FUNDAMENTAL ANALYSIS OF
ATHI RIVER MINING COMPANY (2015)
1. Financial Highlights
•
Regional Infrastructure Development to Stimulate Consumption: The demand for
cement is expected to remain high due to various infrastructure projects being undertaken
by the East African governments including the Lamu Port and LAPSSET corridor in Kenya
and the expansion of the Dar-es-salaam port in Tanzania, as well as a strong demand for
private property development to meet growing housing needs in the region. Cement
demand is expected to grow at 12% in 2013, and steady at an average of 8% for the next
few years.
Commented [Today1]: Huge demand for cement
1.Lamu port
2.Lapseet corridor
3.Real estate boom
•
Huge Limestone Deposits for Sustainable Growth: ARM possesses large limestone
deposits that may be in use for up to 100 years. This ensures that they can expand
production whenever they wish to meet demand. Further, they have recently installed a 6
kilometer conveyor belt in Kaloleni, Kenya, that has the capacity to transport 5000 tons
per day. Also, their Tanzania plant sits directly over their limestone deposits hence no
transport costs are incurred.
Commented [Today2]: Huge supply of raw material available
•
Low Cost Production per Installed Capacity Set Up: ARM installed and set up their
plants at less than $100 per ton of production capacity and financed it through leverage,
which is lower than the industry average of $240 globally. The company reduces their setup costs by managing their non-core costs, achieved by handling their own in-house
fabrication and construction which is 70% cheaper than turnkey projects, effectively
reducing consultancy costs that come with the same.
Commented [Today3]: It had state of art production facility
ARM are also low cost cement producers, hence capitalizing on high margins for high
returns and strategic pricing. This ensures that they will be able to stem any future price
wars.
•
Steady Regional GDP Growth: According to Price Waterhouse Coopers, East Africa’s
GDP is expected to grow at a steady rate of 6.2%, with Kenya’s economy expected to grow
from 4.4% in 2011 to 5.2% in 2013, Tanzania’s from 6.4% to 6.8%, and Rwanda’s from 8.6%
to 7.7%. This is expected to increase the ease of access to credit and mortgages in the
region hence increasing total regional cement consumption. Huge housing deficits and
the subsequent expansion of the middle class will only serve to further increase
consumption in the region.
Commented [Today4]: Economy was growing at good rate
We had an expansion economy
2. Business Description
ARM Cement Limited, formerly Athi River Mining Limited, traces its history in Kenya back to
1974 whence it was established under the leadership of H. J. Paunrana. The company
began operations in the processing of agricultural lime, minerals for paint, rubber, and
glass. It branched out into cement manufacturing in 1996, and is currently a leading
mineral extraction and cement processing company. The company was publicly listed in
1997 on the Nairobi Stock Exchange under Industrial and Allied sector, currently known
as the Construction and Allied sector.
The company is the third largest cement manufacturer in Kenya with a market share of 15.5%
behind EAPC 24% and, Bamburi at 40.5%. They also expect to attain a market share of
22% in Tanzania, and an increased 15.5% market share in Kenya in as far as cement is
concerned.
The company has two main divisions: Cement and Others. Its Cement division is its core
business, hence the change in brand name to Athi River Cement Limited, and accounts for
up to 70% of total revenues. Of the remaining 30%, Sodium Silicate contributes 13% of
total revenues and is produced at their Athi River and South Africa plants, Fertilizer
(Mavuno Brand) contributes 9% and produced at the Athi Plant, Industrial Minerals
contribute 7% and produced at the Athi plant, and Lime contributes 3% and is produced
at the Athi and Tanga plants.
ARM is headquartered in Kenya (Nairobi), with subsequent subsidiaries in Tanzania (Tanga
and Dar-e-Salaam), Rwanda (Kigali), and South Africa. The company is currently
constructing a 6 kilometer conveyer belt in Kaloleni (Kenya), a grinding plant in Tanzania
to complement the one in Dar-E-Salaam, and a clinker plant also located in Tanga.
ARM Company Structure
ARM Cement
Ltd.
