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Imara SSA Cement Report Cementing the investment case...

August 2012

Analysts Farai Vengesai Nontando Zunga Jimmy Mwambazi [email protected] [email protected] [email protected]

www.imara.co

Table of Contents

Executive Summary .............................................................................................. .. 3

Valuation Summary................................................................................................... 4

Valuation ratios ....................................................................................................... 5

SSA cement story: the selling points .............................................................................. 6

A recap of the cement making process ..................................................................... 6

Drawing a parallel with emerging markets ............................................................... 7

Ashaka Cement ....................................................................................................... 8

CCNN ................................................................................................................... 12

Lafarge Wapco ....................................................................................................... 16

Dangote Cement ..................................................................................................... 20

Athi river Mining ..................................................................................................... 24

BamburiCement Limited ........................................................................................... 28

East African Portlant Cement Company ......................................................................... 32

Simba Cement ........................................................................................................ 36

Twiga Cement ........................................................................................................ 39

Lafarge (Zimbabwe) ................................................................................................. 43

Lafarge (Zambia) .................................................................................................... 47

Executive Summary In our maiden coverage of the SSA cement industry, we characterised it as the world’s last cement frontier and focussed our discussion on what makes the cement sector in SSA generally attractive. Our sentiment then was bullish and we remain so. We believe most of the buy factors we touched on then are now playing out as production ramp up occurs after a period of capacity additions, while infrastructure development gathers momentum, underpinning consumption in the region. We followed up that initial coverage with a report aroundcapacity and consumption in East and West Africa. We expressed our opinion that while, in theory, capacity may close the gap and possibly outgrow consumption with West Africa likely to see that scenario by 2015, consumption will always be a moving target. We expect cement demand toevolve with improved availability, while other variables such as prices move to accommodate higher volumes. We have focused on the market dynamics for cement as new production capacity comes on line and volume ramp ups start. We note the slowdown in economic growth across SSA occasioned in the main by a hawkish stance by central banks in the region as they battle to stabilise prices and stop depreciation of the currencies. The result has beena proportionate slowdown in growth of cement consumption in the region, although growth remained higher when compared to other global regions. We have, however, recently seen some easing notably in East Africa and we expect this to spur another cycle of fast paced growth and hence impact cement consumption favourably. Risk however remains with Europe in recession, the US growing at a snail’s pace and emerging markets slowing down significantly. While African economies have previously been resilient in the face of global slowdown, a fall in commodity prices will clearly hurt the region this time. East Africa maintained its pole position as the fastest growing SSA region as regards cement consumption, albeit on the back of slower growth across the region compared to previous years. Lafarge Bamburi’s management stated that consumption grew by an average 9% in 2011 compared to 14.4% growth in 2010. Growth was higher in the first half of the year with the second half negativelyimpacted by the full effects of the tight liquidity conditions in the market and the resultant high cost of capital.Kenya grew by 10.5%, mainly resultingfrom continued government investment in infrastructural development and growth from individual home builders. For Uganda and Tanzania, the market grew by 16.2% and 2.5%, respectively. Tanzania was hamstrung mainly by persistent power challenges.

Competition for the East Africa cement market also intensified with grinding capacity increasing, and cement imports remained competitive as the previously restrictive duty is yet to be reinstated. In Nigeria demand for cement grew by c8% to almost 20mtpa in 2011. However, unlike in previous years,the proportion of imported cement in the overallconsumption numbersbegan to reduce significantly with increasing production among local companies. However, plant utilisationrates for the Nigerian companies are low reflecting the gap that is still there between demand and local supply while instability in the supply of energy- fuel and electricity- compounded the situation. Nigeria’s central bank also adopted a tightening stance in line with its peers in East Africa. The monetary policy rate was hiked from 6.25% at the beginning of the year to 12%. The rate remains at those high levels with the authorities showing great resolve to defend the naira and tame consumer prices. PPC, the dominant cement producer in Southern Africa reported a halt in consumption contraction in in its major market of South Africa. The cyclical nature of cement consumption potentially points to a pending period of sustained growth. The company however reported significant volume growth in Zimbabwe and Mozambique. The former is recovering from a decade long economic meltdown, while mining activities in Mozambique are driving demand. 2012 thus looks positive for Southern Africa. We expect to see strong volumes driven growth for companies that have recently commissioned additional capacity. We have generally revised upwards our ratings and/or target prices for companies like DCP, ARM Holdings and Lafarge WAPCO which fall in this category. We also note PPC’s efforts to follow other major cement manufacturers by transforming its business into a pan African Business. We maintained our recommendations on Tanga and Twiga (both Buy); Dangote Cement (Accumulate); CCNN (Speculative Buy); Lafarge Bamburi and Ashaka Cement (both Hold) as well as EAPCC (Sell). We upgraded our ratings on ARM Holdings and Lafarge Wapco (both from Hold to Buy). We resumed our coverage on Lafarge Zimbabwe and Lafarge Zambia with buy ratings on

