2 cement block plant study 4 lbanon

7/30/2019 2 Cement Block Plant Study 4 Lbanon

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AFC Consultants International

CONCRETE HOLLOW BLOCKS FACTORY

TABLE OF CONTENTS

1 EXECUTIVE SUMMARY...................................................................................... 2

2 PROJECT DESCRIPTION..................................................................................... 2

2.1 FACILITIES AND INITIAL INVESTMENT .................................................................. 2

2.2 PRODUCTION PROCESS......................................................................................... 3

2.3 STAFFING STRUCTURE ......................................................................................... 3

3 MARKET ANALYSIS............................................................................................. 4

3.1 PERCEIVEDNEEDS ............................................................................................... 5

3.2 MAIN COMPETITION............................................................................................. 6

3.3 TARGET MARKET ................................................................................................. 6

3.4 SWOTANALYSIS................................................................................................ 6

4 MARKETING PLAN............................................................................................... 7

4.1 MARKETING STRATEGY ....................................................................................... 7

4.2 PRICING ............................................................................................................... 7

4.3 SALES CHANNEL.................................................................................................. 7

5 FINANCIAL PLAN.................................................................................................. 8

5.1 MAJOR ASSUMPTIONS .......................................................................................... 8

5.2 PROJECTED INCOME STATEMENT ......................................................................... 9

5.3 PROJECTED BALANCE SHEET.............................................................................. 10

5.4 PROJECTED CASH FLOWS.................................................................................... 11

5.5 PROJECTED RATIO ANALYSIS ............................................................................. 12

5.6 BREAK-EVEN ANALYSIS..................................................................................... 13

5.7 SENSITIVITY ANALYSIS ..................................................................................... 13

6 CONCLUSION AND RECOMMENDATIONS.................................................. 14

7 ECONOMIC IMPACT EVALUATION.............................................................. 14


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LBN/B7-4100/IB/99/0225/JC20/0105 AFC Consultants International

Marjeyoun - Feasibility Study Concrete Hollow Block Factory V.2 2

1 Executive Summary

The proposed project consists in establishing a concrete hollow block factory in

Marjeyoun town.

Large areas of Lebanon and specifically in the South region lie in ruin following the recentIsraeli air, sea and land assaults. Therefore, it would be beneficial to invest venturesproducing building materials such as a hollow block concrete factory as this type of block is

one of the most basic elements in construction.

The initial investment is estimated at $123,419, which includes $57,500 for the requiredequipment and $54,919 for working capital.

The projections are taken over a period of 7 years. The plant provides average annualprofitability of $31,941. The average return on investment (ROI) is 106%.

The concrete hollow block factory provides an internal rate of return (IRR) of 23% and apayback period of 5 years 4 months. These results show that the project is feasible and

provides good returns for its shareholders.

The concrete hollow block plant will offer 15 job opportunities . As a result, the plantwill contribute to the general enhancement of the economic environment in Marjeyoun.

2 Project description

The project consists in developing a concrete hollow block factory in Marjeyoun caza. Theplant will be able to supply concrete hollow blocks to Marjeyoun as well as Bint Jbeil, Hasbayaand Nabatieh regions.

2.1 Facilities and initial investment

The total land area is assumed to be 5,000 m2 out of which 1,125 m2 will be needed for thefactory, 125 m2 for the administrative offices, and 3,750 m2 for the warehouse. It is assumed

that the land would be rented out at a rate of $1/m2 per year.


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The following table shows the projected equipment and initial investment requirements. Thetotal investment required includes the cost of equipment, vehicles, as well as working capitalrequirements and amounts to $123,398.

Initial Investment

Cost Items Quantity Unit cost Total cost

Semi-automatic block factory 1 30,000 30,000

Dumper 1 15,000 15,000

Pallets 50 30 1,500

Total equipment 46,500

Pick up (used) 1 5,000 5,000

Furniture & Fixtures 12,000

Computer & Office Equipment 3,000

Establishment Costs 2,000Total fixed assets 68,500

Working capital needs 54,919

Total initial investment 123,419

Source: Tony Abi Antoun,Best Concrete

2.2 Production process

The production process involves the following steps:

1. The ingredients (sand, cement, water, etc) are mixed in a special mixer to obtain themortar.

2. The workers press the mortar through the mechanically operated machines. The

pressing process and the ratio of the ingredients mix play an important role indetermining the strength of the blocks.