ARM (Tanzania)
100%owned
ARM (Rwanda)
100% owned
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ARMSA Pty Ltd
(100% owned)
Maweni
Limestone
(100% owned)
Commented [Today5]: Family business passed from one
generation to other
Upon listing, the family maintained control
3. Company Analysis
Commented [Today6]: At least use three tools of company
analysis
a. SWOT Analysis
Strengths
 85% in-house clinker production that is
higher than competitors in Kenya, thus
reducing production costs and increases
margins.
 100 years limestone deposits in Kenya for
sustainable cement production.
 Diverse portfolio of products.
 Rapid expansion into the region to
strengthen growth and increase revenues.
 CEO owns majority of shares providing
steady management.
 Strong credit rating.

Opportunities
 High regional infrastructure spending that
stimulates consumption.
 Growing export market to increase
revenues.
 Emerging regional markets with
sustainable growth rates expected to
increase per capita consumption of
cement.
 Continued increase in mortgage uptake.
 Southern Sudan and Somalia
infrastructure development.
1.Swot analysis
2.PESTEL ETC
Weaknesses
 Highly leveraged in foreign
debt hence face potential
forex exchange risks.

Threats
 Convertible loan carries
potential dilution of existing
shares.
 Fluctuation in earnings due
to exchange risk volatility.
 Stiff rivalry within the region
expected to erode market
share and reduce margins.
4. Industry Overview and Competitive Positioning
1. Demand Analysis
The East African cement sector has been experiencing a growth of 12% per annum, and this
trend is expected to continue for the next few years. The main drivers for this growth are
government spending on various infrastructure projects to spur growth in GDP, and the
growing middle class that is expected to stimulate demand for housing needs among the
youth in the region. Further, according to the Housing Yearbook, Kenya experiences an annual
demand of 206,000 units of which only 35,000 are met and a current backlog of 2 million units,
with Tanzania experiencing a current backlog of 3 million units. Infrastructure development is
seen as essential to the growth of the economies in the region, hence a primal focus by the
East African governments in the same, evidenced by the numerous projects undertaken in
2012. In addition, the Kenyan government has allocated KES 268Bn ($3.15Bn) to meet various
infrastructure needs, which represents 18.5% of its total budgetary allocation. Tanzania also
has an $8.5Bn budgetary allocation which is financed mainly through loans and grants. The
Tanzanian construction growth stands at 10.2%. The rise in GDP per capita in the region also
sees an increase in demand for cement, especially with the populous of the region having easy
access to credit and mortgage facilities. East Africa’s GDP has grown by 17.16% from the year
2005-2011 and is on a general 5.3% annual growth rate.
2. Competitor Analysis
Commented [Today7]: USE ATLEAST TWO TOOLS
Bamburi Cement is the largest manufacturer in Kenya (40.5% market share), and a significant
player in the region with a total installed capacity of 3.1mtpa across Kenya and Uganda.
However, Bamburi is a key loser in market share due to the onslaught of new entrants in the
region who have adopted a pricing strategy to match Bamburi’s premium pricing model.
However, they execute a diversification strategy, building brand names associated with high
quality. This is further reinforced by their wealth of experience in the Kenyan market as one of
the oldest players, coupled by their anchor owners; LaFarge. Their main plant is located in
Mombasa, which is far from the main demand areas of Nairobi and its environs, which is of
significant disadvantage to them due to high transportation costs as their Athi River plant in
Nairobi cannot satisfy demand for the product. However, they recently revamped their plant
in Hima, Uganda with an increased capacity of 0.85 mtpa, which will increase their total ouput
and revenue, as well as being strategically located near South Sudan which is a high growth
and potential market. Bamburi has access to immense resources due to their anchor owners,
which allows them to have high CapEx as is the norm in this industry. In 2011, for instance,
they had cash amounting to KES 7.13 Bn. In addition, Bamburi has a diversification strategy
that involves building very strong brands that are cement-related, hence having a strong
positive contribution to their revenue margins, such as BamburiBlox. Further, BamburiMix is a
predetermined concrete mix that reduces wastage of time, energy, and reduces on pollution
of the environment, and is a strong alternative to the ARM’s cement due to the advantages it
has.
East African Portland Cement (EAPC) faces high management wrangles and government
interference (the Kenya govt owns 52%) that limits its efficiency and growth, which has seen
it lose market share and investor confidence. They have however also diversified into cement
related products as a survival strategy. They also own 12,000 hectares in Kitengela, Kenya,
which is massively undervalued in their books a KES 0.01million as opposed to current market
value of KES 1.0 million. This increases their asset base upon privatization of the company.
