungi 1%


National Social Security Fund 1%



Others 32%

Total 100%

Cement53%

Sodium Silicate21%

Minerals10%

Lime9%

Fertiliser7%

Figure 25: Divisional Turnover breakdown - 2009

Source: ARML Annual Report 2009

Kenya89%

Tanzania7%

South Africa4%

Figure 26: Regional Turnover breakdown - 2009

Source: ARML Annual Report 2009

Athi River Mining Ltd

ARM Tanzania Ltd

ARM South Africa (Pty) ltd

Maweni Limestone Ltd (Tanzania)

Mavuno Fertilizer ltd (dormant)

100%

100%

100%

100%

Interim Financial Statements

Income Statement (KESm) H1 2009 H1 2010 % ch

Revenue 2,404 2,850 18.6%

Profit before tax 449 519 15.6%

Attributable earnings 300 348 16.0%

HEPS (KES) 3.03 3.51 15.8%

Balance Sheet (KESm)

Total Assets 12,141 15,170 24.9%

NAV 4,129 4,481 8.5%

Net debt 4,658 8,371 79.7%

Gearing 113% 187% 65.6%

28

NOTES

ATHI RIVER MINING COMPANY - 4 CGR and Forecasts

31 DEC (KESm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 2,209 2,605 3,882 4,620 5,145 5,729 6,380 23.54%

EBITDA 524 662 1,012 1,173 1,241 1,424 1,641 24.06%

PBT 296 388 621 705 949 1,056 1,177 33.80%

PAT 196 258 422 503 646 719 801 34.73%

Dividend 71 94 118 118 141 157 175 18.92%

Weighted shares (m) 94 94 94 94 94 94 94

EPS (KES) 2.09 2.74 4.49 5.36 6.87 7.65 8.52 34.73%

DPS (KES) 0.75 1.00 1.25 1.25 1.50 1.67 1.86 18.92%

NAV (KES) 12.36 14.10 18.45 22.63 43.92 33.87 40.40 37.30%

Balance Sheet

Fixed Assets 2,169 3,185 3,304 4,372 8,688 9,557 10,513 41.47%

Current Assets 1,057 1,057 1,182 1,885 3,363 2,038 2,032 33.55%

Total Assets 3,226 4,242 4,504 6,352 12,141 17,460 18,501 39.28%



Current Liabilities 711 1,407 1,066 1,843 3,354 2,506 2,582 47.37%


2009 2010F 2011F 2012F


EV/EBITDA (x) 17.6 15.2 13.4 11.7

Capacity (MT) 0.65 0.65 0.65 2.15


Net Debt/Equity ratio 106.8% 133.5% 120.3% 106.9%

29

BAMBURI CEMENT COMPANY Setting a high standard in EA Lafarge’s EA subsidiary, Bamburi, is Kenya’s largest cement company by capacity, a position it is consolidating with the expansion projects underway. Bamburi’s market dominance in Kenya remains a certainty and the group continues to expand regionally with key footholds now established in neighbouring Uganda and Rwanda.

Deregulation, high inflation and a weak local currency have negatively affected local cement producers in the interim. Medium term prospects however, are quite rosy, underpinned by strong regional infrastructural development, increasing investment and rising per capita incomes.

Regional demand has been robust with strong growth in Uganda (+9.5%), and from a lower base, Rwanda and Burundi (+43%). On commencement of oil production in 2012, Uganda‟s cement consumption will rise in tandem with increased GDP, as well as in nearby South Sudan.

Bamburi has the most impressive profitability ratios, with a 42% RoAE ratio the highest for the country‟s cement sector. It also has a consistent dividend payment policy although the ongoing expansion projects have lowered the dividend payout ratio.

Our DCF model ascribes a top end valuation of KES 267, showing significant upside potential. The EV/tonne valuation at US$326/tonne is more attractively priced than ARML, but not a bargain. Our fair valuation implies an EV/tonne ofS$462/tonne. BUY


Low transport costs as plants are located High energy costs

near large markets Local currency weakness

Strong cashflow and balance sheet High Shilling inflation

Lucrative export market potential increasing competitive space

Strong double digit growth in regional deregulation increasing imports from

volumes India, China and Pakistan


Growing per capita consumption Inconsistent energy supply and rising

Energy cost rationalisation by the intro energy prices

of Petcoke to replace coal (25% substitution) Increasing competition

250MW Bujagali hydro power plant (2011) Drought and its negative impact on GDP

Further decrease in EAT CET

EQUITY RESEARCH

KENYA

FEBRUARY 2011

CEMENT

BLOOMBERG:BMBC: KN BUY

Current price (KES) 195


Target price (KES) 267


12 month High/Low (KES) 150.09-220.00

Liquidity



Shares (m) 363.0

Free Float (%) 11.0




6 months (%) (1.5)



12 months (%) 23.1





Fully Diluted EPS (KES) 18.32 16.59 18.43


DPS (KES) 5.5 5.0 5.5

NAV/share (KES) 53.71 61.75 70.69

EBITDA Margin 28.57% 28.76% 28.53%


Revenue 29,990.0 33,360.9 37,110.6

EBITDA 8,568.0 9,593.0 10,587.5


RATIOS

RoAE 41.7% 27.1% 22.9%

RoAA 25.7% 27.5% 22.5%

VALUATION RATIOS

PBV(x) 3.6 3.2 2.8

PER(x) 10.6 11.8 10.6

EV/EBITDA 7.2 6.2 5.5

EV/Tonne (US$) 336.7 340.2 326.2


30

Overview of the company Bamburi Cement has a cement production capacity of 2.5m MT pa, from production plants in Mombasa and 1m MT pa in its clinker plant in Nairobi. Bamburi is the largest player in the Kenyan cement industry with a 41% shareholding in East African Portland Cement. The company also owns Hima Cement in Uganda. H1 2010 Results Overview A decline in market share, following the increase in capacity and lower selling prices by rivals impacted turnover which went down 19.5% to KES 13.0bn (H1 2009: KES 16.2bn). The operating profit was also lower at KES 3.3bn, down from KES 4.2bn as a result of higher power prices in Q1 2010 which also adversely affected operating margins. PBT amounted to KES 3.5bn, down 22%, which translated to an attributable profit of KES 1.9bn and EPS of KES 6.52. The company declared an interim dividend of KES 1.50. Operational Review Domestic cement demand has been buttressed by the Kenyan government‟s continued investment in infrastructural rehabilitation and expansion projects, which is an underlying theme across the east African bloc. The company has room to increase gearing to fund its expansion projects, with gearing currently at 44% of shareholders funds. The weak Shilling has encouraged exports to regional markets while higher efficiencies at the clinker plant have reduced import requirements positively impacting on operating efficiencies. For FY2009, clinker production was a record 1.14m MT. High energy costs remain an albatross and profitability margins continue to be eroded by the high cost of power. 25% of coal consumption has now been substituted with cheaper pet coke, however energy costs will continue to be a major challenge. Outlook Following stronger market growth from Q3 2010 in Kenya and higher sales volumes in Uganda, the group is optimistic of stronger top-line performance in the second half versus H1 2010 and FY2009. Management intends to continue with cost reduction and cash generating initiatives, while improving industrial productivity. A capacity increase project at Kasese Plant in Uganda is expected to positively impact performance. Valuation and recommendation Our DCF model ascribes a value of KES 267, showing significant upside potential. The EV/tonne valuation at US$326/tonne is on the high side, but still reasonable. Longer term fundamentals remain solid. EA‟s deepening capital markets and the regions rising disposable incomes for the 300m strong catchment area continue to be an attraction. Most importantly, per capita cement consumption at 69kg pp, remains very low compared to the weighted average for our SSA sample of $101kgs/capita. Being the most dominant and stable play in the region, Bamburi remains our preferred stock for exposure to the region. BUY

-

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010F

Figure 27: Bamburi Cement Sales

Source: Bamburi Annual report 2009

Kenya67%

Uganda20%

Other inland Africa13%

Figure 28: Bamburi Regional sales

Source: Bamburi Annual Report 2009

Energy29%

clinker23%

Freight16%

Additives12%

Maintenance8%

Packaging6%

Other6%

Figure 29: Bamburi direct cost breakdown

Source: Bamburi Annual Report 2009


Income Statement (KESm) H1 2009 H1 2010 % ch

Revenue 16,199 13,045 -19.5%

Profit before tax 4,474 3,504 -21.7%

Attributable earnings 2,975 2,366 -20.5%

HEPS (KES) 8.19 6.52 -20.4%

Balance Sheet (KESm)

Total Assets 27,167 26,554 -2.3%

NAV 19,496 18,450 -5.4%

Net Current Assets 1,401 (1,001) n/a

Non Current liabilities 6,227 6,731 8.1%

Gearing 32% 36% 14.2%


ARML Bamburi EAPC

Gross Margin 36.1% 45.2% 21.6%


RoAE 21% 42% -5%

RoAA 10% 26% -3%

2010 PER (x) 24.2 11.8 19.2

2011 PER (x) 21.7 10.6 16.5

2010 PBV (x) 5.5 3.2 1.6

2011 PBV (x) 4.6 2.8 1.5

2010 EV/EBITDA (x) 15.2 6.2 8.5

2011 EV/EBITDA (x) 13.4 5.5 7.9

2010 Div yield (%) 0.9% 2.6% 1.6%

2011 Div yield (%) 1.0% 2.8% 1.8%

Gearing (%) 106.8% 43.8% 43.6%

2010 EV/Tonne (US$) 418.7 326.2 116.8

Capacity (MMT) 0.65 2.50 1.30

31

NOTES

BAMBURI CEMENT COMPANY - 4 CGR and Forecasts

31 DEC (KESm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 14,393 16,488 22,111 27,467 29,990 33,361 37,111 20.15%

EBITDA 3,838 4,397 5,629 6,646 8,568 9,593 10,588 22.23%

PBT 3,147 3,838 5,443 4,889 9,596 8,690 9,657 32.14%

PAT 2,004 2,614 3,596 4,227 6,649 6,021 6,691 34.96%

Dividend 1,924 1,997 2,178 2,178 3,426 3,103 3,448 15.52%


EPS (KES) 5.52 7.20 9.91 11.64 18.32 16.59 18.43 34.96%

DPS (KES) 5.30 5.50 6.00 6.00 5.50 4.98 5.53 0.91%

NAV (KES) 25.0 34.2 40.1 44.7 67.9 102.9 114.6 28.36%

Balance Sheet

Fixed Assets 4,768 5,570 5,768 6,412 8,923 11,374 12,115 16.96%

Current Assets 2,950 3,482 3,170 2,662 3,131 9,411 10,436 1.50%

Total Assets 7,718 9,052 8,939 9,073 12,054 20,785 22,551 11.79%


Interest Bearing Debt 4,570 4,577 3,896 3,870 4,427 7,925 8,052 -0.80%

Current Liabilities 895 1,398 1,435 1,176 1,512 3,444 3,829 14.02%


2009 2010F 2011F 2012F


EV/EBITDA (x) 7.9 7.2 6.2 5.5

Capacity (MT) 2.5 2.5 2.5 2.5



32

EAST AFRICAN PORTLAND CEMENT COMPANY Down in the dumps EAPC is the quintessential example of the ‘Rule of two’ in practice. While the sector is challenged by exogenous factors, several of the shortcomings are a direct result of strategic shortcomings. The US$37m Yen denominated loan creates a structural rigidity for the company, ensuring successive exchange losses due to local currency weakness. Fundamentally flawed. Sell.