3. The company will have a pick-up to deliver blocks directly to work sites. Blocks can be

loaded on pallets or by individual blocks.

2.3 Staffing structure

The staff structure will be distributed as follows:

Number ofSTAFF STRUCTURE employeesManagement & Sales

Plant Manager 1Assistant and accountant 1Drivers 2Total administrative staff 4Foreman 1Daily Workers 10Total production staff 11

TOTAL 15


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3 Market Analysis

The construction blocks market has been on an increasing trend, mainly driven by the

reconstruction efforts in the country.

Large areas of Lebanon lie in ruin following the recent Israeli air, sea, and land assaults.Homes and businesses in a number of Lebanese rural and urban villages and towns in SouthLebanon are in need of reconstruction. According to the Government assessments, the war

has set back the countrys infrastructure for at least 15 years with reconstruction andrehabilitation to be carried out on a large scale basis.

There are 15 small concrete hollow block factories in Marjeyoun and 7 small concrete hollowblock factories in Hasbaya. Therefore investing in a technically advanced factory producing

building materials of high quality and same price would be beneficial for the region. A hollowconcrete block factory operating at full capacity would be sufficient in meeting the needs for

reconstruction in the Cazas of Marjeyoun, Hasbaya, and Bint Jbeil.

Price-wise, the trend has been going upward, especially with the increase in the costs of raw

materials including sand, aggregates, etc In fact, the costs of aggregates and sand haveincreased substantially since the forced shut down of a number of illegal quarries in Lebanon.

In addition, the price of cement is quite high because of the duopoly in the cement sector(only 2 companies operate in this sector). More recently, the increased demand created by the

reconstruction activities following the July 2006 war has led to cement price hikes by 20% to25%.

The high costs of raw materials are reflected in the selling price.

Generally, demand is seasonal, where winter is considered a low season.


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3.1Perceived Needs

The large scale of destruction has left many towns and villages in the districts of Marjeyoun,Hasbaya and Bint Jbeil in ruins. The following table shows the scale of destruction by selected

villages and the surfaces of houses and residences to be rebuilt as well as the amounts of

concrete needed for reconstruction.

In October 2006, the area to be constructed in the Khiyam region was estimated at 300,000m2. Up to November 2007, 80% of the ruins have been rebuilt with 60,000 m2 remaining.

District Town

Approximate Area to be

constructed in m2

Estimated Concrete

needed in m3

Marjeyoun El-Khiyam 60,000 20,000

Kfar Kila 6,000 5,700

Houla 25,000 24,200

Meis el Jabal 20,000 19,000

Jdeidat 5,000 4,700

Debine 35,000 34,200

Blat 4,500 4,200Kantara 4,500 4,370

Taybee 45,000 42,700

Deirmimas 3,000 2,800

208,000 161,870

Bint Jbeil Bint Jbeil 400,000 370,000

Ayatroun 34,000 32,750

Aynata 105,000 102,000

Maroun el Ra 47,000 45,200

Blida 22,000 21,300

Baraachite 38,000 36,700

Ain Ebel 7,500 7,200

Rmeich 3,700 3,500

Kouneen 28,000 26,900

Tebnine 15,700 15,000

Shakra 2,700 2,500

703,600 663,050

Hasbaya Kfarshouba 25,000 24,200

Kfaraman 3,000 2,800

Rashaya Fokh 1,500 1,400

Hibariyeh 2,000 1,920

31,500 30,320

Total in need 943,100 855,240


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Moreover, the towns of the three mentioned districts have regular and continuous needsarising from population growth. Data on building permits allocated by the Office ofUrbanization below is a clear indication.

Bldg Permits Surface in m2 Bldg Permits Surface in m32000 N/A N/A 122 52,000

2001 N/A N/A 271 110,0002002 550 220,000 339 135,0002003 390 156,000 234 95,0002004 388 212,406 232 93,0002005 430 177,000 240 94,679

Bint Jbeil Marjeyoun & Hasbaya

Furthermore, unforeseen needs may arise due to the large number of UNIFIL troops that are

residing in the South region specifically Bint Jbeil, Marjeyoun, and Hasbaya.