They are also setting up a new kiln, which will be used to move to coal as a primary source of
fuel, and thus reduce their production costs. The company also currently uses the open system
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1.PORTERS MODEL ETC
of production which is energy inefficient and wasteful, which does little to reduce their costs.
Further, boardroom wrangles and poor management saw them take up a KES 3.0 billion Yen
denominated loan which is only 30% hedged, hence leaving them exposed to foreign
exchange fluctuations.
Tanzanian Portland Cement (TPCC) is the largest cement company in Tanzania and
possesses a 46% market share. They produce 100% of their own clinker, which significantly
reduces their costs. In addition, they have just set-up a third kiln to be used with coal as a
source of fuel, hence allowing them to reduce their production costs. This will also allow them
to produce 100% of their own clinker, which further reduces their costs. They also have an
extensive distribution network that keeps them in touch with changing consumer needs and
demands, and makes their product available throughout the country. TPCC is 69.25% owned
by Heidelberg Cement, which allows them resources for significant CapEx as is witnessed by
their recent expansion in capacity to 1.4 mtpa. They also produce their own electricity, and
possess gas deposits, which further reinforces their position in management of costs.
Tanga Cement is the second largest cement company in Tanzania with a market share of
34%.They announced plans to set up a clinker plant to curb their imports and increase margins
at the cost of $165 million. Further, they are focused on exports to inland nations such as
Burundi and Rwanda which generate larger margins. In addition, their focus to exporting to
the larger East African market with the focus of full integration in the EAC will increase
revenues. However, they face a short-term risk from cheaper imports due to their imported
clinker which is expensive and lowers their margins.
Others: In Kenya, Savannah, National and Mombasa Cement are recent entrants in the market,
each with a capacity of 1.5, 0.35 and 0.8 mtpa respectively. In addition, Cemtec Sanghi have
plans to penetrate the market by the end of 2013 with a capacity of 1.5 mtpa. In Tanzania,
Dangote and Lake Cement are potential entrants by the year 2015, each with a planned
installed capacity of 1.5 and 0.5 mtpa respectively.
3. Porter’s Competitive Forces
Competitive Rivalry
The nature of the Cement industry in East Africa is oligopolistic with few players accounting
for the bulk of the market share, whilst rivalry is relatively intense within the market. The
entry of Savannah into the Kenyan market with a 1.5 mtpa grinding plant only serves to
increase the competition coupled with the expected expansion of National Cement from
0.35mtpa to 2.0mtpa grinding capacity by installing a new plant in Kenya. National Cement
are a direct threat to ARM in Kenya due to low pricing. In Tanzania, the expected
commissioning of ARM’s second grinding plant in Tanga with a capacity of 0.75 mtpa is
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expected to increase the competition for market share. Also, the Dangote Group plans to
install a grinding plant with a capacity of 1.5mtpa, all these angling for the imports market
share, and increased demand in cement. This shows that the rivalry is set to intensify
between competitors. Further:
- Cement is not differentiated; hence the companies sell standardized products that
intensify competition.
- METL Group in Tanzania is a major importer of cement and owns trading houses of well
diversified products. They are influential in policy formation as their owner is an influential
politician, and hence are a direct threat to ARM’s plans to carve into the import market
share.
Bargaining Power of Buyers
Buyers have limited bargaining power due to the lack of effective substitutes in the market
and the inelastic demand shown by consumers of the same, combined with the oligopolistic
nature of the market. In general, buyers have low power and are basically price takers, with
the firms involved able to set prices due to the inelastic demand. It is worthy to note however
that in the short run, when production exceeds consumption, the power swings to the buyers,
and they are considered powerful due to price wars. However, in the long run, they are price
takers.
Bargaining Power of Suppliers
The main components of cement are clinker, pozzolana, and gypsum. ARM’s supplier power
is low because the company produces most of its own clinker, with imports totaling to 15% of
its required total, and plans are underway to install clinker plants aimed at self-sufficiency. Of
the other constituents, ARM has pozzolana deposits within 100 kilometres radius of the Athi
plant; hence the company has a sustainable supply of the same. Also, the labor force is a key
component in the manufacturing process. However, Kenya has an available and steady supply
of affordable labour, which gives ARM the supplier power. Finally, the company extracts its
own supply of gypsum, and hence it’s almost independent in the production of cement.