For FY 2010, the company broke its profit making trend by registering a KES 292m loss compared to an attributable profit of KES 1.8bn in the prior year. Revenue had however gone up from KES 8.1bn to KES 9.4bn for the full year.

Production and administration costs have been rising steadily. The main contributor has been the group‟s use of expensive fuel oil as compared to its peers ARML and Bamburi who use coal.

Coal prices have remained largely unchanged, for the year, compared to the more volatile fuel prices. Thus the company is facing thinner margins in the competitive market as sales have been growing albeit at reduced prices due to external competition from Asian imports.

Although EAPC‟s EV/tonne is attractive at US$118/ tonne versus the regional average of US$300, the high cost structure dampens future prospects. Structurally inefficient. We see better upside potential in peers, Athi and Bamburi. SELL

EQUITY RESEARCH

KENYA

FEBRUARY 2011

CEMENT


Revenue 9,408.7 10,274.3 11,219.5

EBITDA 475.2 1,446.3 1,574.2

Attributable Profit -299.9 507.4 588.2

RATIOS

RoAE -5.1% 8.6% 9.4%

RoAA -2.9% 4.8% 5.3%

VALUATION RATIOS

PBV(x) 1.7 1.6 1.5

PER(x) (32.4) 19.2 16.5

EV/EBITDA 25.7 8.5 7.9

EV/Tonne (US$) 116.4 116.8 118.0



Diverse shareholders base Limited free float

East Africa's growth story and potential Management and gvt bureaucracy

markets in the heart of Africa:- Rwanda, Yen denominated debt resulting in perennial

Burundi, Southern Sudan, Eastern DRC exchange losses

Poor cost control and lowest efficiencies


Switch to coal to improve cost Inconsistent and expensive energy supply

efficiencies Increasing competition and loss of market share

Access to government funded projects Dumping of susidised cement by China,Pakistan

Potentially greater trade with regional Civil strife in export countries eg Southern

countries through bi-lateral accords Sudan and DRC

Local currency weakness

BLOOMBERG: EAPC: KN SELL

Current price (KES) 108


Target price (KES) N/A

Upside/Downside N/A

12 month High/Low (KES) 80.00-133.00

Liquidity



Shares (m) 90.0

Free Float (%) 6%

Ave monthly value traded (US$ '000) 59.0

Ave monthly volume traded ('000) 44.0


6 months (%) 8.0



12 months (%) 35.0





Fully Diluted EPS (KES) (3.33) 5.64 6.54


DPS (KES) - 1.7 2.0

NAV/share (KES) 63.35 67.04 71.33

EBITDA Margin 5.05% 14.08% 14.03%

33

Nature of business East African Portland Cement Company Limited engages in the manufacture and sale of Portland cement in Kenya under the brand name Blue Triangle. Its other products include concrete pavers, kerbstones, cement slabs, and cement fence posts. It also makes cement tiles, culverts, panels, and tubes for the construction industry. The company was incorporated in 1933 and is based in Nairobi, Kenya. It has a capacity of 1.3m MT located in Athi River. FY2010 Results Overview Performance for FY2010 was dire in view of the high production costs, which saw cost of sales going up 33% from FY2009. Revenue had gone up 16% to KES 9.4bn on the back of higher sales volumes encouraged by lower selling prices. The increase in costs lowered the gross profit by 25% to KES 2.0bn (FY2009: KES 2.5bn). Profit from operations stood at KES 90m (FY2009: KES 1.2bn) after additional administration, selling and other operating costs totalling KES 2.0bn. Unlike in the prior period there was no fair value adjustment of investment property to pull the company back into positive territory. On the balance sheet borrowings amounted to KES 3.0bn, largely made up of the Yen denominated loan (US$ 37m equivalent) whilst total assets were largely unchanged at KES 12.0bn. The current ratio weakened from 2.1x to 1.6x on the back of a weakening in the cash generating ability and cash held at the end of the period more than halved to KES 444.8m from KES 1.9bn. Operational Review In addition to the expensive fuel costs, EAPC‟s operating cost line was adversely affected by the high clinker import requirement. The company plans to convert its kilns to be fuelled by solid fuels (coal/coke) by June 2011. The Yen denominated debt continues to adversely affect earnings, with huge foreign currency losses being made on the back of the strengthening of the Japanese currency against the Kenya Shilling (≈17% devaluation ytd). The initial loan of KES 7.6bn was drawn down in 1990 but runs to FY2020. For FY2010, exchange losses of KES 451m (US$ 5.6m) accrued from this long term liability. The outstanding amount on the loan is KES 3.0bn (≈US$ 38m) Outlook Increasing competition on the Kenyan cement market threatens any potential market share growth. However management is optimistic that it will garner more sales in terms of volumes as a result of improved production and organic market demand growth. On conversion to coal firing, the plant will become more efficient. The outstanding yen denominated loan may constrict financing options. Valuation The company is in a loss position and is fundamentally much weaker than its peers. While a low EV/tonne valuation may indicate speculative potential, we would not advise this. SELL


NSSF 27.0%

GOK 25.3%

Cementia (Lafarge) 14.6%

BCI 14.6%

Bamburi (Nominees) 12.5%

Others 6.0%

Total 100%

0%

20%

40%

60%

80%

100%

120%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Raw

Mate

rials

Fu

rnace

Oil/Po

wer

Fact

ory

sta

ff c

ost

s

Main

tenan

ce

Tra

nsp

ort

Oth

er

CO

S (K

ESm

)

Figure 30: Cost of sales breakdown

2009 2010 % change (RHS)

Source: EAPC 2010 Annual

Figure 31: Kenyan Shilling vs Japanese Yen


ARML Bamburi EAPC

Gross Margin 36.1% 45.2% 21.6%


RoAE 21% 42% -5%

RoAA 10% 26% -3%

2010 PER (x) 24.2 11.8 19.2

2011 PER (x) 21.7 10.6 16.5

2010 PBV (x) 5.5 3.2 1.6

2011 PBV (x) 4.6 2.8 1.5

2010 EV/EBITDA (x) 15.2 6.2 8.5

2011 EV/EBITDA (x) 13.4 5.5 7.9

2010 Div yield (%) 0.9% 2.6% 1.6%

2011 Div yield (%) 1.0% 2.8% 1.8%

Gearing (%) 106.8% 43.8% 43.6%

2010 EV/Tonne (US$) 418.7 326.2 116.8

Capacity (MMT) 0.65 2.50 1.30

34

NOTES

EAST AFRICAN PORTLAND CEMENT - 4 CGR and Forecasts

30 JUNE (KESm) 2006 2007 2008 2009 2010 2011F 2012F 4 Yr CGR

Income Statement

Revenue 6,181 6,403 7,204 8,101 9,409 10,274 11,220 11.08%

EBITDA 1,138 1,179 1,326 1,491 475 1,446 1,574 -19.61%

PBT 924 1,113 716 2,122 (346) 585 679 n/a

PAT 412 764 537 2,074 (300) 507 588 n/a

Dividend 234 234 - 117 - 152 176 n/a


EPS (KES) 1.15 5.08 10.57 3.78 (3.33) 5.64 6.54 n/a

DPS (KES) 2.60 2.60 - 1.30 - 1.69 1.96 n/a

NAV (KES) 34.2 40.1 44.7 67.8 63.3 67.0 71.3 16.67%

Balance Sheet

Fixed Assets 5,570 5,768 6,412 8,923 11,374 12,115 12,115 19.54%

Current Assets 3,482 3,170 2,662 3,131 2,912 2,951 3,012 -4.37%

Total Assets 9,052 8,939 9,073 12,054 20,785 22,551 22,551 23.10%





2010 2011F 2012F 2013F

Enterprise Value (US$m) 151.3 151.9 153.5 154.2

EV/EBITDA (x) 25.7 8.5 7.9 7.3

Capacity (MT) 1.3 1.3 1.3 1.3



35

TANGA CEMENT COMPANY Solid foundation Tanga Cement’s alliance with Holcim has provided the company with a competitive edge over its local peers. Prospects for growth driven by organic augmentation in the local population and increased infrastructural investment have been dampened by the lowering of import duties and the subsequent increase in imports. On the positive this has incentivised a ‘leaner, meaner’ ideology and has forced local players to strive towards global standards in order to compete effectively. This part of Africa possesses some of the cheapest cement plays in the world which we see significant upside to.

A new cement mill and packing plant were commissioned during FY2009 and resulted in a 500,000 MT increase in the installed cement grinding and packaging capacity, increasing the installed cement capacity to 1.25m MT.

For FY2009, a final dividend of TZS 179 per share was declared (Total: TZS 11.4bn/US$ 7.8m) indicating a dividend yield of 9.42% and dividend cover for the full year of 2.7x. For FY2010, we forecast the dividend yield to stay constant at 9.4% whilst the cover should grow to 3x.

We are optimistic about prospects for FY2010, with the cement market expected to grow, the new plant will tap into this expected growth to increase sales volumes and market share.

The EV/tonne ratio lags the regional average at US$ 74/tonne against the SSA and Kenyan weighted averages of US$ 151/tonne and US$ 300/tonne respectively showing the underlying upside potential. Our DCF valuation of TZS 6,292 indicates a significant rerating, despite low liquidity.