3.2 Main competition

There are around 22 concrete hollow block factories in Marjeyoun and Hasbaya cazas; 15factories are in Marjeyoun and 7 small factories are in Hasbaya.

These factories will not pose a threat to the concrete hollow block plant on condition that the

plant will offer high quality blocks at same prices.

3.3 Target marketThe factory will be able to accommodate the construction needs of the South region andspecifically Marjeyoun, Bint Jbeil, Hasbaya, and other nearby areas.

3.4 SWOT AnalysisSTRENGTHS WEAKNESSES

It will be a unique technically advancedfactory due to the presence of smalltraditional factories in the region.

It will facilitate construction needs byproviding the most basic and neededconstruction element; concrete hollow

block. The factory will have a strategic location in

Marjeyoun where there are wide and urgent

reconstruction activities.

Generally, demand is seasonal, wherewinter is considered a low season.

OPPORTUNITIES THREATS

The construction market is a very activesector and there is a constant demand forconstruction materials especially in the

South. The reconstruction efforts following the July

2006 war are leading to an increase in

demand for construction materials. Unforeseen construction needs in addition to

the existing urgent construction needs dueto the war destruction may arise due to the

large number of UNIFIL troops that areresiding in the South region specifically Bint

Jbeil, Marjeyoun, and Hasbaya.

Environmental threats include theeconomic recession in the country andthe regions closeness to Israel and the

fear of another war. The increase in the cost of labor

following the war and the political

instabilities. Fluctuations in the prices of raw

materials and cements.


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4 Marketing Plan

The marketing objectives of the concrete hollow block plant consist in capitalizing on itscompetitive advantages.

High quality products. Competitive and attracting prices due to lower transportation costs to neighboring

construction sites. Existence of a solid demand for reconstruction efforts specifically post the July 2006

war.

4.1 Marketing Strategy

The concrete hollow block factory will base its marketing strategy on the following:

An informative pamphlet could be developed displaying the factorys product. Thispamphlet will be distributed to all contractors and consultants working on projects in the

South. The concrete hollow block plant manager/owners should develop direct contacts with

families looking for rehabilitating their properties in Marjeyoun, Bint Jbeil, Hasbaya, and

other nearby areas.

4.2 Pricing

The prices of the concrete hollow blocks will essentially be determined by market conditions.

For the study, we assumed the following average pricing structure based on current market

prices.

Pricing

Block Length Price ($)

10 cm 0.2315 cm 0.3520 cm 0.46

The factory will apply differentiated pricing and discounts according to the quantity ofblockspurchased and to the client loyalty.

4.3 Sales Channel

The concrete hollow block plant will establish strategic alliances with consultants, contractors

and other professionals and businesses in the construction sector in the South. Promotion ofthe concrete hollow block products will be done mainly through direct contacts by the owner.

The targeted regions will mainly cover Marjeyoun caza and neighboring cazas such as Hasbayaand Bint Jbeil.


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5 Financial Plan

This section details the calculations, assumptions and methodology used as a basis for theprojections of the expected financial performance of the concrete hollow block plant.

5.1 Major assumptions

The projections are based on conservative assumptions as well as market performance. Theytake into consideration the economic situation in the caza.

The following table shows the sales growth assumptions:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Sales growth 10% 5% 5% 3% 2% 0% 0%

The sales growth assumptions are based on plant capacity that starts with 80% of its capacity

in the first year and then gradually increases to reach its full capacity by year 7.

The following table summarizes the income statement assumptions. The cost of sales andoperating charges are mainly based on market levels.

Income Statement Assumptions

Cost of materials 64% of sales

Average sales price USD 0.35 per blockBlocks production capacity 3,500 per day

Maintenance & Repairs 0.5% on sales

Fuel 1.7% on sales

Annual increase in general expenses 4% annuallyIncrease in salaries 2% annually

Increase in rental expenses 5% every 3 yearsIncome Tax Rate 2%

The plant capacity is assumed to be at 3,500 blocks per day; work days are around 300 days

per year.

