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Industry Recommendation: Medium Term - BUY We recommend a Medium Term BUY on the shares of cement companies listed in the DSE (Tanzania cement industry). Our conviction is backed by the relatively strong demand over the medium term followed by excess capacity following the recent expansions, increased imports and the emergence of new players. The sector is trading at an FY10E PER of 6.6x and dividend yield of 10.4%. We forecast a 3 year CAGR in EPS for the sector of 27% In Tanzania, production capacity, currently at 3.01m tonnes, and demand of 2.1m tons has had a compounded annual growth rate (CAGR) of 17% over a five year period to FY10E which is relatively higher than the regional CAGR of 13%. We expect demand to to grow at 18% if the retail, business, infrastructure development and mining investments are sustained and the economic momentum quickly return to pre-global financial crisis and its subsequent recession. Retail and business sector, infrastructure and mining’sector’s share of the market is 60%, 20% and 20% respectively. Tanzania is still a net importer of cement, and, despite the recent up-cycle expansion of about 1.4 m tonnes, there are plan to increase capacity with 0.75m tonnes – Lafarge (Mbeya Cement) 0.25m tonnes and Lake Cement 0.5m tonnes in the next two years. Construction and housing sector with a five year CAGR of about 10% is the main driver of cement consuption continues to develop strong results in an increase in cement demand Although the cement industry is facing some critical issues in the short term (notably the removal of suspended import duties, deteriorating power supply and difficult logistics), we believe that political stability and continued economic reforms will support the steady level of growth in the medium to long term. The need for infrastructure development, commecial constructions and new housing is still very significant in Tanzania and cement consumption per capita is low even in the African context. With the recent expansions of their capacities -- Tanzania Portland Cement Company Ltd (Twiga Cement) and Tanga Cement Company Ltd (Simba Cement) are well placed to serve this growing demand for cement. High margins, underlying sales growth, strong cash flow, above average yields and dividend payouts provides a compelling case for a medium term investment. Key sector concerns include the escallating cost of power and energy. Energy is estimated to constitute about 30% of the total production cost. The other concerned is on the removal of the suspended duties on cement that has resulted in an increased importation of subsidized cement into Tanzania, from countries such as Pakistan, India and Egypt – This, coupled with global oversupply and collapsed sea fleight rates, imported cement is reaching Tanzania at a substantial low costs compared to local production. In total 0.25m tonnes (2008: 0.12m tonnes) of cement were imported in Tanzania representing 12% market share. Based on the above, within a sector we recommend a medium term accumulate on both Twiga Cement and Simba Cement.

20 December 2010 Equity Research Cement Sector Research Analyst Moremi Marwa +255 22 2666227 +255 782 007 785 moremi@tanzaniasecurities.co.tz

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Sector Key Statistics Key Statistics Twiga Cement Simba Cement Price 1,800 1,900 Number of shares 179, 923,100 63,671,045 Market Cap (Tshs.b) 323.86 120.97

EPS (Tshs.) Twiga Cement Simba Cement 2009A 266.7 478.0 2010E 322.1 522.1 2011E 412.3 622.1 2012E 515.5 741.3

DPS (Tshs.) Twiga Cement Simba Cement 2009A 130.0 179.0 2010E 88.8 185.0 2011E 118.5 206. 5 2012E 158.1 256.0 NAV (Tshs. bn) Twiga Cement Simba Cement 2009A 165.7 105.2 2010E 185.4 128.2 2011E 215.1 145.8 2012E 250.5 167.5

Source: Twiga Cement, Simba Cement Financials & Tanzania Securities Estimates

Relative Statistics

PER(x) Twiga Cement Simba Cement 2009A 6.2 3.6 2010E 8.1 5.1 2011E 6.4 4.3 2012E 5.7 3.6

Div. yield Twiga Cement Simba Cement 2009A 7.9 10.3 2010E 7.1 13.7 2011E 9.9 14.1 2012E 13.6 16.2

P/NAV(x) Twiga Cement Simba Cement 2009A 1.8 1.1 2010E 1.7 0.9 2011E 1.5 0.8 2012E 1.3 0.7