STRONG BUY

EQUITY RESEARCH

TANZANIA

FEBRUARY 2011

CEMENT


Technical assistance from Holcim Inadequate energy suppy by Tanesco

Strong cash flow; fat dividend policy Ineffefient rail service and need to use

Low per capita consumption more expensive road transportation

Exports markets opening up in central Dumping of subsidised cement by

Africa Pakistan


Continued GDP growth Increased imports and competition

Local currency weakness

Power outages affecting production

Instability of rail transport system

adversely affecting transportation

FINANCIAL SUMMARY (TZSm) 2009 2010F 2011F

Revenue 119,898 129,346 141,668

EBITDA 47,445 47,846 52,321


RATIOS

RoAE 39.7% 32.5% 31.6%

RoAA 35.2% 27.0% 27.5%

VALUATION RATIOS

PBV(x) 1.3 1.3 1.1

PER(x) 4.0 4.1 3.7

EV/EBITDA 2.3 2.8 2.6

EV/Tonne (US$) 60.9 73.6 74.2


BLOOMBERG: SIMBA:TZ BUY

Current price (TZS) 1,900


Target price (TZS) 6,292

Upside/Downside 231%

12 month High/Low (TZS) 1,680-1,900

Liquidity

Market Cap (TZSm) 120,975.0


Shares (m) 63.7

Free Float (%) 19%




6 months (%) 10.5



12 months (%) 9.2





Fully Diluted EPS (TZS) 478 466 511

Free Cashflow per share (TZS) 504 525 575

DPS (TZS) 179 174 191

NAV/share (TZS) 1,443 1,425 1,807

EBITDA Margin 35.48% 28.60% 28.65%

36

Nature of business Commissioned in 1980, Tanga Cement Company Limited was built largely from funds donated by Danish Government and in 1989 Holcim, the world's second largest cement company, took over management of Tanga Cement Company. Holcim Mauritius in 1996 successfully acquired the majority share of the company, and currently it holds 62.5% of the company while 36.9% is owned by the Tanzanian public and local institutions. H1 2010 Results Overview Tanga revenue for the interim period went up 8% to TZS61.1m, although sales volumes had gone up 16%. The limited growth was mainly on the back of increased imports and competition within the industry. The cost of sales was driven mainly by the high cost of imported clinker as the company‟s factory had been closed .The gross profit thus declined by 7% to TZS 22.9m while the PBT stood at TZS 14.6m (H1 2009: TZS 18.3m) . The company‟s working capital ratio weakened as a result of a 25.5% increase in current liabilities versus a 7.4% decrease in current assets which was due to a TZS 1.4m increase in debt. On the cash flow statement, funds raised from financing activities amounted to TZS 1.4bn although the closing cash flow position was a negative TZS 8.4m after TZS 16.4m was spent on financing working capital and capex projects. We expect the cash flow position to remain strained due to high working capital requirements. Operational Review Tanga cement consumption in the northern region of Tanzania shrank by 3% in FY2009, despite growth in cement demand in and around Dar es Salaam. 706,000 MT of cement were produced and sold, resulting in a revenue figure of TZS 119.9m, down 1% from the prior year. The company was profitable despite increased competition and the economic crisis in its core markets. Operational efficiency was however hampered by power shortages, as supply of electricity from Tanesco (Tanzania Electricity Supply Company) deteriorated and back-up generators had to be used, increasing production costs. Use of rail for the transportation of cement came to a standstill affecting the movement of goods to the Lake Zone, and now the goods are being moved through the more expensive road transportation. Outlook Performance in H2 2010 is expected to be positive on the back of growing cement demand and the recent capacity expansion is expected to tap into this growth with a positive impact on sales. Plant efficiencies are also expected to improve thereby lowering production costs. Valuation and Recommendation The EV/tonne ratio at US$74/tonne is in bargain territory compared the SSA and Kenyan averages of US$122/tonne and US$287/tonne respectively showing the underlying upside potential. Our DCF derived target price of TZS6,292 indicates 231%

upside potential. STRONG BUY


Income Statement (TZSm) H1 2009 H1 2010 % ch

Revenue 56,381 61,090 8.4%

EBITDA 19,468 17,292 -11.2%

Profit before tax 18,302 14,641 -20.0%

Attributable earnings 12,811 10,254 -20.0%

HEPS (KES) 201.00 161.00 -19.9%

Balance Sheet (TZSm)

Total Assets 116,146 127,786 10.0%

Shareholders' Equity 91,882 90,739 -1.2%

Net debt - 13,013 n/a

Gearing 0% 14% n/a


AfriSam Mauritius Investment Holdings 62.5%

Public Service Pension fund 7.2%

National Social Security fund 6.5%

Social Action Trust fund 1.8%

Employee Share option Scheme 0.8%

Sajjad Rajabali 0.6%

Aunali Rajabali 0.5%

Government employees Provident Fund 0.4%

Local Authorities Provident fund 0.4%

BP Tanzania Provident Trust 0.3%

Other 19.1%

Total 100%

Table 22: Tanzania Relative Metrics

Tanga Twiga

Gross Margin 47% 52%

EBITDA margin 35% 36%

RoAE 40% 39%

RoAA 35% 34%

2010 PER (x) 4.1 5.1

2011 PER (x) 3.7 4.5

2010 PBV (x) 1.3 1.8

2011 PBV (x) 1.1 1.4

2010 EV/EBITDA (x) 2.8 2.9

2011 EV/EBITDA (x) 2.6 2.2

2010 Div yield (%) 9.2% 9.6%

2011 Div yield (%) 10.1% 10.9%

Gearing (%) 14.3% -6.8%

2010 EV/Tonne (US$) 73.6 142.0

37

NOTES

TANGA CEMENT COMPANY - 4 CGR and Forecasts

31 DEC (TZSm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 67,169 77,619 93,778 121,349 119,898 129,346 141,668 15.6%

EBITDA 16,933 31,674 42,727 44,153 47,445 47,846 52,321 29.4%

PBT 10,575 23,027 34,379 43,219 43,835 42,713 46,889 42.7%

PAT 7,330 15,994 23,709 30,253 30,420 29,642 32,540 42.7%

Dividend 1,846 8,596 - 7,641 11,397 11,106 12,191

Weighted shares (m) 64 64 64 64 64 64 64 0.0%

EPS (TZS) 113.60 251.26 370.51 475.15 477.77 465.55 511.07 43.2%

DPS (TZS) - - - 120 179 174 191 n/a

NAV (TZS) 386.7 556.9 793.4 964.4 1,443.1 1,425.1 1,807.1 39.0%

Balance Sheet

Fixed Assets 22,475 28,897 41,327 59,286 84,319 93,722 101,220 39.2%

Current Assets 16,113 23,133 27,460 29,544 31,156 28,857 30,460 17.9%

Total Assets 38,589 52,030 68,787 88,830 115,475 122,579 131,680 31.5%


Interest Bearing Debt - - - (6,078) - 10,000 10,000 n/a



2009 2010F 2011F 2012F


EV/EBITDA (x) 2.3 2.8 2.6 2.2

Capacity (MT) 1.3 1.3 1.3 1.3


Net debt/equity ratio n/a 14% 12% 9%

38

TANZANIA PORTLAND CEMENT COMPANY Slowly but surely Having successfully completed the expansion of the clinker and cement production and packing facilities, TPCC is now in an excellent position to benefit from the boom in infrastructural development in Tanzania. This, despite the opening up of the market to imports that came with the reduction in tarrifs. Strong internal cash flows financed the expansion and now shareholders can expect an even higher payout. Attractively priced, and another Strong Buy.

Sales and production increased by 28% in FY2009, increasing TPCC‟S market share to around 45% of the domestic market. 1m MT of cement was produced out of a total capacity of 1.4m MT.

In June 2009, the company effected an 11% price reduction in order to fight competition, which had the effect of boosting total revenue by 20% from the prior period whilst cost of sales increased by 8%.

Cement consumption improved during the year by about 18% as a result of the removal of supply bottlenecks. The commissioning of the new clinker plant in FY2009 increased capacity from 400,000 MT to 1.15m MT.

We value the counter at TZS 4,827, implying 165% upward potential. We recommend the counter a BUY on the back of the good dividend payout and upbeat future prospects. The EV/tonne valuation of US$125/tonne is in line with the SSA weighted average of US$122 but at a 56% discount to the average for Kenya (US$287). Still undergoing strong double digit volume growth we expect a rerating as YTD share price performance has been negative relative to MXEF and the NSE20, unjustifiably so, we would believe.

STRONG BUY

EQUITY RESEARCH

TANZANIA

FEBRUARY 2010

CEMENT


Increased capacity and efficiency High energy costs

Strong local and regional demand Stiff competition from subsidised imports

Low per capita consumption Price taker environment

Massive infrasctructure developments Local currency weak

double digit growth in demand regionally


Growth in sales supported by growing Increased imports from Asia

cement consumption in the country increase in coal and electricity costs

Increasing stable economic growth to

push for higher infrastructure and

housing development needs.

FINANCIAL SUMMARY (TZSm) 2009 2010F 2011F

Revenue 179,000 204,776 234,263

EBITDA 79,479 100,388 114,325


RATIOS

RoAE 38.8% 39.6% 35.7%

RoAA 33.9% 34.5% 31.9%

VALUATION RATIOS

PBV(x) 2.3 1.8 1.4

PER(x) 6.8 5.1 4.5

EV/EBITDA 4.0 2.9 2.2

EV/Tonne (US$) 155.9 142.0 125.9


BLOOMBERG: TWIGA:TZ BUY

Current price (TZS) 1,820


Target price (TZS) 4,827


12 month High/Low (TZS) 1,620-1,820

Liquidity

Market Cap (TZSm) 327,459.9


Shares (m) 179.9





6 months (%) 4.6



12 months (%) 9.7





Fully Diluted EPS (TZS) 267 357 408

Free Cashflow per share (TZS) 296 388 442

DPS (TZS) 130 174 199

NAV/share (TZS) 787 1,015 1,276

EBITDA Margin 36.03% 41.12% 41.34%

39

Nature of business Established in 1959, Tanzania Portland Cement Company Limited (TPCC) engages in the manufacture, retail and distribution of cement in Tanzania. It manufactures two brands of cement, Twiga ordinary and Twiga extra, through which it controls 45% of the country‟s total cement market. H1 2010 Results Overview For H1 2010, Tanzania Portland Cement Company (TPCC) recorded revenues amounting to TZS 86.4bn, 2% lower than in H1 2009. Price reductions were effected during the period to push higher sales volumes and compete against cheaper product imported from China, Pakistan and India. The additional cost of imported clinker and high depreciation costs from the capitalisation of the new production facility negatively affected the operating profit line. Consequently, the net profit fell by 20%. Operational Review The company is carrying out extensive rehabilitation work with 2 old kilns temporarily shut for refurbishment while it operates the new one. The oldest of the kilns is currently being refurbished whilst the other will be rehabilitated in 2011. Increased cement imports are posing a threat to the East African cement industry. The removal of duties on cement came at a time when the regional cement companies were making investments to ensure that local capacity matches demand and the resultant local substitution has caused a glut on the market. Outlook Although unfair competition is being faced from imported products a steady growth in demand for cement is expected in the medium to long term given the country‟s need for infrastructural development and new housing. Valuation and Recommendation Our DCF value for the counter is TZS 4,827, implying potential upside of 165%. The strength of the company‟s cash generating capacity is brought into perspective when it is noted that the US$ 20m plant expansion activities undertaken in 2009 were completely financed from internal cash flows, and paid for in 6 months! The EV/tonne valuation is in line with the SSA weighted average (excluding Dangote) at US$142/tonne. Coming from a lower base, Tanzania‟s growth fundamentals are even stronger than those for Kenya, from an upside perspective. Kenya‟s average per tonne valuation of US$287 would be a good proxy for Tanzanian companies of comparative strength. This would result in upside of at least 100% on current market valuations, which we believe would not be unreasonable. We recommend the counter a BUY on the back of the good dividend payout and upbeat future growth prospects.