The sales price per block varies depending on the size of the block as displayed in the below

table.

Length Price ($)

10 cm 0.23

15 cm 0.35

20 cm 0.46

Therefore, average sales price accounts for the average of the block sizes that the plant will

offer.

General expenses are assumed to increase by 4% annually. Salaries are assumed to increaseby 2% annually.

The income tax rate is estimated at 2% (individual establishment).


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Accounts receivable are estimated at 2 months of sales. Inventories are estimated at 2months ofcost of materials. The accounts payable are based on 1 month of cost of materials.

Balance Sheet Assumptions

Accounts receivable 2 months of sales

Inventories 2 months of COGS

Accounts payable 1 months of COGS

Expenses payable 5% of general expenses

The depreciation rates are based on International accounting standards as shown in the belowtable.

Depreciation rates

Plant machinery 10%

Fixtures & furniture 10%

Vehicles 12%

computer & office eqpt 20%

Establishment Costs 33%

5.2 Projected income statement

Concrete Hollow Block Plant

Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Sales 294,000 323,400 339,570 356,549 367,245 374,590 374,590

Total Revenues 294,000 323,400 339,570 356,549 367,245 374,590 374,590

Cost of sales

Cost of sales-materials 188,160 206,976 217,325 228,191 235,037 239,738 239,738

Wages-production 40,800 41,616 42,448 43,297 44,163 45,046 45,947

Fuel 4,998 5,498 5,773 6,061 6,243 6,368 6,368

Rent 5,000 5,000 5,000 5,250 5,250 5,250 5,513

Maintenance & repairs-equipment 1,470 1,617 1,698 1,783 1,836 1,873 1,873

Depreciation machines & vehicles 4,350 4,350 4,350 4,350 4,350 4,350 4,350

Total cost of sales 244,778 265,057 276,594 288,932 296,879 302,625 303,788

Gross margin 49,222 58,343 62,976 67,616 70,366 71,965 70,801

Gross profit margin% 17% 18% 19% 19% 19% 19% 19%

GENERAL & ADMINISTRATIVE EXPENSES

Electricity charges 600 624 649 675 702 730 759

Telephone charges 1,200 1,248 1,298 1,350 1,404 1,460 1,518

Salaries & Social Security Charges-Ad 24,000 24,480 24,970 25,469 25,978 26,498 27,028

Depreciation expenses 3,666 3,666 3,668 3,200 3,200 2,600 2,600Other expenses 1,000 1,040 1,082 1,125 1,170 1,217 1,265

Total General & Administrat ive Exp 30,466 31,058 31,666 31,819 32,454 32,505 33,171

Earnings Before Tax 18,756 27,285 31,310 35,797 37,912 39,460 37,631

Tax expenses 375 546 626 716 758 789 753

Net Income 18,381 26,739 30,684 35,082 37,153 38,671 36,878

Net prof i t Margin 6% 8% 9% 10% 10% 10% 10%

The projected income statement shows an increase in net profit margins that reach 10% in

the 7th year of operations. These levels are expected to be reached through a gradual increase

in sales.The increase in volume of sales is expected to allow higher net earnings, which are projected

to reach $36,878 by year 7.


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5.3 Projected balance sheet

The projected balance sheet shows the assets and liabilities of the company based on thefeasibility assumptions.


BALANCE SHEET Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Cash & banks 20,265 24,558 32,159 38,568 47,555 56,833 66,562