Source: Twiga Cement, Simba Cement Financials & Tanzania Securities Estimates

Change in Shares Prices Company Current

Price % 1month % 3months % 6months % 1year

Twiga Cement 1,800 0.0% 0.0% 11.8% 12.2% Simba Cement 1,900 0.0% 0.0% 4.7% 3.5%

Source: Tanzania Securities Ltd Analysis

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Relative Valuations

EV/EBITDA(x) Twiga Cement Simba Cement 2009A 4.0 2.6 2010E 3.5 2.5 2011E 2.7 1.7 2012E 2.4 1.7

EV/Sales(x) Twiga Cement Simba Cement 2009A 1. 8 1.1 2010E 1.7 1.0 2011E 1.4 0.8 2012E 1.3 0.7

Market cap/Sales(x) Twiga Cement Simba Cement 2009A 1.7 0.9 2010E 1.6 0.8 2011E 1.4 0.7 2012E 1.2 0.6

Source: Tanzania Securities Analysis & Estimates

Selected Key Ratios

Gross Margin (%) Twiga Cement Simba Cement 2009A 51.7 46.8 2010E 54.5 45.3 2011E 54.7 46.5 2012E 54.9 47.6

Operating Margin (%) Twiga Cement Simba Cement 2009A 40.2 38.0 2010E 42.4 35.9 2011E 44.7 37.6 2012E 47.2 39.2

Net Margin (%) Twiga Cement Simba Cement 2009A 26.8 25.4 2010E 27.9 22.7 2011E 29.4 22.1 2012E 30.1 21.6 Debt / Total capital (%) Twiga Cement Simba Cement 2009A 0.3 0.00 2010E 0.3 10.5 2011E 0.2 7.6 2012E 0..2 5.4

Source: Tanzania Securities Analysis & Estimates

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Comparative Ratios

Tanzania Production Capacity (tons m)

Market Cap per Ton

Market Cap US$ m

Historic PER

Div Yield

Twiga Cement 1.40 210 215 6.2 7.93 Simba Cement 1.25 92 81 3.6 10.29 Mbeya Cement 0.35 N/A N/A N/A N/A Kenya Athi River 0.65 267 231 26.8 0.86 Bamburi 2.20 365 978 11.0 5.45 E.A Portland 1.30 184 137 -35.1 0.00 National Cement 0.70 N/A N/A N/A N/A

(Source: Various)

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Economic Growth: Outlook Economic growth is expected to continue with the pace that picked up in 2010, supported by positive developments in the mining sector and greater investment from public and private entities. Bank of Tanzania is expecting growth of 7.1% in 2011, after an estimated 7.0% in 2010 and 5.4% expansion in 2009, on the back of continued strong consumer demand and increased activity in the mining sector prompted by higher gold prices. This view has been strengthened by developments in the first nine months of 2010, with gold exports markedly higher than a year earlier. Indeed, the outlook for 2011 is heavily dependent on growing exports, a pick-up in the manufacturing and agricultural sectors domestically, and stronger regional demand. Improvements in external demand for both goods and services, along with better weather patterns, should support a gradual recovery through 2011.

Recent Developments The Tanzanian economy grew 7.0% year-on-year (y/y) in the first half of 2010, according to GDP figures released by the National Bureau of Statistics. This compares with a first-half expansion of 5.1% y/y in 2009 during the trough of the global economic downturn. The most impressive performance was recorded in the mining sector, where output rose 33.5% in the first half on the back of a significant increase in the production of gold and diamonds. The sector thus added 0.7 percentage point to economic growth in the first half despite accounting for less than 2.5% of GDP. The more economically important manufacturing sector was in significantly weaker state in the first half, recording growth of 5.0%. The weakness was equally spread across the board, with a 4.1% increase in textile production compensating for a 1.7% drop in the output of tobacco products. Nevertheless, the agricultural sector recorded growth of 1.5% in the first half, which compared well with the 0.3% increase in the first half of 2009.