Scancem International Ans 69.6%

Parastatal Pension Fund 3.1%

Public Service Pension Fund 2.7%

Aunali Rajabali 2.3%

Sajjad Rajabali 2.2%

Umoja Unit Trust Scheme 0.9%

Wazo Hill Saccos 0.8%

Cypy Masawe 0.6%

National Social Security Fund 0.5%

Sayed Basharat, Mehboob, Khalid, Muzamil 0.4%

Other 17.1%

Total 100%

Table 24: Tanzania Relative Metrics

Tanga Twiga

Gross Margin 47% 52%

EBITDA margin 35% 36%

RoAE 40% 39%

RoAA 35% 34%

2010 PER (x) 4.1 5.1

2011 PER (x) 3.7 4.5

2010 PBV (x) 1.3 1.8

2011 PBV (x) 1.1 1.4

2010 EV/EBITDA (x) 2.8 2.9

2011 EV/EBITDA (x) 2.6 2.2

2010 Div yield (%) 9.2% 9.6%

2011 Div yield (%) 10.1% 10.9%

Gearing (%) 14.3% -6.8%

2010 EV/Tonne (US$) 73.6 142.0

40

NOTES

TANZANIA PORTLAND CEMENT COMPANY - 4 CGR and Forecasts

31 DEC (TZSm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 69,039 80,203 119,765 148,710 179,000 204,776 234,263 26.89%

EBITDA 26,161 31,020 48,147 56,481 79,479 100,388 114,325 32.02%

PBT 22,326 27,857 43,017 50,193 68,788 92,043 105,333 32.49%

PAT 15,628 19,500 30,112 34,962 47,993 64,218 73,491 32.38%

Dividend 3,125 5,038 7,737 12,595 23,390 31,298 35,817 65.40%


EPS (TZS) 86.9 108.4 167.4 194.3 266.7 356.9 408.5 32.38%

DPS (TZS) 17 28 43 70 130 174 199 65.40%

NAV (TZS) 208.1 299.1 438.5 589.8 786.5 1,014.9 1,276.2 39.43%

Balance Sheet

Fixed Assets 27,019 29,416 60,201 121,927 142,136 153,507 165,787 51.45%

Current Assets 25,009 39,422 42,766 46,513 49,953 83,641 122,759 18.88%

Total Assets 52,027 68,839 102,967 168,666 192,336 263,693 308,399 38.66%


Interest Bearing Debt - - - 529 478 478 478 n/a



2009 2010F 2011F 2012F


EV/EBITDA (x) 4.0 2.9 2.2 1.7

Capacity (MT) 1.4 1.4 1.4 1.4

Enterprise Value/tonne (US$) 156 142 126 107

Net debt/equity ratio (0.07) (0.21) (0.31) (0.39)

41

Southern Africa Cement Industry Overview

The Southern African region is split into two: South Africa, and everything else ex-SA. Cement demand in SA has faced a third year of slumping sales and volumes have declined by an estimated cumulative 20%. The outlook continues to be uncertain, on the back of stalled government infrastructure projects, post the World Cup. Out of SA, the region is booming, fuelled by various factors including economic stabilisation and boom times in Zimbabwe, recovery in mining in Zambia, strong demand from Botswana and Mozambique which are expanding infrastructure, and resilient exports into Angola and DRC that are undersupplied. The broad SWOT analysis is as follows: STRENGTHS Strong infrastructure spend in Botswana (the Morupule B

power station, the Dikgathlong and Lotsane Dam projects, which will continue for the next 12 to 18 months)

Economic recovery in Zimbabwe on dollarisation (100% growth in volumes demanded); sales now at 600,000 MT representing 40% of installed capacity

Increased investment in platinum mining in Zimbabwe led by Angloplats, Zimplats, Rio Tinto and Unki Platinum in excess of US$ 2bn

Very low levels of consumption out of SA, especially in Zambia (44kg pp) and Zimbabwe (50kg pp)

WEAKNESSES Inadequate power and high energy costs, a universal

theme Weak consumer credit markets with little or no access to

mortgage lending. Stressed mortgage lending market in SA Inefficient distribution via rail which is the most cost

effective method of distribution Low, albeit growing disposable incomes High cost of capital increases project risk Massive housing shortage across the region OPPORTUNITIES Increasing infrastructure spend to sustain growth;

especially in Mozambique, Botswana and Zimbabwe Stabilisation of banking sector post global financial crisis

will increase depth. Pan-Africanisation of African banking space will deepen

markets Dollarisation in Zimbabwe has stabilised the economy and

cement demand has recovered significantly. Also an important hub into DRC and Central Africa

THREATS Local currency weakness. This is less of a risk in the short

term as commodity markets have stabilised High import requirement for spares, clinker etc. Power cuts affecting output and inefficiencies; pervasive

problem regionally Increasing competition, especially from China.

Figure 32: US$ vs ZAR Exchange rate

Figure 33: US$ vs ZAR Exchange rate

Figure 34: US$ vs BWP Exchange rate

42

FINANCIAL SUMMARY (ZARm) 2009 2010F 2011F

Revenue 6,807.0 7,147.4 7,880.0

EBITDA 2,464.0 2,566.5 2,811.4


RATIOS

RoAE 76.8% 85.7% 97.5%

RoAA 18.6% 19.5% 21.0%

VALUATION RATIOS

PBV(x) 19.9 20.3 20.8

PER(x) 16.9 15.7 14.1

EV/EBITDA 8.3 8.1 7.4

EV/Tonne (US$) 520.9 528.1 507.3


PRETORIA PORTLAND CEMENT Resilient, through the recession In 2010, PPC celebrated its centenary as a JSE-listed company, joining an extremely small and elite group of listed centenarians, not only in South Africa but worldwide. The construction depression in SA has seen cement sales drop to 10 year lows and the outlook is murky. Regional sales have buoyed demand, but the dynamics remains in oversupply mode. A bell-weather stock, whose pan African expansion strategy will reinforce the concrete solid fundamentals. HOLD.

Local cement demand has now declined for three successive years and the cement industry is down to capacity utilisation levels last seen a decade ago. However, this is not the first recession PPC has had to endure. PPC has withstood the test of time and should remain a core holding.

Although South Africa has now reported modest GDP growth for four consecutive quarters, this has not yet filtered through to building and construction activity, which has historically been slower to respond to economic recovery.

The decline in South African cement sales was partially offset by ongoing infrastructural expansion in Botswana, exports to Angola and Mozambique and rising cement demand in Zimbabwe (now 9% of full year EPS). A strong recovery in lime sales to the South African steel industry was also recorded.

Aggregate sales in Gauteng declined by 7% mainly due to a slowdown in construction activity and aggressive competition in the latter half of the financial year. This was partially offset by higher demand in Botswana for new infrastructure expenditure, especially roads.

PPC‟s increased focus on the region will bear fruit as the smaller regional countries develop. Out of South Africa, the infrastructural deficit provides much scope

for growth. Good time to consolidate holdings.


Lions share of the domestic market SA construction market in recession

Increasing regional diversification High (and rising) energy costs

Strong balance sheet; dividend payout Dependence on government projects

Developed capital markets in SA and Weak housing demand

increasing pan-African strategy Stressed mortgage market


Strong recovery in Zimbabwean market Further power price inflation due to

Strong exports into Angola and Mozam. coal and electricity shortages

Strong infrastructure spend in Botswana Transnet Freight Rail strikes and

Further regional expansion inefficiencies

Low interest rates to spur growth Rand weakness

EQUITY RESEARCH

SOUTH AFRICA

FEBRUARY 2011

CEMENT

BLOOMBERG: PPC:SJ HOLD

Current price (ZAR) 29.19


Target price (ZAR) 34.47


12 month High/Low (ZAR) 28.78 - 35.60

Liquidity

Market Cap (ZARm) 17,110.3


Shares (m) 586.2





6 months (%) (6.7)



12 months (%) (16.6)



*Relative to JALSH index **Relative to MSCI EM index


Fully Diluted EPS (ZAR) 1.72 1.86 2.07

Free Cashflow per share (ZAR) 2.35 2.46 2.71

DPS (ZAR) 1.8 1.9 2.1

NAV/share (ZAR) 1.46 1.43 1.40

EBITDA Margin 36.20% 35.91% 35.68%

43

Overview of operations PPC is the leading supplier of cement in southern Africa through eight cement manufacturing facilities and three milling depots in South Africa, Botswana and Zimbabwe that can produce around eight million tons of cement products each year. PPC also produces aggregates, metallurgical-grade lime, burnt dolomite and limestone. Overview of South African construction sector Economically this has been a tough year for South African manufacturers, specifically for the local building and construction industry. Although South Africa has now reported modest GDP growth for four consecutive quarters, this has not yet filtered through to building and construction activity, which has historically been slower to respond to economic recovery. Low interest rates support the recovery Despite a 30-year low in South African lending rates, a recovery in residential development has not yet become evident. This has been due to a combination of tighter credit control by financial institutions, a relatively high level of consumer indebtedness and developments that remain unsold since the 2007 downturn in the residential market. Slow recovery of the South African economy reinforces the strategic intent to expand the group‟s geographic footprint to other emerging economies in Africa. Zimbabwe comes back to life PPC Zimbabwe made a positive contribution to the group in the first half of the financial year which contributed 9% of earnings after tax. Bear in mind this growth has been driven solely by a recovery in cash flows and FDI, as the credit markets are still illiquid and undergoing recapitalisation. The pent up demand after a decade long recession in Zimbabwe should see cement sales exceeding the 600,000 tonnes achieved in FY2010 and in anticipation capacity at Colleen Bawn has been increased to 850,000 MT. Cement demand in Zimbabwe is expected to plateau leading up to elections late in 2011 or early 2012. Future political stability should result in greatly increased cement demand as the country rebuilds and upgrades its infrastructure. Outlook for the Group Our longer-term outlook is still positive and this is reinforced by the South African government‟s continued commitment to infrastructure development and job creation. Record-low lending rates should encourage demand. Cement demand is a derived demand that has historically shown a high correlation with macroeconomic indicators such as GDP, fixed capital formation and interest rates.


Government employee pension fund 14.3%

PPC SBP Consortium Funding 6.8%

Lazard Emerging Markets Portfolio 5.9%

PPC Cement Pty Ltd* 3.4%

PPC Construction Industry Associations Trust Funding SPV 2.0%

PPC Black Managers Trust 1.8%

PPC Education Trust Funding SPV 1.0%

PPC Community Trust Funding SPV 0.7%

PPC Team Benefit Trust Funding SPV 0.5%

The Current PPC Team Trust 0.4%

Others 63.3%

Total 100%

*Held as treasury shares on consolidation

0

1000

2000

3000

4000

5000

6000

7000

2008 2009 2010

Re

ven

ue

s (M

illio

ns

of

Ran

ds)

Figure 35: Revenue by region - Growing regional contribution

South Africa Other AfricaSource: PPC

44

Other pertinent developments Lime sales volumes increased 23%, driven by stronger demand from the local steel and alloys sector and

increased export sales to Zambia and Democratic Republic of the Congo. This, combined with a good operating performance, resulted in a 75% rise in operating profit.