Threat of Substitutes
Cement in the East African market does not have a direct efficient substitute, and contractors
may only reduce the amount of cement they use instead of the available substitutes.
Substitutes that exist in the market take the form of interlocking bricks (which still require 10%
cement and 90% soil), and the traditional methods. However, these pose an insignificant threat
to ARM as modern methods are in use, and cement is used for most housing and commercial
property needs.
Threat of Entrants
The lucrative nature of the industry is attracting new entrants into Kenya in the form of
Savannah Cement (already commissioned) and Cemtec Sanghi, whilst Dangote Group and
Lake Cement have plans to infiltrate the Tanzanian market. The number of entrants and
subsequent expansion of existing companies is indicative that although there is high CapEx
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involved in investing in the cement industry, the growth potential in the region is attractive
and sustainable, thus allowing for long-term profitability. In general, the threat of new entrants
is relatively high due to the noted increase in entrants in the East African market, all targeting
the emerging economies in the region.
4. Financial Analysis
Revenue Growth analysis:
Tanzania: Strong entry into the Tanzanian market based on careful examination of market
demographics with a strong focus on their GDP growth. Tanzania as a country received
higher Foreign Direct Investment (FDI) than any other country in the region, making it a
high potential area for infrastructure development which is imperative to cement
consumption. Further, Tanzania imports 40% of their cement, which ARM intends to carve
into for market share by pricing at import landing cost at the port. We estimate a 5-year
CAGR of 30.25% growth in sales in Tanzania.
Kenya: Sales are projected to increase through large infrastructure undertakings by the
Kenyan government totaling to 18.5% ($3.15Bn) of it budgetary allocation, coupled with
a rapidly growing middle class that puts immense pressure on the country’s housing
needs. We estimate a 5-year CAGR of 7.47% growth in sales in Kenya. ARM also expect to
push their previous Tanzanian exports into South Sudan who have high cement needs as
they are a newly formed republic with huge infrastructure demands. The International
Monetary Fund (IMF) projects South Sudan’s GDP growth rate to hit 69.6% in 2013, which
plays in well for ARM.
ARM also anticipate to export part of their Tanzania and Rwanda production into
neighbouring Burundi and the Democratic Republic of Congo (DRC) to take advantage of
high market prices in the long run as the two countries have no local production, which
will contribute to total revenue. Current market price in the DRC is $200/ton in comparison
to $130/ton in Tanzania, resulting a huge revenue potential to be met infiltrating this
market.
1. Balance Sheet Analysis:
Commented [Today8]: 2 ratio analysis for a particular area of
interest eg profitability, activity, efficiency etc
Although ARM is highly leveraged, they maintain a good credit rating. Furthermore, they
expect to fund future expansion from retained earnings post-payment of existing debt
due to increased Operating Cash Flows.
RoCE increases from 6.94% in 2013 to 30.46% in 2017. It is however lower than the
company’s cost of debt of 7.5% due to high CapEx investments made in 2011 and 2012.
However, there is significant improvement in the same due to high net sales and market
share growth.
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+ any other area of interest
ARM has a low current ratio of 0.84 in 2011 with a cash conversion cycle of 24 days which
reduces dependency on liquid assets, and puts the company in a favorable position, and
is still significantly better than the industry average of 0.4.
Net profit margin is fairly low at 2.7% compared to the industry average of 9.4% influenced
mainly by steep finance costs. The net profit margin is expected to increase at CAGR of
28.3% for the forecasted period.
ARM has an asset turnover of 0.73 over an industry of 0.19, effectively putting their
existing assets to good work and generating steady revenues. This is indicative of high
efficiency at ARM.
Times interest coverage ratio is 1.21 times in 2012 which allows the capability to pay its
interest costs that grows at 16.66% CAGR in the forecasted period, easily allowing ARM
to deal with their finance costs. Their debt-to-equity is expected to reduce from 2.04 in
2012 to 1.01 in 2017 as they offload their debt.