Inflation: Outlook We expect relatively favorable food supply conditions and strong base effects to push consumer price inflation into low single digits during the second half of 2010. Food prices dropped 2.0% month-on-month (m/m) in June and are likely to continue to act as a disinflationary force during the second half of the year on the back of good rains. Nevertheless, the 0.8% m/m increase in food prices in August and the drought warning issued by the Tanzania Meteorological Agency in early September indicate that food prices may have bottomed out and could increase in the fourth quarter. While rising utility prices may underpin consumer price inflation, base effects from sharp price hikes in September and December last year will cut into the year-on-year rate. The drop back into single digits from the double-digit rates that characterized 2008 and 2009 should help to lower inflation expectations going forward.

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Industry Overview Cement is the main binding agent in concrete and, thus, the most common building and construction material in the world. The primary raw material used in cement manufacture is limestone, followed by gypsum, shale or clay and fuel oil or coal. Cement production is one of the most energy intensive industries in the world. Cement is stored on-site and transported either in bulk or packed in paper or plastic-lined paper bags before shipment. After water, cement is the second most consumed material on the planet.

A key feature of the cement industry is the strong direct relationship between economic growth and cement consumption. This link is clearly reflected in the reduction of worldwide consumption during periods of recession. Accordingly, the recent healthy growth in the world economy has resulted in rapid growth in cement's consumption. Moreover, going forward, global cement demand is projected to grow by 4.1% per annum through 2013 – gains will be fuelled by rising infrastructure investment in developing countries and improved markets in developed areas, 2010E global cement demand is expected at 2.8 billion tonnes. Blended cement is estimated to increase its dominant position over Portland. Ready-mix concrete will remain the fastest growing outlet.

Another feature of the sector is that cement production closely mirrors cement consumption, indicating generally a relatively low level of international trade. This follows from the direct link with economic growth but also reflects cement's low unit value, where freight cost has a considerable weight, and the widespread availability of raw materials worldwide.

Regional Cement Market

Cement consumption in Sub-Saharan Africa is the lowest in the world, averaging 70 kg per capita, while the global average currently stands at 2,000 kg per capita. Hence, there is a considerable growth potential for cement in the region. Global cement manufacturer Lafarge predicts that growth in demand for cement in Sub-Saharan Africa will increase by 9% annually over the next decade.

One of the main growth factors of the construction industry is the continuously expanding urban population across Africa but also infrastructure and general construction projects. Fuelled by foreign direct investments and donor money, infrastructure and mining projects have good financing support even in a weaker economy. A third important factor is the developing mortgage industry that, except for South Africa, up until now has been nonexistent in the region. The majority of homes are still financed from individual savings and thus take years to complete. With a functioning mortgage industry this will improve and increase the underdeveloped housing market in the region.

When breaking down the market for the cement producers (in Eastern Africa), approximately 60% of the demand can be attributed to the retail and small business sector. This is due to the fact that no brick is produced in the region, leaving cement as the only viable option for building material. 15%-20% of the demand comes from infrastructure projects like road and bridge constructions. The remainder of the demand comes from the mining industry.

The total cement production in Southern and Eastern Africa, excluding

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South Africa, is approximated to 15 million tonnes per year.

There are three dominant cement-producing companies in Sub-Saharan Africa; French Lafarge International, German Heidelberg Cement and Switzerland’s Holcim.

During the last ten years especially Lafarge has acquired majority stakes in several cement producing companies in the region such as Bamburi Cement in Kenya, Mbeya in Tanzania, Chilanga, the largest cement producer in Zambia and Hima in Uganda. In Sub-Saharan Africa Lafarge has an approximate market share of 40% making it the dominant manufacturer in Southern and Eastern Africa. Heidelberg Cement is another major cement producer globally. Through its subsidiary Scancem, Heidelberg owns 69% of Tanzania Portland Cement that has a market share of about 20% in Sub-Saharan Africa and runs a plant in Tanzania. Heidelberg’s other operations in Africa are concentrated to the west coast in countries like Gabon, Liberia and Sierra Leone. Holcim which has presence in South Africa, Madagascar, Nigeria, Ivory Coast and Tanzania (though Simba Cement) market share is approximated at 10%.