Coal and liquid energy costs are expected to rise as the global economy recovers and could exhibit

considerable volatility depending on currency exchange rates. While the construction of Medupi and Kusile power stations continues to draw cement, other projects need to begin to reverse current declining demand.

While PPC has publically committed to maintaining prices at a level that allows the recovery of input cost

inflation, competitors have used price discounting in an attempt to win market share. While this has put pressure on prices, the company has maintained an average 5% increase for the year.

After three years of solid growth, demand for cement in Botswana declined during the year. Despite this,

cement demand is expected to be underpinned by ongoing infrastructure projects such as the Morupule B power station, the Dikgathlong and Lotsane Dam projects, which will continue for the next 12 to 18 months

In the late 1990s, annual cement demand in Zimbabwe was around 1,2m MT and this declined to around

100,000 MT in 2008. Since early 2009, when the economy adopted the US dollar as its primary currency, demand has risen to 600,000 MT in the 2010 financial year. Demand is being driven primarily by retailers and concrete product manufacturers for supply to private housing projects.

PPC continued to pursue existing and new export opportunities during the year. Export volumes grew by

30%, but this was offset by lower selling prices due to a stronger rand and increased logistics costs. Mozambique and Angola remain the primary export markets. PPC estimates that the industry ran at around 75% capacity utilisation for the review period. PPC‟s utilisation levels remained between 70% and 75%, slightly below the industry average due to the fact that PPC absorbs the full impact of the downturn in the Western Cape Province.

Electricity costs per tonne of cement produced went up some 30%, in line with the announced national electricity price increase for 2010. A similar increase is planned by Eskom for the coming years

PRETORIA PORTLAND CEMENT - 4 CGR and Forecasts

31 DEC (ZARm) 2006 2007 2008 2009 2010 2011F 2012F 4 Yr CGR

Income Statement

Revenue 4,686 5,566 6,248 6,783 6,807 7,147 7,880 9.78%

EBITDA 1,968 2,339 2,537 2,237 2,464 2,566 2,811 5.79%

PBT 1,875 2,172 2,264 1,850 1,766 1,851 2,060 -1.49%

PAT 1,205 1,428 1,499 1,128 1,112 1,199 1,334 -1.99%

Dividend 1,059 1,212 1,319 1,172 1,026 1,106 1,231 -0.79%


EPS (NGN) 2.07 2.44 2.56 1.75 1.72 1.86 2.07 -4.48%

DPS (NGN) 1.81 2.07 2.25 2.00 1.75 1.89 2.10 -0.79%

NAV (NGN) 3.8 4.0 2.9 1.6 1.5 1.4 1.4 -21.00%

Balance Sheet

Fixed Assets 1,414 2,178 2,813 3,941 4,175 4,384 4,603 31.08%

Current Assets 2,941 2,704 1,720 1,878 1,937 1,782 1,949 -9.91%

Total Assets 4,355 4,882 4,533 5,819 6,112 6,166 6,552 8.84%

Shareholders' equity 2,203 2,349 1,713 915 858 841 822 -21.00%

Interest Bearing Debt 83 68 55 2,628 2,645 2,645 2,777 137.59%

Current Liabilities 1,667 2,181 2,310 1,538 1,663 1,746 1,878 -0.06%


2010F 2011F 2012F 2013F

Enterprise Value (US$m) 3,021 3,063 3,089 3,117

EV/EBITDA (x) 8.3 8.1 7.4 6.8

Capacity (MT) 8.0 8.0 8.0 8.0



45

LAFARGE CEMENT ZIMBABWE Setting new heights on the rebound Post dollarisation, the playing field has been levelled for the Zimbabwean cement players to join their regional and international peers in a growing and lucrative industry. The ongoing rebuilding projects in Zimbabwe post the lost decade and new upcoming projects in the mining and construction sectors will boost the cement producer’s performance.

Production has increased, with current capacity utilisation at Lafarge Zimbabwe now at 76% and distributing circa 1,000 tpd of cement from its plant, of which about 85% is destined for the local market. Lafarge's Zimbabwe unit plans to increase cement output to 90% of its installed capacity of 450,000 tonnes next year.

Lafarge intends to increase its plant capacity over the next five years to 1m MT to meet the country‟s growing demand. This will boost national capacity to circa 2.5m MT.

Cement sales per capita, have moved up from a low of 10.73kg in 2008 to 50kg per capita in 2010. EV/tonne at US$ 112 compares well against the regional average of US$ 122 (excluding Dangote).

Our DCF valuation indicates full valuation on present cash flows. Already at healthy capacity utilisation, the full recovery of the construction sector will determine the speed at which the expansion operations take place. We recommend that investors Hold their positions in Lafarge.

EQUITY RESEARCH

ZIMBABWE

FEBRUARY 2011

CEMENT


Sizeable market share High energy costs; ZESA inefficient

Strong brand and majority shareholder Very low liquidity in the counter

Recovering domestic demand Low capacity needs to be ramped up

Robust technical and brand support Weak banking sector with no mortgage

High capacity utilisation lending just yet

No Foreign exchange risk - USD exchange Weak middle class, although growing


Recovery in the construction sector Increase in imports pose a threat to

Reconstruction and refurbishment after pricing power and increasing sales

decade long recession Electricity shortages

Growting government revenues 2012 elections

Recapitalisation of the local banking sector Continued shortage of liquilidity in

Construction costs still very cheap in Zim the economy, slowing down

Mining activity on the rise the rate of economic recovery.

FINANCIAL SUMMARY (USDm) 2009 2010F 2011F

Revenue 28.33 41.08 61.62

EBITDA 1.33 11.37 22.93


RATIOS

RoAE 18.0% 27.5% 37.0%

RoAA 3.9% 22.8% 32.8%

VALUATION RATIOS

PBV(x) 4.10 3.71 3.27

PER(x) 26.78 27.16 19.50

EV/EBITDA 55.21 6.44 3.19

EV/Tonne (US$) 176.23 138.11 112.05

Dividend yield 0.0% -1.0% -1.4%

BLOOMBERG: LAFARGE: ZW HOLD


Target price (US$) 0.88


12 month High/Low (US$) 0.80-1.40

Liquidity


Shares (m) 80.0

Free Float (%) 0.0




6 months (%) (0.7)



12 months (%) 50.8



*Relative to ZSE Ind index **Relative to MSCI EM index


Fully Diluted EPS (USD) 0.03 0.03 0.05

Free Cashflow per share (USD) 0.04 0.05 0.07

DPS (USD) - (0.01) (0.01)

NAV/share (USD) 0.22 0.24 0.28

EBITDA Margin 36.84% 33.49% 31.33%

46

Nature of business Lafarge Cement Zimbabwe Limited, formerly Circle Cement Limited, is a Zimbabwe-based cement manufacturer and also a distributor of cement and allied products. Lafarge has a production capacity of 450,000 MT per year, 120,000 MT of which is exported. The company‟s products include PC16 (a non-drip, thixotropic solvent based pipe cement) and Masonry 42.5 grade (ordinary Portland cement with standard strength development). H1 2010 Results Overview For the interim period to 30 June 2010, Lafarge recorded revenues of US$ 17.2m, up 69% from the comparative period on the back of improving cement demand on the local market, especially from the retail sector. An operating profit of US$ 2.3m was registered compared to an operating loss of US$ 78,188 in H1 09. Profit before tax for the period was US$ 2m after finance costs of US$ 148,000, mainly accruing from the use of short term debt to finance working capital requirements. Attributable profit was US$ 1.5m (H1 09: US$ 807,000) translating to an EPS of US$0.02. On the balance sheet, the current ratio strengthened marginally due to higher inventories to allow for the major kiln shutdown that was planned for H2 2010. The company also managed to mobilise borrowing facilities of US$ 5m (US$ 3m offshore and US$ 2m onshore). To date US$ 2m has been drawn down. Operational Review For FY2009, Lafarge increased its capacity utilization to 72% from 62% the prior year, as dollarisation of the economy and the removal of price controls restored viability to the company‟s business units. The target for FY 2010 is to increase cement output to 90% (optimum capacity) of the installed capacity of 450,000 MT. The parent company recently pledged to inject US$ 3m into Lafarge Zimbabwe for the recapitalisation of the company‟s operations. This will be in line with the US$ 15m capital budget the company needs in capex for the next three years. Lack of long term financing at favourable rates on the local money market has resulted in the company looking externally for financing options.

Cement exports dropped to 20% from 30% in the prior period due to Malawi stopping the importation of cement as the government seeks to promote local production. Exports to Mozambique continued, however, with potential to increase sales to that country. Export markets include Mozambique, Zambia and the DRC although management intends to concentrate more on the domestic market as the fundamentals continue to improve. Outlook Although improving production capacity in the region may continue to adversely affect exports (down 36% for the half year), strong demand on the local front should propel future growth in sales volumes. Management is optimistic that seasonal demand revenue in the second half should exceed that of the first half, although growth in margins may be limited by the significant PPE maintenance costs.


Income Statement (US$m) H1 2009 H1 2010 % ch

Revenue 10.18 17.20 69%

EBITDA (0.08) 2.29 n/a

Profit before tax 0.69 2.00 189%

Attributable earnings 0.81 1.49 84%

HEPS (KES) 0.01 0.02 100%

Balance Sheet (TZSm)

Total Assets 37.78 40.29 6.6%

Shareholders' Equity 17.57 19.06 8.5%

Current assets 11.11 15.35 38.2%

Curerent liabilties 13.03 13.95 7.1%

Cement70%

Clinker27%

Special paints2%

Other1%

Figure 36: Revenue Breakdown

Source: Lafarge Zimbabwe Annual Report

47

NOTES

LAFARGE ZIMBABWE - 4 CGR and Forecasts

31 DEC (US$ '000) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 18,275 14,054 3,971 - 28,333 41,082 61,623 11.6%

EBITDA 3,557 4,674 445 - 1,326 11,371 22,933 -21.9%

PBT 1,594 2,999 (605) - 1,624 10,268 21,891 0.5%

PAT (1,466) 4,612 8,541 - 2,689 6,161 13,135 n/a

Dividend


EPS (USD) (0.02) 0.06 0.11 - 0.03 0.08 0.16 n/a

DPS (USD) - - - - - - - n/a

NAV (USD) 0.1 0.1 0.2 0.2 0.2 0.3 0.5 25.9%

Balance Sheet (US$ '000)

Fixed Assets 10,855 7,694 19,658 24,780 26,677 30,672 36,805 25.2%

Current Assets 4,306 3,398 3,127 5,151 11,105 21,781 42,446 26.7%

Total Assets 15,161 11,092 22,785 29,930 37,782 52,453 79,251 25.6%


Interest Bearing Debt 2,008 59 760 8,811 7,188 8,009 9,216 37.5%



2009 2010F 2011F 2012F


EV/EBITDA (x) 55 6.4 3.2 3.2

Capacity (MT) 0.45 0.54 0.65 0.78


Net debt/equity ratio 42% 13% 3% -1%

48

BLOOMBERG: LAFARGE:ZL BUY

Current price (ZMK) 6,900


Target price (ZMK) 11,557


12 month High/Low (ZMK) 4,500-6,898

Liquidity

Market Cap (ZMKm) 1,380,276.0


Shares (m) 200.0

Free Float (%) 4.2%

Ave monthly value traded (ZMKm) 100.1



6 months (%) 16.0



12 months (%) 54.7



*Relative to LuSE index **Relative to MSCI EM index


Fully Diluted EPS (ZMK) 725.36 701.34 736.41

Free Cashflow per share (ZMK) 948.02 927.95 979.02

DPS (ZMK) 100.0 96.7 101.5

NAV/share (ZMK) 2,855.8 3,471.8 4,119.0

EBITDA Margin 38.4% 28.3% 28.2%


Technical assistance from parent High input costs lowering operating

company Lafarge France margins

Strong cashflow and balance sheet Soft local currency and high import

Strong recovery in mining sector requirement for raw materials and

Low per capita consumption spares

Deepening financial intermediation High local interest rates


Cement market expected to grow Weakening Kwacha

New export opportunities in Power outages affecting production

Burundi, DRC and Copperbelt High cost of debt

Policy makers's decision in relation to

importation of cement

LAFARGE ZAMBIA Copper fortunes drive demand Lafarge Cement Zambia manufactures and provides cement for its local market and also exports to neighboring DRC and Burundi. Infrastructural development in the housing, health and educational sectors in the country still need substantial investment, and with firm copper prices seeing an increase in activity in the mining sector, a stronger economic footing will have a positive impact on cement demand.