both.

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Valuation Summary

4

Valuation Ratios

5

A recap of the cement making process

Source: Climatetch

Portland cement, the fundamental ingredient in concrete, is a calcium silicate cement made from the combination of calcium, silicon, aluminium and iron. The first step in themanufacturing process is obtaining raw materials. Generally, raw materials consisting of combinations of limestone, shells or chalk, and shale, clay, sand, or iron ore are mined from a quarry near the plant. At the quarry, the raw materials are reduced by primary and secondary crushers. Stone is first reduced to 5-inch size (125-mm), then to 3/4-inch(19 mm). The picture above takes the process from when the raw materials arrive at the cement plant. The materials are proportioned to create cement with a specific chemical composition. Two different methods; dry and wet, are used to manufacture portland cement. In the dry process, dry raw materials are proportioned, ground to a powder, blended together and fed to the kiln in a dry state. In the wet process, a slurry is formed by adding water to the properly proportioned raw materials. The grinding and blending operations are then completed with the materials in slurry form. After blending, the mixture of raw materials is fed into the

upper end of a tilted rotating, cylindrical kiln (rotary kiln

in the picture). The mixture passes through the kiln at a

rate controlled by the slope and rotational speed of the

kiln. Burning fuel consisting of powdered coal or natural

gas is forced into the lower end of the kiln. Inside the kiln,

raw materials reach temperatures of 2,600°F to 3,000°F

(1,430°C to 1,650°C). At 2,700°F (1,480°C), a series of

chemical reactions causes the materials to fuse and create

cement clinker, -greyish-black pellets, often, the size of

marbles. Clinker is discharged red-hot from the lower end

of the kiln and transferred to various types of coolers to

lower the clinker to handling temperatures.

Cooled clinker is combined with gypsum and ground into a

fine grey powder in the cement mill, so fine that nearly all

of it passes through a No. 200 mesh (75 micron) sieve. This

fine grey powder is what is called portland cement.

SSA cement story: the selling points SSA is by all measures the world’s last cement frontier and as such provides the brightest growth opportunity for cement and aggregate producers unparalleled in any region globally. The cement story becomes even more compelling when path travelled by its peers especially in the BRIC nations is concerned. If history is to repeat itself, SSA cement companies are poised to register significant growth in valuations as capacity and consumption increase over the next decade. While such can obviously not be stated with certainty, the region’s economic growth prospects and the huge investments currently being made by cement companies in the region, gives us reason to believe that growth in the long term will not be too different to what obtained in BRIC nations. Key selling points to SSA’s cement story have been discussed extensively, the major ones being:

� The low per capita consumption which stands at c60kg compared to c230kg for South Africa, c420kg in Russia, a member of the BRIC nations as well as c300kg for US in the developed world. The gap represents the potential for growth among cement producers in SSA.

� The brisk pace in GDP growth across SSA, which has averaged upwards of 6% aided in the main by firming oil and commodity prices (metals and minerals), a higher degree of political stability, debt relief, the repatriation of funds by African expatriates living in the West and massive investment by China. Given that cement consumption is known to grow at a multiple to GDP growth, this fast paced growth invariably translates to robust demand for cement.

� Rapid urbanisation which is double edged as it improves affordability especially for the retail market while developments such as housing as well as water and sewer reticulation systems all push up the demand for cement. The map below compares SSA with the rest of the world as regards population growth, urban population growth and working age population growth.

Source: Lafarge Group

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� Increasing realisation by authorities that the aforementioned growth cannot be durable without the supporting physical infrastructure (such as roads, power stations and houses), the instalment of which generates significant demand for cement. Efforts by governments and regional organisations to improve infrastructure will provide significant uptake for cement going forward.