The remaining 30% of the Sub-Saharan Africa market is divided between smaller local producers such as Athi River Mining in Kenya, East African Portland Cement Company in Kenya and Zambia Portland Cement.

Expansion Plans

The table below shows ongoing and planned projects by cement producer. Twiga and Simba cement has recently successfully completed their plant expansion plans in total bringing about 1.4m tonnes in the cement industry and Lafarge (Mbeya Cement) also has plans for a new investment which will increase the capacity by over 0.25 million tonnes per year. India-based Banco Products is investing $65 million in its cement plant in Tanzania, which targets the East African market. The investment follows Banco Products’ acquisitions of 51 per cent stake in the Tanzania’s Lake Cement Company Ltd. Initially, the plant is expected to produce about 0.5 million tonnes of cement a year.

Other regional planned investments include those by Cemtech in Kenya and Uganda, which will increase capacity with 1.2 million tonnes. In total, current planned investments will increase the production with an additional 5 million tonnes, representing an increase of 30% during the next two to three years.

In Uganda, Hima Cement is about to complete a new plant in Kasese that will increase its production capacity from 0.35m tonnes to 0.5m tonnes, while Tororo Cement recently announced that it will invest $50 million to double its capacity from 1 million tonnes to 2.2 million tonnes.

Company Current (mn MT)

Planned (mn MT)

Year & Company

Tanzania 3.01 0.75 2011; 0.25 Lafarge (Mbeya Cement) and 0.5 Lake Cement/Banco Products

Kenya 4.00 0.6 2012, Cemtech (India) Uganda 1.50 1.1 2011, Lefarge, Cemtech Rwanda 0.50 - -

Demand and Supply Tanzania's cement industry is dominated by three companies, Twiga

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Cement, Simba Cement, and Mbeya Cement. In 2010, the combined cement production capacity of three companies reached 3.01 million tonnes while demand stands at 2.1m tonnes. With an estimated population of about 42 million, Tanzania's per capita consumption of cement stands at about 50 kg per annum.

The improving performance of Tanzania's economy has led to a strong growth in cement demand in the country. Tanzania, like other countries in Sub-Saharan Africa - excluding South Africa - has enjoyed the construction boom seen in other developing regions around the world. Tanzania is benefiting from new investment in residential and commercial property, in infrastructure projects, such as roads and schools, in mining and hotel construction for the growing tourism industry.

Tanzania's economy is predicted to grow around 7% over the next five years, with the manufacturing, mining, and tourism sectors featuring strongly. An improved macroeconomic environment should attract already growing FDI, particularly spurred by privatizations and the mining sector. Continued strong commodity prices are expected to bolster gold production in particular, as Tanzania is becoming one of Africa’s major producers. As we could expect, economic growth was coupled with an increase in cement consumption.

Prospects for the Tanzania cement sector are also favourable. The generally projected positive outlook for real GDP growth (7.0%) in Tanzania, suggests rising demand for cement. The sector may also be attracting interest from overseas investors. Asian producers in particular are now looking at potential investment in Tanzania. While this may aim to supply the local market, it would also offer the opportunity to export cement to regional markets.

In 2009-10, Twiga and Simba Cement embarked in increased their production capacity from 700,000 tons and 750,000 tons to 1.4 m metric tonnes and 1.25 mn metric tonnes respectively.

Company (‘000 tons)

Previous Capacity

Additional Capacity

Total capacity

Completion date

Twiga Cement 700 700 1,400 2010* Simba Cement 750 500 1,250 2010*

Source: Various, *approximate)

Key take-aways

Demand for Cement is strong in the country and the region, with little supply from low cost and subsidized producers such as Pakistan and India. Regional demand from neighboring countries such as Burundi, Rwanda, Southern Sudan and Comoro are expected to continue. Demand side drivers are in favor, with large infrastructure projects on facilities such as roads, bridges, universities, schools, commercial and domestic buildings expected to keep on growing in the medium term

Dilapidated infrastructure, coupled with strained facilities such as roads is expected to be a basis for expansion in years to come.