2009 was a record year for Lafarge Zambia in terms of turnover, volume, profit and cash flow. However, the performance in H1 2010 showed a reversal of the positive trend with operating margins dropping to 31% from 38% in the prior period.

Domestic demand is set to improve in H2 2010 from a depressed performance in the first half, whilst regional demand from DRC and Burundi is expected to remain strong with higher exports of cement and clinker.

The Chilanga II plant became operational in October 2009, and had two unscheduled stops in H1 2010. The significant capex expenditure on the mill and packaging splant is paying off however, with benefits being realised from the improved efficiencies.

Using our DCF valuation method, we derive a value of ZMK 11,557. On an EV/tonne basis the counter is trading at US$226/tonne and is still looking cheap in light of the anticipated growth in FY2011. BUY

EQUITY RESEARCH

ZAMBIA

FEBRUARY 2011

CEMENT

FINANCIAL SUMMARY (ZMKm) 2009 2010F 2011F

Revenue 737,479 774,353 813,071

EBITDA 386,734 309,741 325,228


RATIOS

RoAE 63.2% 39.0% 34.2%

RoAA 61.8% 20.7% 12.8%

VALUATION RATIOS

PBV(x) 2.4 2.0 1.7

PER(x) 9.5 9.8 9.4

EV/EBITDA 3.6 4.4 4.1

EV/Tonne (US$) 234.9 231.2 226.1


49

Nature of business In 1949, the Northern Rhodesian Government and the Colonial Development Corporation, now the Commonwealth Development Corporation (CDC), established Chilanga Zambia after which in 1951 the company commenced cement production and installed two kilns in 1956 and 1967. Under the government‟s privatisation programme, the company became the first to list on the Lusaka Stock Exchange (LuSE) with CDC being the majority shareholder. In 2001, CDC rearranged its operations in Southern Africa forming Pan African Cement which owned shares in Chilanga, Mbeya Cement in Tanzania and Portland cement in Malawi. In May 2001, Lafarge France acquired PAC from CDC and 34% of Chilanga Cement through a compulsory offer to minorities. In 2007 Chilanga Cement changed its name to Lafarge Cement Zambia, aligning it with its parent company. H1 2010 Financial Overview H1 2010 performance was depressed when compared to the prior period with revenues down 15% to ZMK 261.8bn. EBITDA also declined by 31% to ZMK 80.7bn. The operating profit margin deteriorated from 38% to 31%, pressured by lower volumes and a higher mix of export sales. Profit before tax stood at ZMK 78.6bn translating to attributable earnings of ZMK 55.0bn. The balance sheet remained solid on the back of stringent cost and cash management. Total assets amounted to ZMK 872.0bn while the total cash and cash equivalents amounted to ZMK 117.1bn. Operational Review Power supply shortages continues to affect performance efficiencies at both plants, and during FY 2009 operations at the Ndola line 1 had to be restricted by the Environmental Council of Zambia (ECZ) stance for stoppage of production until the company replaced the Electrostatic precipitator (ESP). The company opened depots in Mpulungu and Chingola in a bid to improve distribution to Burundi, DRC and the Copperbelt. Clinker exports to the region have resumed and the export proceeds are expected to improve foreign currency earnings whilst increasing export volumes should drive up capacity utilisation. Outlook Management estimates that for FY2010 the domestic cement market will be around 940,000 MT, although growth will be dependent on continued positive sentiment in the mining sector. The recovery in copper prices from around US$3,000/tonne in H1 2009 to circa US$8,000/tonne currently, and the firming of the Kwacha should invigorate infrastructural sector spending thus the sector‟s growth should, at a bare minimum be in line with forecast GDP growth of 6.6%. Valuation Our DCF model values the counter at ZMK11,557 implying 67% upside potential. On an EV/tonne basis the counter is trading at US$226/tonne. We see increased momentum primarily due to the increased activity in the mining sector and see upside to current pricing levels. BUY


Income Statement (ZMKm) H1 2009 H1 2010 % ch

Revenue 308,228 261,773 -15%

EBITDA 116,207 80,666 n/a

Profit before tax 95,597 78,621 -18%

Attributable earnings 61,756 55,035 -11%

HEPS (ZMK) 309 275 -11%

Balance Sheet (ZMKm)

Total Assets 497,329 625,400 25.8%

Shareholders' Equity 497,229 625,300 25.8%

Net debt 202,252 94,198 -53.4%

Gearing 41% 15% -63.0%

0

200

400

600

800

1000

1200

1400

2006 2007 2008 2009F 2010F

00

0's

of

ton

ne

s

Figure 37: Lafarge Zambia capacity vs production

Plant Capacity Cement Production

Source: Lafarge Zambia

0

200

400

600

800

1000

1200

2006 2007 2008 2009F 2010F

000's

of to

nnes

Figure 38: Lafarge Cement Sales (000 tonnes)

Local Export

Source: Lafarge Zambia


Pan African Cement Limited 50.1%

Financiere Lafarge 34.0%

LuSE Central Share depository 11.8%

Public institutions and individuals 4.2%

Total 100%

50

NOTES

LAFARGE CEMENT ZAMBIA - 4 CGR and Forecasts

31 DEC (ZMK m) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 299,944 282,325 324,596 430,133 737,479 774,353 813,071 25.22%

EBITDA 83,160 80,017 96,213 139,402 308,413 247,013 259,363 38.77%

PBT 80,434 91,351 91,196 125,494 255,471 247,013 259,363 33.50%

PAT 50,880 54,122 63,437 74,017 172,636 166,920 175,266 35.72%

Dividend - - - 12,002 20,004 19,342 20,309


EPS (ZMK) 253.69 269.85 316.30 369.05 860.76 1,187.83 1,697.16 35.72%

DPS (ZMK) - - 60 30 100 178 212

NAV (ZMK) 1,187.6 1,433.4 1,749.2 2,017.5 2,848.3 4,308.5 6,073.6 24.45%

Balance Sheet

Fixed Assets 133,340 234,520 487,232 607,356 680,099 748,109 822,920 50.28%

Current Assets 182,338 157,805 206,553 199,692 269,627 1,087,597 1,207,833 10.27%

Total Assets 315,678 392,325 693,785 807,048 949,726 1,835,706 2,030,753 31.70%


Interest Bearing Debt 104 102 102 202,355 94,253 98,966 103,914 448.68%


Total Liabilities and equity 315,678 392,325 693,785 807,048 949,726 1,835,706 2,030,753 31.70%

2009 2010F 2011F 2012F


EV/EBITDA (x) 3.6 4.4 4.1 3.9

Capacity (MT) 1.23 1.23 1.23 1.23


Net debt/equity ratio -1% -4% -7% -5%

51

North Africa Cement Industry Overview

North Africa boasts some of the highest cement consumption rates in Africa, viz: Morocco 416kg pp; Tunisia 564kg pp and Egypt 601k gg pp. For historical reasons, the Maghreb is essentially plugged in to Mediterranean Europe and trade and financial services sectors are very closely integrated. Massive investments have been made into the development of new cities, particularly in Morocco, Tunisia and Algeria and much of these investments have been driven driven by the governments, in partnership with the private sector. North Africa possesses some of the deeper and more sophisticated capital markets, and with their integration into the Middle East and North Africa (MENA) bracket, have welcomed investment from their wealthier Arab allies, particularly in Arab Emirates. Recent political developments have shaken the regions capital markets in Tunisia and Egypt. Consequently these markets were closed, but only after significant falls. Despite the politics, the north African Economic block remains well placed for continued expansion and we see speculative value, particularly in Egypt and Tunisia. Overview of Cement Sector in Morocco Domestic consumption of cement in 2009 registered an increase of 3.4% to 14.5m tonnes compared to 2008. Morocco has one of the highest per capita cement consumption ratios at 470kg‟s per person, which has about doubled in ten years from around 240kg per person in 1998. Government‟s main priority has been the development of social housing projects, and new town are being built in Tamensourt and Tamesna, with a defined focus on job creating and easing social tensions. Morocco is already in a state of oversupply, and while cement consumption continues to grow, it is mostly organic and valuations are at the top end. Overview of Cement Sector in Egypt Egypt has for over 40 years had the most prolific cement sector on the Continent. Famous for some of the most impressive engineering projects like the Suez Canal and the Aswan Dam, Egypt‟s cement industry is second to none. With clear emerging market credentials, Egypt plans to increase cement output by 54 percent to 77m MT by 2015. The latest political developments have shaken the country somewhat and led to the closure of the Cairo and Alexandria Stock Exchange, after foreign investors flew en masse. Despite the political risk, Egypt has some of the most attractively priced cement factories on the continent, and we see the turmoil as an excellent entry point to mop up the oversold market.