Accounts receivable 49,000 53,900 56,595 59,425 61,207 62,432 62,432

Inventory 31,360 34,496 36,221 38,032 39,173 39,956 39,956

Total current assets 100,625 112,954 124,974 136,024 147,935 159,221 168,950

Plant machinery 31,500 31,500 31,500 31,500 31,500 31,500 31,500

Fixtures & furniture 12,000 12,000 12,000 12,000 12,000 12,000 12,000

Vehicles 20,000 20,000 20,000 20,000 20,000 20,000 20,000

Computer & Office Equipment 3,000 3,000 3,000 4,000 4,000 4,000 5,000

Establishment expenses 2,000 2,000 2,000 2,000 2,000 2,000 2,000

Accumulated depreciation 8,016 16,032 24,050 31,600 39,150 46,100 53,050

Net fixed assets 60,484 52,468 44,450 37,900 30,350 23,400 17,450

TOTAL ASSETS 161,109 165,422 169,424 173,924 178,285 182,621 186,400

LIABILITIES & OWNERS EQUITY

Liabilities

Accounts payable 15,680 17,248 18,110 19,016 19,586 19,978 19,978

Expenses Payable 3,630 3,700 3,772 3,858 3,933 4,010 4,102

Current Liabilities 19,310 20,948 21,883 22,874 23,520 23,988 24,080

Total liabilities 19,310 20,948 21,883 22,874 23,520 23,988 24,080

Invested capital 123,419 123,419 123,419 123,419 123,419 123,419 123,419

Owner's equity 18,381 21,055 24,123 27,631 31,347 35,214 38,902

Total owners' equity 141,799 144,473 147,542 151,050 154,765 158,632 162,320

TOTAL LIAB.& OWNERS EQUITY 161,109 165,422 169,424 173,924 178,285 182,621 186,400

Owner's equity Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Begin. Owner's equity - 18,381 21,055 24,123 27,631 31,347 35,214

Net income 18,381 26,739 30,684 35,082 37,153 38,671 36,878

Owners' Withdrawals 24,066 27,616 31,573 33,438 34,804 33,190

Ending owner's equity 18,381 21,055 24,123 27,631 31,347 35,214 38,902

The owners can start withdrawing cash in year 2.


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5.4Projected cash flows


STATEMENT OF CASH FLOWS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Net income 18,381 26,739 30,684 35,082 37,153 38,671 36,878

Adjus tments to reconc i le net income

to cash provided by operat ing act iv i t ies

Depreciation 8,016 8,016 8,018 7,550 7,550 6,950 6,950

Changes in receivables (49,000) (4,900) (2,695) (2,830) (1,783) (1,224) -

Changes in inventories (31,360) (3,136) (1,725) (1,811) (1,141) (783) -

Changes in accounts payables 15,680 1,568 862 906 570 392 -

Changes in general expenses 3,630 70 72 86 75 77 91

Total Ad jus tmen ts (53,034) 1,618 4,533 3,901 5,272 5,411 7,041

Cash provided by operating activities (34,653) 28,358 35,217 38,982 42,425 44,082 43,920

Cash Flow from Investing Activities

Capital expenditures

Investment in fixed assets (68,500) - - (1,000) - - (1,000)

Net cash used in investing activities (68,500) - - (1,000) - - (1,000)

Cash flow from financing activities

Capital 123,419 - - - - - -

Owners' Withdrawals - (24,066) (27,616) (31,573) (33,438) (34,804) (33,190)

Cash provided by financing activities 123,419 (24,066) (27,616) (31,573) (33,438) (34,804) (33,190)

Cash at beginning of year - 20,265 24,558 32,159 38,568 47,555 56,833

Changes in cash 20,265 4,292 7,601 6,409 8,987 9,278 9,729

Cash at end of year 20,265 24,558 32,159 38,568 47,555 56,833 66,562

The projected statement of cash flows shows the initial net investment in fixed assets and the

capital expenditures of the projected years. The cash flow statement also shows the netinvested capital by the owners.

The statement shows the owners withdrawals that start in year 2.


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5.5Projected ratio analysis

Ratio Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Liquidity Ratios

Current Ratio 5.21 5.39 5.71 5.95 6.29 6.64 7.02

Quick Ratio 3.59 3.75 4.06 4.28 4.62 4.97 5.36

Working Capital 81,315 92,005 103,092 113,150 124,415 135,232 144,870

Profitability Ratios

Gross Profit Margin 17% 18% 19% 19% 19% 19% 19%

Net Profit Margin 6% 8% 9% 10% 10% 10% 10%

Financial Strength

Total Debt to Owners' Equity 14% 14% 15% 15% 15% 15% 15%

Management Effectiveness

Return on Assets=ROA 11% 16% 18% 20% 21% 21% 20%Return on Equity=ROE 13% 19% 21% 23% 24% 24% 23%