The underdeveloped mortgage market coupled with the systematic increase in middle level income earners indicates that demand for new housing construction, although relatively high, is likely to accelerate in coming years as a result of rising disposable incomes and improved access to credit which would have more people moving to better houses

Indicative prices per 50 kg

Country Price (US$) Tanzania 9.2 Kenya 8.8 Uganda 11.5

Indicative Market Share

Company % Twiga Cement 42 Tanga Cement 34 Mbeya Cement 12 Imported Cement 12

0%10%20%30%40%50%

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Retail prices in Tanzania compares favorably with other countries. The side bar shows a table with indicative prices across the region. As a result, downward pricing pressure in Tanzania from new capacity would result in higher exports to other regional markets with higher margins.

A Cost of Energy Challenge

Energy costs in cement production on average constitute about 30% of the total production costs. The quality and reliability upon electricity power in Tanzania is generally not guaranteed and cement producers are forced in some cases to use expensive thermal, HFO and coal power. In addition, over the past few years, electricity tariffs have been increasing, resulting in an increase of electricity bill. Generally, the extra costs are being passed to consumers through higher retail prices which has risen by about 22% over the past 3 years.

Sector SWOT Analysis

Strengths Weaknesses Skilled human resources and

management capability Abundant source of high

quality limestone deposits in Tanzania

Financial capacity to take advantage of opportunities

Robust and growing construction industry, infrastructure development provides opportunities to the future capacity expansion

High costs and poor quality of power in Tanzania makes the country an expensive production destine compared to South Asian producers

Dilapidated infrastructure connecting to key markets in the country increase the cost of moving cement to various markets

Opportunities Threats Political stability and

continued economic reforms will support a steady level of growth in the medium to long term

Improving economic performance and growth in the middle income earners with demand for new housing units

Ongoing infrastructure projects and those in plan are expected to sustain the demand for cement

Growing interest in the mortgage industry

Growth, expansion may not work as planned

Removal of the suspended duties on cement resulting in an increase in importation of cement

Reduced services from Tanzania Railway Corporation hindering distribution

Unpredictability policies to protect local industry

Deteriorating power supply and difficult logistics

Source: Tanzania Securities Analysis

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Tanzania Portland Cement Company Limited (Twiga Cement) Recommendation: ACCUMULATE Investment Summary The investment case for Twiga Cement presents several

catalysts. Aside from a healthy demand outlook, the other reasons we view this stock positively include the ability of the company to produce a substantial portion of clinker locally, making Twiga Cement mostly independent of importing clinker

With a recent expansion of its production facility and the packaging plant, Twiga Cement is well placed to serve the growing demand for high quality cement the company indicates a determined efforts to remain the leading player in the Tanzania cement production – the company’s market share currently stands at 42%

Twiga Cement managed to finance most of its expansion project from its own cash flow – the US$ 20m line of credit that partly financed the expansion was repaid within H2 of 2009. with almost negligible debt ratio, 0.3% as of June 2010, Twiga Cement has ample potential upside from additional gearing on any other future plans of increasing capacity and enhancing its delivery channels

Solid economic growth and rising income levels, particularly in urban areas will continue to stimulate construction over the medium to long term. Infrastructure needs will also continue to fuel the construction sector in the foreseeable future – Twiga Cement is well placed to take advantage of these rising opportunities

The company’s medium term strategic focus of serving better its customers by increasing capacity and availability, reducing prices and improved services and attention to its key customer groups has started paying dividends as depicted in the company financial performance in 2009H2 and 2010H1.

High margins, underlying sales growth, strong cash flow, above average yields, profits reinvestment for future opportunities and dividend payouts provides a compelling case for a medium term investment in Twiga Cement.

A review of Twiga Cement’s capital appreciation 12.2% over the past one year (11.2% over the last 6 months) coupled with a considerable and consistent dividend payout provides a good return mix for both medium and long term investors

In mid-2009 the company’s 5-year Managing Director Mr. Klaus Hrassing left the Company and was succeded by Mr. Pascal Lesoinne who was the project manager for Twiga Cement expansion – we however,

o not envisage significant change in the company’s policies and strategies as a result of this change in senior management

The downward risk is particularly on the imported cement, the removal of the suspended duties on cement and the falling in international freight rates has resulted in an increase in importation of subsidized cement from Asia and the Middle East which is relatively cheaper.