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

F

20

11

F

Mill

ion

s o

f to

nn

es

Figure 39: Morocco Cement consumption

Table 27: Morocco Relative Metrics

CM Holcim Lafarge

2010 PER (x) 11.7 15.9 18.1

2011 PER (x) 9.9 15.1 15.6

2010 PBV (x) 3.4 4.8 5.2

2011 PBV (x) 3.0 4.2 4.5

2010 EV/EBITDA (x) 10.9 10.9 11.4

2011 EV/EBITDA (x) 9.1 10.5 9.9

2010 Div yield (%) 5.8% 3.4% 3.4%

2011 Div yield (%) 6.9% 3.6% 4.0%

Gearing (%) 0.0% 118.7% 17.9%

2010 EV/Tonne (US$) 372.9 355.6 646.3

Figure 40: US$ vs MAD exchange rate

Figure 41: US$ vs EGP exchange rate

52

BLOOMBERG: CMA:MC ACCUM

Current price (MAD) 1,146

Current price (US$) 132

Target price (MAD) 1,487


12 month High/Low (MAD) 2,766-1,774

Liquidity

Market Cap (MADm) 16,552.9


Shares (m) 14.4

Free Float (%) 17.0




6 months (%) (4.5)



12 months (%) 45.1



*Relative to MCSINDEX **Relative to MSCI EM index


Fully Diluted EPS (MAD) 81.3 98.3 116.1

Free Cashflow per share (MAD) 54.0 69.6 89.8

DPS (MAD) 55.0 66.5 78.6

NAV/share (MAD) 308.8 340.6 378.2

EBITDA Margin 48.1% 48.1% 48.1%

EQUITY RESEARCH

MOROCCO

FEBRUARY 2011

CEMENT

Ciments du Maroc is the second largest cement producer in Morocco with three cement factories in Agadir, Safi and Marakech and, with a total production capacity of 5.9m MT/year. In 2006 the government availed funds amounting to MAD 3.6bn (US$ 413m) to be invested into the production of the new d’Aït Baha plant in Agadir, which came on line in November 2009. The group boasts pole position in the ready to use concrete segment with 23 concrete plants through its subsidiary, Betomar. Ciments du Maroc is a subsidiary of Italcimenti, the Italian cement giant which owns a 62% stake in the Moroccan entity. Morocco is a modern day success story that has been

the direct result of the proactive measures taken by the kingdom to encourage public/private partnerships and foreign investment in order to diversify the economy. Ambitious plans to build new cities in Tamensourt on the outskirts of Marrakech and Tamesna have spurned economic growth and led to a boom in the cement and construction industries.

Despite already having one of the highest per capita consumption statistics in Africa at 445kg per capita, the continued expansion of the economy has resulted in buoyant demand for cement.

The new cement plant at d‟Aït Baha increased the company‟s capacity by 2.2m MT and was commissioned in November 2009. The board has ratified the decision to construct a new factory, north of Marakech to meet growing demand.

Ciments du Maroc has outperformed both the local index and EM index by a margin of at least 25 percentage points year to date. Prospects for the cement industry remain positive and valuations indicate further upside of up to 31%.

Shaky investor sentiment in Tunisia, Algeria and Egypt is likely to see some selling pressure, which should create an opportune entry point. ACCUM.


Housing backlog and ambitious Lull in construction/property sector

plans to fill this - circa 140k Short term drop in remittances

2 new cities being built Cement consumption per capita

new ports, highways and other already at a peak at 416 kg/capita

infrastructure projects


increased public investment into Cement sector already at peak

infrastructure projects High valuations and strong share

EM credentials price appreciation recorded YTD

Stong demand in West Morrocco

Expansion of Western Sahara

FINANCIAL SUMMARY (MADm) 2009 2010F 2011F

Revenue 2,804.3 3,652.0 4,382.3

EBITDA 1,347.9 1,755.4 2,106.4


RATIOS

RoAE 29.8% 32.7% 36.1%

RoAA 20.4% 18.8% 18.7%

VALUATION RATIOS

PBV(x) 3.7 3.4 3.0

PER(x) 14.1 11.7 9.9

EV/EBITDA 13.0 10.9 9.1

EV/Tonne (US$) 545 373 372


53

Overview of the Group Ciments du Maroc, a member of the world‟s fifth largest cement group, Italcementi Group, and is a Moroccan producer of Portland cement, ready-made concrete and pellets. Its products include artificial Portland cement 35, Portland cement 45 and Super White Cement. The Company's industrial complex consists of four factories (Agadir, Safi, Marrakech and d‟Aït Baha), a crushing unit (Laayoune) and a packing unit (Jorf Lasfar). Ciments du Maroc operates through several subsidiaries, including Betomar and Indusaha, engaged in the production of building materials. Aït Baha came on stream in November 2009 following the initiation of the project in 2007 at a total cost of MAD 3.3bn (US$ 379m) with a capacity of 2.2m MT of cement per year. Overview of the Interim results to June 2010 Revenues from operations increased by 8.6% to MAD

1,563m (US$ 179m), and sales volumes increased by 5.8% compared to June 2009 as the additional capacity from Aït Baha came on-stream in November 2009.

Net income for the period reached MAD 560m (US$ 64m).

The company also reported cement consumption growth in Morocco of 1.1% in H1 2010, and announced plans to invest in another cement plant to the north of Marrakech in the coming years.

Outlook for the Moroccan cement sector Despite the significant growth of the Moroccan cement industry over the past 10 years, the country‟s bull case is supported primarily by a massive public housing project and the construction of two new towns in Tamensourt and Tamesna. The following major infrastructure projects will ensure a buoyant domestic market: Social housing programme to construct 140 000 new

houses Construction of new bridges at Tasskourt and Zerrar Continued hotel infrastructure expansion for the

tourism sector. Residential housing projects in Agadir, Marrakech and

Essaouira The El Jadida – Safi highway project Dualisation of the roads between Safi, Essaouira and

Marrakech Expansion of the port and phosphate factories at Jorf

Lasfar. Valuation and Recommendation Group revenues have grown at a four year compound growth rate of 10%, while, due to greater efficiencies, attributable profits have grown by 22% and dividends by 32%. Intrinsically we value the counter at MAD 1,487, and our target price indicates 31% upside. Accumulate, especially into any weakness caused during the political tensions in the Maghreb and Egypt. Notes


Ciments Français (Italcementi) 61.82

CDG 8.73

CIMR 7.05

Abu Dhabi Fund for Development 5.38

Others 17.02

Total 100.0


Income Statement H1 2009 H1 2010 % ch

Revenue 1,439 1,563 8.6%

EBITDA 720 782 8.6%

PAT 513 562 9.5%


CM Holcim Lafarge

2010 PER (x) 11.7 15.9 18.1

2011 PER (x) 9.9 15.1 15.6

2010 PBV (x) 3.4 4.8 5.2

2011 PBV (x) 3.0 4.2 4.5

2010 EV/EBITDA (x) 10.9 10.9 11.4

2011 EV/EBITDA (x) 9.1 10.5 9.9

2010 Div yield (%) 5.8% 3.4% 3.4%

2011 Div yield (%) 6.9% 3.6% 4.0%

Gearing (%) 0.0% 118.7% 17.9%

2010 EV/Tonne (US$) 371.7 335.4 521.1

Capacity 5.9 4.5 6.5

54

Notes

CIMENTS DU MAROC - 4 CGR and Forecasts

31 DEC (MADm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 1,942 2,087 2,379 2,685 2,804 3,652 4,382 9.62%

EBITDA 820 863 1,182 962 1,348 1,755 2,106 13.21%

PBT 774 792 1,018 904 1,282 1,611 1,955 13.47%

PAT 524 525 1,018 873 1,175 1,420 1,678 22.36%

Dividend 267 325 325 722 794 961 1,135 31.34%


EPS (MAD) 36 36 70 60 81 98 116 22.36%

DPS (MAD) 18 22 22 50 55 67 79 31.34%

NAV (MAD) 179 195 215 252 309 341 378 14.57%

Balance Sheet

Fixed Assets 844 797 1,063 1,709 3,187 5,078 5,332 39.39%

Current Assets 1,446 1,439 2,428 2,729 2,549 2,834 3,098 15.22%

Total Assets 2,562 2,508 4,470 5,037 6,465 8,677 9,233 26.04%


Interest Bearing Debt - - 518 401 950 2,649 2,587 n/a

Current Liabilities 383 406 854 987 1,054 1,220 1,453 28.79%


2009 2010F 2011F 2012F


EV/EBITDA (x) 13.0 10.9 9.1 8.6

Capacity (MT) 3.7 5.9 5.9 5.9



55


PPn growing by 0.4m per year One of the highest cement per

Strong demand from capita consumption statistics

Emerging middle class

EM Credentials

Latest technologies in use


Aggressive housing programme Economy succeptible to shocks in

massive urban expansion with the agriculture sector

two new cities being built

Expansion into Western Sahara

Exports to region

EQUITY RESEARCH

MOROCCO

FEBRUARY 2011

CEMENT

Holcim Maroc is a subsidiary of the Swiss cement giant and the third largest cement manufacturer in Morocco with a market share of about 26%. Like its two larger players, capacity has grown exponentially over the past ten years, and continues to expand to meet the country’s seemingly insatiable growth requirements. At an EV/tonne of $335, Holcim is the most attractively priced cement counter on the bourse, and while fully priced at present, we expect organic growth to be in line with broader economic fundamentals. Accumulate. Cement sales for Holcim increased by 7% y-o-y to

3.7m tonnes while aggregates (gravel and sand) increased sharply by 77% to 1.1m MT. Concrete sales were flat at half a million tonnes.

This growth has principally been driven by the government‟s strategy to keep expanding the infrastructure to meet the country‟s burgeoning requirements.

The group continues to focus on expanding its capacity, with the latest development being the doubling of the capacity of the cement plant at Fes. A total investment of €125m has been made for this expansion.

The Deployment of the first Moroccan network of franchise building materials branded „Batipro‟, has created over 100 franchisees enhancing distribution.

Investor sentiment has been negatively affected by political developments in the other Maghreb countries i.e. Tunisia and Algeria, as well as in Egypt. The fundamentals for continued growth are solid and we see any price weakness as a buying opportunity. Our target price of MAD 3417 indicates 31% upside.

Holcim Maroc

Force. Performance. Passion.


Revenue 3,542.7 3,719.9 3,905.9

EBITDA 1,215.0 1,275.8 1,339.5


RATIOS

RoAE 64.5% 58.0% 52.8%

RoAA 12.2% 12.8% 12.8%

VALUATION RATIOS

PBV(x) 5.6 4.8 4.2

PER(x) 17.0 15.9 15.1

EV/EBITDA 11.3 10.9 10.5

EV/Tonne (US$) 426 356 335


BLOOMBERG: HOL:MC ACCUM





12 month High/Low (MAD) 2,790 - 1,774

Liquidity



Shares (m) 4.2

Free Float (%) 35.2




6 months (%) 9.8



12 months (%) 47.5







DPS (MAD) 86.0 92.3 96.9

NAV/share (MAD) 483.6 561.7 643.6

EBITDA Margin 34.3% 34.3% 34.3%

56

Overview of Holcim Maroc Holcim Maroc is the Moroccan subsidiary of the Swiss cement giant, and has roots that stretch back over three decades. The company started up operations in 1972 as a joint venture between the Moroccan and Algerian governments in the border town of Oujda where a 1.2m MT cement plant was built. As part of the government‟s privatisation initiatives in the 90‟s, Holcim Group took control of what was then called CIOR. Since then, the group has expanded aggressively and the newest plant at Settat commissioned in 2007 increased the company‟s capacity to 4.5m MT. In 2010 a project to double the production of clinker at the Cement factory in Fes commenced. Outlook The doubling of the Fes plant capacity at a cost of €125m commenced in FY2009. The plant will be equipped with a combination of European and Chinese machinery and commissioning of the plant is planned for early FY2012. Valuation and Recommendation The growth of the Moroccan construction industry has been nothing short of phenomenal and has been the result of a well planned and coordinated effort to ensure that sustainable momentum is achieved. Having mapped out the next phase of development that is necessary, the industry has been incentivised to continue to grow its capacity in order to stay in line with strategic objectives. We see this as the main difference between the cement companies in North Africa and elsewhere on the continent. The success of Public Private Partnerships has been immense and has resulted in those countries achieving the highest cement consumption rates in Africa. The average cement consumption in Egypt, Morocco and Tunisia as per our sample 489 kg per capita vs 101kg per capita for SSA. Viewed from another perspective, this highlights SSA‟s relative potential for future growth. Valuations in Morocco are not cheap, however at US$355/tonne, Holcim offers the best value for exposure to the cement industry. Our DCF implies 31% upside to the current price and we would recommend investors to add to existing positions, taking advantage of the price weakness that the Casablanca Stock Exchange is experiencing resulting from the ongoing political tensions in

Tunisia and Egypt.