2. Cash Flow Statement analysis:
Commented [Today9]: Income statement analysis is missing
We rate ARM as a Star company using the BCG Matrix due to its high regional market
share and high growth potential based on its tremendous growth and ambitious regional
expansion. Operating Cash Flows increase from KES 3.799 billion in 2013 to KES 6.076
billion indicating a 9.8% CAGR due to increase in utilization of installed capacity. These
OCF increments will put the company in a strong position to maintain their significant
asset base across the region, whilst also servicing CapEx brought about through this
maintenance. Also, the company may be able to service significant portions of their
current debt in house without having to rely heavily on external financing.
5. Investment Risks
ARM Africa faces risks in certain fields including:
•
Overcapacity is the key risk in the short term which would likely damage the pricing
environment. Such a situation is likely to occur due to excess production that outweighs
demand, hence leading to price wars. Further, overcapacity leads to reduced utilization of
installed capacity and wastage of capital resources, which increases price per unit of
production. This would force companies to reduce costs to maintain profit margins, and
the subsequent lack of cash reduces Research and Development budgetary allocation,
and overall innovation. Finally, the lack of cash would also stifle interest payments made
to owners of credit, which would affect highly-leveraged firms such as ARM.
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•
New entrants to the already highly competitive East African cement sector poses a threat
to their market share by carving into their existing customer base. This may result in unsold
stocks, hence a decline in overall revenue. In Kenya, Savannah Cement has begun
operation in a recently installed plant with a capacity of 1.5 mtpa, with National Cement
also beginning operations in 2012 with an additional plant capacity of 1.65 mtpa, totaling
to 2.0mtpa. This puts ARM Kenya in fifth position in terms of production capacity. In
Tanzania, The Dangote Group intends to infiltrate the market by installing a plant capacity
of 1.5 mtpa by the year 2015, with Lake Cement, another competitor, intending to install
a plant capacity of 0.5 mtpa by the year 2013.
•
ARM Africa also faces foreign exchange risk. This takes many forms, one of them taking
the form of repayment of international credit. For instance, they made KES 69.861 million
net foreign exchange losses on borrowings in the year 2011. This is because ARM is highly
leveraged in international credit, with the most recent borrowing of $50 million from AFC
Africa to finance their current debts and fund CapEx in Tanzania. In the year 2011, their
local borrowing levels stood at KES 588.637 million as compared to KES 6.895 billion in
international credit. Further, completion of the Kaloleni Conveyor Belt to the tune of KES
1.02 billion in the year 2012, combined with plans to install power plants in Kenya and
Tanzania at a total cost of $150 million only adds to the risk ARM faces in terms of credit
repayments. Another angle to the foreign exchange risk is that of conversion of profits
from subsidiaries into Kenya shillings at the end of each financial year. This could affect
profits whilst converting earnings at the end of a financial year, with an unfavorable spot
rate potentially decreasing expected earnings.
•
Political Risk
Being that Kenya is a cultural melting pot with strong political undertones based on tribal
affiliations, elections are a very tense period with little to no investment prior to the same.
Further, any recurrence of violence similar to that witnessed in 2007 could potentially
disrupt ARMs sales and subsequent supply chain.
Also, economic ramifications based on the result of the trial of four Kenyan suspects at
the ICC, and any violence associated with the elections may affect ARM and its growth
plans. In addition, the results of the elections may have a negative impact on the Kenyan
economy which holds a positive correlation with the GDP, which would then negatively
influence ARM’s growth and profitability.
There are also several land disputes in Kenya with land ownership taking centre stage.
Depending on the next government’s influence on the same, land equalization may
negatively influence the construction sector due to the shift in ownership of the same.
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• Risk of Dilution. ARM is highly leveraged, most recently by AFC Africa to the tune of
$50 million. This is convertible to equity at anytime at AFC’s option, and would lead to
dilution of their current shares by 13.62%. The company, however, maintains a good
credit rating as per S&P and South Africa’s Global Credit Rating Company.
• Default Risk. Although unlikely, ARM still face default risk due to their high debt levels,
and expensive finance costs. Any default on their part would likely damage their credit
ratings, and subsequently make access to leverage difficult and more expensive
hampering any expansion plans.
Missing sections in this reports
•
Cost and revenue drivers in the firms
•
Structure of management
•
Overall strategy of the firm
•
Future projections of the firm
•
Growth prospect of the firm
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