Share Statistics

Price (Tshs) 1,800 Issued Shares (mn) 179.92 Market cap (Tshs. bn) 323.86 Year end 31 Dec. Average Trading vol (Tshs. Mn)

128.7

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Key Statistics FY2009A FY2010E FY2011E FY2012E EPS (Tshs.) 266.7 322.0 412.3 515.5 DPS(Tshs.) 130.0 144.9 188.7 276.3 Relative Ratios PER(x) 6.2 5.6 4.6 3.9 DY(%) 7.9 7.2 9.9 13.6 Relative Valuation P/NAV(x) 1.8 1.7 1.5 1.3 Ev/sales(x) 1.8 1.7 1.4 1.3 EV/EBITDA(x) 4.0 3.5 2.7 2.4 Mark.Cap/Sales(x) 1.7 1.6 1.4 1.2

(Source: Tanzania Securities analysis)

Price Movement Company Current

Price % 1month

% 3months

% 6months % 1year

Twiga Cement 1,800 0.0% 0.0% 11.8% 12.2% (Source: Tanzania Securities analysis)

Financial Summary Income Statement (Tshs. million)

FY2009A FY2010E FY2011E FY2012E

Sales 179,000 207,406 252,643 307,748 Gross profit 92,445 112,946 138,130 168,931 Operating profit 71,983 85,148 113,051 145,256 Attributable profit 47,993 64,383 74,176 92,746 Dividends 23,390 27,550 33,961 52,499 Retained earnings 24,603 36,833 40,215 40,247

(Source: Tanzania Securities forecasts)

Earnings Drivers

We expect capacity enhancement and equipment optimization to be key drivers of earnings growth for Twiga Cement over the next three years.

Reduced costs as well as possible pricing upside are expected to moderately increase margins and overall profitability over the medium term

With an almost negligible debt ratio, 0.3% as of June 2010, Twiga Cement has ample potential upside from additional gearing on any other future plans of increasing capacity and enhancing its delivery channels

The key Twiga Cement plant is located near the business and retail largest market segment (Dar es Salaam) thus lowering transport costs which account for up to 50% of the landed cost of cement for imported cement

A strong demand for cement coupled with the company’s ability to produce clinker locally gives the company leverage over its competitors.

We are impressed by the Twiga Cement operating business model, its management, strategic business location and financial performance – we regard these factors as a key leverage of the company.

Risks

Among the main raw materials used in the cement manufacturing: limestone, sand, shale, clay, and iron ore -- the main material,

Price Movement (Past 1 year)

Price Trend

1,450 1,500 1,550 1,600 1,650 1,700 1,750 1,800 1,850

Curr

ent P

rice

% 1

mon

th

% 3

mon

ths

% 6

mon

ths

% 1

year

Price Movement

0500

1000150020002500

2006

A20

07A

2008

A20

09A

2010

E20

11E

2012

E

Price per Share

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limestone, is mined on site. In future the company may consider other source of raw materials i.e. industrial by-products. The use of by-product materials to replace natural raw materials is a key supplementary element in achieving sustainable development and cost efficient over long term

Twiga cement lacks significant diversification from its key cement product (i.e. portland). Diversification into blended cement, ready-mix and other industrial minerals may provide a more competitive edge for the company, however, diversification so much hinges on the market demand.

Increase in imported cement as a result of the removal of the suspended duties on cement has resulted in an increase in importation of cement from Southern Asia and the Middle East which is relatively cheaper as they originate from countries that subsidizes cement products and/or from countries that have free economic operating areas – this has recently resulted into stiff competition in market share and may pose negative impact on price.

Strategy

Twiga Cement has recently concluded its expansion project – the company now focuses on market consolidation and increasing outreach through existing and planned delivery channels

As the market permits, the company has plans to continue with expansions in the next few years – despite rewarding shareholders, the company will keep on growing the business for long-term and sustainable future shareholders returns.

Twiga Cement plans to introduce energy substitution. The company intends to increase the use of gas for energy production as the existing quality and cost of energy continues to pose a major challenge to the company. Implementation of energy substitution is expected to provide a platform for minimizing the energy cost and quality in future.