HOLCIBEL SA 51.0

Free float 35.2

Banque Islamique de Développement 13.8

Total 100.0

0

0.5

1

1.5

2

2.5

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3.5

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cement Aggregates concrete

Mill

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s o

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es

Figure 42: Holcim volume sales

2007 2008 2009


CM Holcim Lafarge

2010 PER (x) 11.7 15.9 18.1

2011 PER (x) 9.9 15.1 15.6

2010 PBV (x) 3.4 4.8 5.2

2011 PBV (x) 3.0 4.2 4.5

2010 EV/EBITDA (x) 10.9 10.9 11.4

2011 EV/EBITDA (x) 9.1 10.5 9.9

2010 Div yield (%) 5.8% 3.4% 3.4%

2011 Div yield (%) 6.9% 3.6% 4.0%

Gearing (%) 0.0% 118.7% 17.9%

2010 EV/Tonne (US$) 372.9 355.6 646.3


57

Notes

HOLCIM MAROC - 4 CGR and Forecasts

31 DEC (MADm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 1,753 1,995 2,388 3,152 3,543 3,720 3,906 19.23%

EBITDA 617 720 664 948 1,215 1,276 1,340 18.46%

PBT 488 605 652 857 1,143 1,200 1,260 23.69%

PAT 354 439 483 532 668 717 753 17.21%

Dividend 223 282 282 324 362 389 408 12.86%

Weighted shares (m) 4.2 4.2 4.2 4.2 4.2 4.2 4.2 0.00%

EPS (MAD) 84 104 115 126 159 170 179 17.21%

DPS (MAD) 53 67 67 77 86 92 97 12.86%

NAV (MAD) 313 364 361 411 484 562 644 11.49%

Balance Sheet

Fixed Assets 2,101 2,933 3,208 3,514 3,538 3,715 3,901 13.92%

Current Assets 644 631 887 1,752 1,790 1,856 1,949 29.11%

Total Assets 2,745 3,565 4,095 5,266 5,329 5,571 5,850 18.03%


Interest Bearing Debt 463 1,305 1,512 1,849 1,700 1,785 1,874 38.41%

Current Liabilities 965 726 1,061 1,687 1,593 1,421 1,266 13.36%


2009 2010F 2011F 2012F


EV/EBITDA (x) 11.3 10.9 10.5 10.1

Capacity (MT) 3.7 4.5 4.8 5.2



58

EQUITY RESEARCH

MOROCCO

FEBRUARY 2011

CEMENT

In Morocco, Lafarge has a long standing partnership with the state owned conglomerate Société Nationale de Investissements (SNI), jointly owning 69% of the company. Consequently, Lafarge is the quintessential play on Morocco’s impressive state driven infrastructural expansion, controlling a market share of 42%. Having already proven its strategic mettle over the past 10 years, Lafarge will continue to benefit from the strategic alliance with the monarchy. Cement sales increased by 4.2% over FY2008, despite

sluggish domestic demand recorded in H1 2009. Improved efficiencies at the newly commissioned second line at the Tetouan plant and the extended use of aeolic (wind) energy partially offset the 18% increase in electricity prices.

The group also benefitted from the reduced price of petroleum coke in international markets and the impact of these developments was an increase in operating margins from 47% to 50%.

During FY2009, the scope of the company increased following the creation of a new entity, Calcinor Lafarge Maroc, which is a partnership between Lafarge and Cementos Calcinor, whose main activity is the production of lime.

The government‟s commitment to the meeting the housing needs for the low and middle classes of the population is seen as the fundamental basis upon which the cement industry will continue to grow.

It is noted that following the entry of new players into the market, 2010 marks the tipping point where the country is now in a state of over capacity, especially in Casablanca. Nonetheless, Lafarge plans to mitigate the concentration risk by building a new factory in the Souss region.

Valued at US$521/tonne, Larfarge Maroc is the most expensive cement play in the market and is fully valued. HOLD.

During the year 2009, the scope of Lafarge Ciments has widened following the creation of a new entity "Calcinor Lafarge Morocco which is a partnership between Lafarge and Cementos Calcinor, whose main activity is the production of lime. The Lafarge Group holds 49% of Calcinor Morocco through which it exercises significant influence. The strength of the domestic market combined with

an improvement in prices helped domestic sales increase by 11% in 2009.

Current operating income benefited from good volumes and price trends combined with tight cost control.

Morocco, a strong domestic market, despite some deceleration in the fourth

Lafarge Ciments Maroc

Built on Excellence


PPn growing by 0.4m per year One of the highest cement per

Strong demand from Emerging capita consumption statistics

middle class Weakness in the Hotels sector which

Deep financial markets with well is overinvested

developed mortgage products Most expensive valuation in sector


Aggressive housing programme Contagion of tensions in Maghreb

massive urban expansion with

two new cities being built

Expansion into Western Sahara


Revenue 5,441.0 5,800.9 6,726.8

EBITDA 3,051.6 3,253.5 3,772.7


RATIOS

RoAE 46.9% 45.0% 45.6%

RoAA 22.6% 22.7% 25.1%

VALUATION RATIOS

PBV(x) 5.9 5.2 4.5

PER(x) 19.3 18.1 15.6

EV/EBITDA 12.1 11.4 9.9

EV/Tonne (US$) 652 646 521


BLOOMBERG: LAC:MC HOLD





12 month High/Low (MAD) 2195-2180

Liquidity



Shares (m) 17.5

Free Float (%) 12.6




6 months (%) (2.2)



12 months (%) 39.5







DPS (MAD) 66.1 70.5 81.7

NAV/share (MAD) 346.4 396.1 452.9

EBITDA Margin 56.1% 56.1% 56.1%

59

Overview of the company Lafarge Maroc is the longest established cement group in Morocco with a current production capacity in excess of 6.5m MT, through which it controls over 42% of the local market. Lafarge Maroc is active in four principle sectors which are cement, concrete, aggregates and most recently, lime and the group has three cement

plants in Casablanca, Méknes, and Tétouan. Outlook for the group The success of the Moroccan construction industry has principally been a result of government partnering with the private sector to achieve its strategic developmental objectives, particularly for the lower income and middle class segments of the population. Having attained a national capacity of over 15m MT in 2010 following continued capacity expansion by the three largest players and the entry of new players, in H1 2010, the country has now crossed the threshold and is in a state of over-capacity. Specific regions, most notably the economic powerhouse that is Casablanca, are now oversupplied and sales volumes are expected to wane. Lafarge has strategically decided to mitigate the anticipated tightening by building a new factory in the Souss region, about 300km to the south east of Casablanca. This shift in market positioning is justified by the saturation of the Grand Casablanca market, the deceleration in the growth rate of the Tangier Tétouan region, and the strong growth potential of the Souss region. It is noteworthy to mention that total cement consumption is above 1.3m MT in this region, and more so Souss Massa Draa is the second contributor to GDP right after Casablanca. 55% of the projects undertaken in 2009 were related to the building and public work sector in this region and plans are underway for the development of the first fishing park in the Kingdom which will be extended over 150 ha with an investment amounting to MAD 6.6bn (US$ 758m) over 5 years. Valuation and Recommendation Lafarge is currently the most expensive cement company in Morocco, valued at US$ 521/tonne, significantly ahead of its peers Ciments du Maroc and Holcim, which are trading at discounts of 40% and 43% to Lafarge on an EV/tonne basis. While the cement sector will keep pumping for some time yet, we believe that the latter two offer more upside for investors seeking exposure to Morocco.

Table 32: Top 5 Shareholders' list

Lafarge Maroc* 69.4

CDG 8.0

BID 5.5

CIMR 3.9

Lafarge Cementos 0.6

Others 12.6

Total 100.0

50/50 JV between Lafarge and SNI (State)


CM Holcim Lafarge

2010 PER (x) 11.7 15.9 18.1

2011 PER (x) 9.9 15.1 15.6

2010 PBV (x) 3.4 4.8 5.2

2011 PBV (x) 3.0 4.2 4.5

2010 EV/EBITDA (x) 10.9 10.9 11.4

2011 EV/EBITDA (x) 9.1 10.5 9.9

2010 Div yield (%) 5.8% 3.4% 3.4%

2011 Div yield (%) 6.9% 3.6% 4.0%

Gearing (%) 0.0% 118.7% 17.9%

2010 EV/Tonne (US$) 371.7 335.4 521.1


60

Notes

LAFARGE CIMENTS MAROC - 4 CGR and Forecasts

31 DEC (MADm) 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR

Income Statement

Revenue 3,203 3,732 4,356 4,914 5,441 5,801 6,727 14.17%

EBITDA 1,484 3,732 2,166 2,510 3,052 3,253 3,773 19.76%

PBT 1,163 1,032 1,905 2,292 2,734 2,915 3,381 23.84%

PAT 855 1,034 1,908 1,684 1,859 1,982 2,298 21.43%

Dividend 507 611 873 1,048 1,155 1,231 1,428 22.87%


EPS (MAD) 49 59 109 96 106 113 131 21.36%

DPS (MAD) 29 35 50 60 66 70 82 22.87%

NAV (MAD) 319 321 346 396 453

Balance Sheet

Fixed Assets 5,233 6,417 7,058 7,411 7,782

Current Assets 2,257 1,429 1,495 1,415 1,615

Total Assets 7,490 7,846 8,553 8,827 9,397

Shareholders' equity 5,573 5,605 6,052 6,919 7,912

Interest Bearing Debt - - - - -

Current Liabilities 837 1,083 1,242 1,324 1,536

Total Liabilities and equity 5,573 5,605 6,052 6,919 7,912

2009 2010F 2011F 2012F


EV/EBITDA (x) 12.1 11.4 9.9 8.4

Capacity (MT) 6.5 6.6 8.2 8.2


Net debt/equity ratio 17.9% 19.0% 17.4% 16.0%

61

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Notes

imara african cement report - feb 2011

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