Return on Investment = ROI 30% 51% 69% 93% 122% 165% 211%

Sales / Business Days (360) 817 898 943 990 1,020 1,041 1,041

Asset Management (Efficiency)

Total Assets Turnover: Sales/tot assets 182% 196% 200% 205% 206% 205% 201%

Total Debt to Total Assets 12% 13% 13% 13% 13% 13% 13%

Working Capital Cycle

Days Sales Outstanding 60 60 60 60 60 60 60

Days of Inventory 60 60 60 60 60 60 60

Days of payables 30 30 30 30 30 30 30

Working Capital Turnover=Sales/Working Capit 3.6 3.5 3.3 3.2 3.0 2.8 2.6

The current ratio, which is computed by dividing current assets by current liabilities, witnessesa major increase over the years led by higher levels of inventories.

The quick ratio, which is the same as the current ratio except that it excludes inventoriesincreases rapidly over the years as accounts receivable increase. The current and quick ratios

demonstrate the capability of the company to quickly meet its short term liabilities.

The return on average assets, which is computed by dividing net profits by total assets, showshow much profit the company is able to achieve from the use of its assets. This ratiofluctuates around an average of 18%.

The total assets turnover shows how well the management is making use of its assets. The

assets turnover is computed by dividing sales over total assets. It is expected to increase withthe growth in sales to reach 201% in year 7.

The gross profit margin improves over the years with the growth in sales. The operatingmargins and the net profit margins improve as well.

The return on average equity shows healthy levels fueled by the growth in profitability. Also

the return on investment shows increasingly high levels that reach 211% in year 7.

The internal rate of return is 22.6% and the payback period, which is the period necessary to

pay back the investment, is 5 years 4 months.


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5.6Break-even analysis


Break-even Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Total Revenues 294,000 323,400 339,570 356,549 367,245 374,590 374,590

Total Variable Costs 194,628 214,091 224,795 236,035 243,116 247,978 247,978

Total Fixed Costs 80,616 82,024 83,464 84,716 86,217 87,151 88,981

Break-even Revenues 238,509 242,675 246,936 250,639 255,080 257,843 263,257

The above table shows the break even revenues required in each year to cover operating

expenses. Revenues exceeding these levels start producing net income. Thus, in year 1,revenues of $ 238,509 are needed to break even.

5.7 Sensitivity Analysis

A worst-case scenario is taken by assuming a slower sales growth that even does not reachfull capacity by year 7.

In this case, the concrete hollow block factory will have an average profitability of $26,246annually. The internal rate of return is 19%. The payback period is 6 years and 1 month.

A best-case scenario is developed considering faster sales growth to reach target where the

plant will start operating at full capacity since year 3.

This scenario gives an average profitability of $33,706 annually. The internal rate of return is

23% and the payback period is 5 years and 1 month.

Sensitivity Analysis Worst-case Most-likely Best-case

Average yearly sales 329,940 347,135 352,464

Average Net Income 26,246 31,941 33,706

Average Net profit margin 8% 9% 9%

Internal rate of return 19% 23% 23%

Payback period in years 6 years 1 month 5 years 4 month 5 years 1 month

These results show that the project is feasible, especially if it is well-managed providing

quality at affordable prices and if the marketing and distribution activities are well developed.


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6 Conclusion and Recommendations

The market for construction materials has been growing over the years. Currently, a majoropportunity appeared for faster growth following the war of July 2006 and the reconstruction

efforts.

In order to achieve good results, there are some essential success factors, which include:

A key success ingredient in this sector and especially in the region is the ability to

produce concrete hollow blocks of high quality at same prices.

The ability to deliver on time good quality products coupled with good servicing is also an

important factor for success.

The plant should capitalize on its major advantages of proximity to all the cazas in the

South where most of the reconstruction activities are taking place.

7 Economic Impact Evaluation

The concrete hollow block plant in itself will create 15 jobs in Marjeyoun.

A hollow concrete block factory operating at full capacity would be sufficient in meeting the

needs for reconstruction in the Cazas of Marjeyoun, Hasbaya, and Bint Jbeil where most of theurgent reconstruction activities are.

The concrete hollow block is expected to have a positive effect on the whole socio-economicenvironment of the caza.

2 cement block plant study 4 lbanon

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