Capacity enhancement and equipment optimization are key drivers of earnings growth

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Tanga Cement Company Limited (Simba Cement) Recommendation: BUY Investment Summary With a just completed expansion and modernization program, coupled with

the improved operating efficiency and the company’s focus on market share expansion, Simba Cement is set to continue with its above average yields pace and the increased shareholders’ value creation.

Historically the company has generated strong returns that we expect to continue over the medium term. Its defensive and proactive business model should provide a stable and attractive FCF, this, combined with its long-standing and quasi-symbiotic relationships with its key customers and markets together with its experienced management team, should offer Simba Cement a robust platform from which to expand its footprint in the Tanzania and regional wholesale and retail cement industry and grow its export activities.

Simba cement stems from a strong dividend payout -- averaging 46% over the past five years (50% 2010 interim), this coupled with plant efficiency improvements, reduction in production costs and a strong ROE justifies our bullish outlook on Simba Cement. The just completed expansion capital requirement resulted into additional debt, however we do not foresee this affecting the company’s short to medium term dividend payout sustainability

The strong economic growth will continue to stimulate the commercial and retail construction and infrastructure development activities which are envisaged to result into sales growth, growing margins and the underlying profitability and shareholders’ returns.

Despite a recent change in senior management -- where the 6-year company’s Managing Director, Mr. Juerg Fluehmann left the company and been replaced by Mr. Erik Westerberg – we do not foresee any significant impact on company’s policies and strategies resulting from this change in management. Eric, like his predecessor, has a deep experience in the cement industry having held a similar position with Ghana’s leading Cement Company.

The downward risk is particularly on the imported cement -- the removal of the suspended duties on cement has resulted in an increase in importation of cement from Asia, North Africa and the Middle East which is relatively cheaper. The subsidized cement, mainly from Pakistan based on the removed suspended duties is having a big impact on the company’s margins and volumes sold. Due to the unpredictability of policies in place to protect local industry, Twiga cement decided to stop further expansion projects.

Use of expensive imported clinker and the high cost of power (from imported coal from South Africa) also remain to be obstacles to the company. Again due to recent deterioration of supply of electricity from TANESCO, the company has been supporting its production frequently with the installed back-up generator, which does increase cost of production. Simba Cement distribution of cement via rail came to a complete standstill with the reduction of services from TRL -- all of the company’s products to the Lake Zone are currently transported via road at a substantial higher cost.

Share Statistics

Price (Tshs) 1,900 Issued Shares (mn) 63.67 Market cap (Tshs. bn) 120.97 Year end 31 Dec Average Trading vol (Tshs. Mn)

12.35

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Key Statistics

FY2009A FY2010E FY2011E FY2012E EPS (Tshs.) 478.0 522.1 622.1 743.3 DPS(Tshs.) 179.0 261.0 280.0 333.6 Relative Ratios PER(x) 3.6 3.6 3.2 2.8 DY(%) 10.3 13.7 14.1 16.2 Relative Valuation P/NAV(x) 1.1 0.9 0.8 0.7 Ev/sales(x) 1.0 1.0 0.7 0.7 EV/EBITDA(x) 2.6 2.6 1.8 1.7 Mark.Cap/Sales(x) 0.9 0.8 0.7 0.6

(Source: Tanzania Securities analysis)

Price Movement Company Current

Price % 1month

% 3months

% 6months

% 1year

Simba Cement 1,900 0.00% 0.00% 4.65% 3.47% (Source: Tanzania Securities analysis)

Financial Performance (Tshs. million) FY2009A FY2010E FY2011E FY2012E Sales 119,898 146,616 179,210 219,050 Gross profit 56,070 66,425 83,257 104,354 Operating profit 45,539 52,643 67,300 86,039 Attributable profit 30,420 33,242 39,611 47,201 Dividends 11,397 16,704 17,920 21,568 Retained earnings 19,023 16,538 21,691 25,633

(Source: Tanzania Securities forecasts)

Financial Results: Key Up-takes The key take-away from Simba Cement’s results are mainly the following:

Sales growth over the past five years to 2010E has been at a CAGR of 25% to about Tshs. 147 billion 2010E, mainly driven by a strong underlying volume and demand growth. The company’s H1 2010 reported a sales growth of 2% to Tshs. 61 billion which slightly decreased by 0.9% compared to H1 2009, mainly due to a negative price effect. The poor result in 2010H1 is mainly attributed this to production shut down that was done to allow maintenance.