� These positives have not gone unnoticed by cement manufacturers operating in SSA. There has been an unprecedented investment in improving production capacity. Lafarge initiated the scramble to add capacity, but DCP stole the limelight by doubling its capacity in Nigeria and unveiling plans to create Africa’s foremost cement company. We believe these investments will help the respective companies to profit from the opportunity at hand, and hence our bullish view on the sector.

� The opening up of bond markets is a pre-cursor to large scale infrastructure projects. SSA nations are increasingly accessing international debt markets via a cocktail of funding structures from Eurobonds to syndicated loans. The funds are largely for infrastructure development and hence we expect this to largely aid cement consumption.

� Africa getting richer.Research indicates that poverty is declining in Africa. SSA GDP is growing at a faster pace than its population with the continent’s collective GDP expected to exceed USD 2.6tn, while consumer spend, likewise, is forecast to exceed the USD 1.3tn mark by 2020.The impact on cement consumption and hence producers of cement can only be positive.

The bears SSA’s cement story is not without its own obstacles. Key bear factors include:

� Energy constraints: low electricity generation capacityis generic across the region. Infrastructure to deliver gas in Nigeria for instance is inadequate and often leads to work stoppages. The alternative, LPFO, is very expensive and often erodes margins significantly.

� Stiff competition from Asian nations particularly Pakistan. This challenge affects coastal markets especially those in East Africa that are closer to Asia.

� High cost of capital stifles investment and mortgage extension. The expansion programs recently embarked on were largely funded by an existing anchor shareholder. Companies like EAPCC in Kenya and CCNN in Nigeria for instance are failing to deliver on their expansion programs owing to capital constrain.

� SSA susceptible to commodity price shocks. A sharp fall in oil prices will significantly stifle growth in the region as most of the high growth nations are oil reliant.

Drawing a parallel with emerging markets… A major driver to our bullish sentiments on SSA cement producer is because we see history repeating itself, with the BRIC cement story being relived once more. What we cite today as drivers to cement industry growth in the region are no different to what was obtaining in the emerging markets. Over the past several years, emerging markets have become the largest producers and consumers of cement. Their share of global cement consumed rose from 70% in 1990 to almost 90% in 2010. Favourable demographics, rising urbanisation and increasing demand for housing and infrastructure are all credited for driving demand. China emerged as the largest cement market, producing and consuming half of world production each year. China consumed 203mtpa as of 1990 and over two decades, consumption soared more than 8.0x to 1,800mtpa in 2010. Sustained infrastructure development and urbanisation measures implemented by government were the major drivers of demand. Capacity has also been increasing and expectations are that China will have 2,245mtpa as at the end of 2012. Cement prices in China are lower than those in SSA, with a tonne going for USD40-45, compared to the USD 180-200 for SSA. Per capita consumption is also way higher at cUSD 1,210 against cUSD 433 for the rest of the world. Global Demand Break down

Source: Cementing Growth, Nitin Gupta. India’s cement consumption rose from 46mtpa to 260mtpa, primary drivers were buoyancy in the country’s economy which increased investments in the infrastructure and real estate sectors. The current consumption drivers for SSA are clearly not different from what drove cement consumption in India and China. Africa is where these emerging markets were more than a decade ago. The outturn maybe different, but we see cement manufacturers in Africa growing significantly in the coming

decades.

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As Cement

EQUITY RESEARCH

NIGERIA

AUGUST 2012

CEMENT

Ashaka dominates the north-eastern market of Nigeria and has been making capacity additions (0.35m tonnes/year), with the expansion due for completion in 2012. Additionally, the company has been undertaking a project to substitute the more expensive LPFO fuel with coal from its own coal mine. Our call for investors to buy Ashaka shares was driven by expectations that these two factors would drive efficiency and profitability through economies of scale as well as a lower energy bill. We held the view that the risks to our call included intensifying competition on the back of increased deliveries to the north from players such as DCP. We expected this to take away its pricing power and eat into margins. Further, fuel substitution was taking longer to fully deliver the expected cost savings. Nevertheless, we believe Ashaka’s relatively lower valuation more than discounts all these negatives and we hence reiterate our call. BUY

� The company’s drive to substitute LPFO with coal remains a key attraction. Coal is mined from own coal fields and there is a strong case for Ashaka to attain self-sustenance in as far as energy to fire its kilns is concerned. However, substitution ratios are still fall far behind expectations; hence profit margins are not reflecting improved efficiency.