Recent capacity expansion from 750,000 to 1.25m tonnes are expected to continue resulting in higher revenues and profitability. The full benefits of this expansion i.e. improved operating efficient, lower raw material and fuel costs, are expected to accrue from this year going forward.

Due to higher than expected financial expenses related to the replacement of the company’s credit facilities during the course of its plant expansion, the company’s net income growth was below the EBIT growth H1 – however, this is unlikely sustainable, H2 is expected to be better. Out of the Tshs. 60 billion incurred for expansion, Tshs. 50 billion was internally financed

The company’s cash flow generation was poor in H1 mainly due to an increase of the company’s NWC above last year’s level (i.e. at Tshs 7.9b versus Tshs. 2.1b last year mainly due to an increase of the company’s inventory and receivables position in H1 2010 and the decrease in payables. It is worth-mentioning that the company’s NWC is also impacted

Price Movement (past 1 year)

Projected price movement

A recent capacity expansion from 700,000 tonnes to 1.25m tonnes is expected to result into higher revenue and profitability

Tanga Cement recorded a poor cash flow position in H1 of 2010 relative to last year.

1,750 1,800 1,850 1,900 1,950

Price Movement

1,400 1,600 1,800 2,000 2,200

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by seasonal factors (i.e. the company’s cash flow generation should be higher in H2 than in H1). Income tax payments, purchase of fixed assets for expansion and dividends payments were also contributing factors to the poor cash flow position.

Simba Cement expects H2 to be better than H1, also due to seasonality reasons and the continued stabilization of economic growth – implying strong demand for cement consumption. As a result the company expects higher sales and profits for the 2010 FY versus 2009. Accordingly the company currently has a full product pipeline, which should have a positive top line effect.

Despite the recent rise of raw material prices, the company expects the average price of raw material prices to be slightly below last year’s level, which should mean that the gross margin should remain stable over the next few months. Further positive effects should come from the company’s value creation initiatives, which are currently in the process of implementation.

Simba cement, largely depend on imported clinker as it does have adequate capacity of its own – this is particularly true when production demand is higher where the company imports from Korea and China.

Risks and Strategies Risks

Higher energy costs and the partial use of expensive imported clinker continues to limit the company’s profit sustainability – time to time the company imports clinker mostly from Korea and China which relatively expensive and eats on the company’s margins and profitability

General excess capacity in the market, import of cement, power interruptions and rail services delivery problems are amongst the main challenges for the company in the short to medium term

Increase in imported cement as a result of the removal of the suspended duties on cement has resulted in an increase in importation of cement from Asia and the Middle East which is relatively cheaper

Strategy

Simba Cement has recently successfully concluded its expansion project – the company now focuses on market consolidation and increasing outreach. Historical the company key and core market have been the Northern circuit, with moderate presence into the Central and Lake zone market. The company’s strategy is to consolidate in its key markets and increase the level of export to existing markets such as Rwanda and Burundi but in future – DR Congo and Comoro.

Simba Cement plans to introduce energy substitution. Currently, the company uses imported coal. Implementation of energy substitution is expected to provide a platform for minimizing the energy cost in future. This will also allow a diverse, reliable, quality and sustainable operations.

Tanga Cement has recently changed its Managing Director Energy costs, expensive imported clinker and increased imported cement threaten the company profit sustainability

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Analyst’ stock ratings are defined as follows:

Outperform/Buy/Accumulate: The stock is of good value, is currently underpriced and has strong fundamentals

Neutral/Hold: The stock is correctly valued with little upside or downside pricing

Underperform/Sell: The stock’s total return is expected to underperform; it has weak fundamentals and challenging operating environment/currently overpriced

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