� Capacity addition is on-going and is due to be delivered in 2012. Lafarge led its peers in increasing capacity across the region and there is no doubt that this will be delivered. We see this as being vital in buttressing efficiency gains, a necessary ingredient that will be handy in defending its market share in North Eastern Nigeria.

� The company’s share price took a severe battering, sliding from a high of around NGN 27.50 in January 2011 to a low of around NGN 7.70 in April 2012. The decline has shown clear signs of bottoming out and we believe this offers a very good entry opportunity for a company that is taking concrete steps to

improve efficiency and restructure its cost base.

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Nature of business Ashaka, like WAPCO, is a member of the Lafarge group and the second smallest among Nigerian plants covered in this report. Cement capacity, which is expected to reach 1.2mtpa this year, will represent c4% of Nigeria’s installed capacity. Ashaka has 0.30mtpa coal production capacity on its proven coal reserve which is enough for 25 years of cement production requirements. Its cement plant is situated in North Eastern Nigeria in Gombe state and as such controls a lion’s share of the market in that region. Recent capacity additions and the setting up of distribution depots in its backyard by the likes of DCP is threatening this dominance. We also note the fact that planned capacity additions will not help it retain its capacity market share which stood at 7% before DCP’s additions. Nonetheless, with improved volumes and efficiency, we believe the company will hold its own in defending its market. Anchor investor... Ashaka became part of the Lafarge group in July 2001 after the acquisition of Blue Circle Industries plc by Lafarge. Lafarge is the world leader in cement materials, the second largest aggregate producer, the third largest concrete producer and the third largest gypsum wall board manufacturer worldwide. The company’s investments are now skewed towards the developing world with the MENA region and SSA contributing the highest towards revenues (EUR 3.9bn or a quarter of its revenue worldwide). Lafarge views SSA as critical for its growth going forward and as such it pays special attention to its investments in the region. We view this as positive especially as regards corporate governance, which gives Ashaka an edge over locally owned companies. We view Lafarge’s presence in the company as being vital to the implementation of the expansion program. FY 11 financials review Ashaka’s FY 11 performance surprised on the downside. The historically strong fourth quarter saw revenue slip 10.50% q-o-q, which translated to a muted 8.5% growth in FY 11 revenue (y-o-y). Gross margins improved marginally to 38% from 37.8% while efficiency made up for some of the lost ground sending operating profit 15.0% higher y-o-y. The company had, however, shown significant gains in containing operating costs during the first nine month of 2011, but efficiency suffered in Q4 11 with the company managing only 3.10% growth in operating profits q-o-q. We still believe inefficiency is driven by delays in implementing the energy substitution project which was compounded by the contraction in revenue in the fourth quarter. We nevertheless see EBITDA margins gradually expanding in 2012 and beyond driven by energy savings. As such, Ashaka’s energy management project remains the largest risk in our valuation model. Tax benefits enabled PAT to grow by a respectable 18.9% which translated to an EPS of NGN 1.60. The company paid a 0.40 kobo dividend which works out to a yield of 3.77%

9

Outlook, Valuation and Recommendation The ban on cement imports in Nigeria, its relatively lower per capita consumption rates, higher factory gate prices compared to the rest of the world and increasing funding by the federal government for infrastructure projects all make cement production a worthwhile venture in the country. The major factors that are likely to determine Ashaka’s success as an investment case in this setting include the following:

� Energy savings… Energy savings have to kick in at some point in time and efficiency will also improve as new capacity comes online. We do not expect a significant impact from capacity additions to have occurred in H1 12, with Q4 12 more likely to give clearer indications of the impact.

� Intensifying competition… Competition is set to increase in Ashaka’s North Eastern niche. DCP, in particular, is likely to pose challenges, but we believe Lafarge has the capacity to manage that and enhance shareholder value.

� Further downside on share price looks limited… We note that Ashaka’s share price declined from NGN 15.01 (-29.70%) since we upgraded our rating from sell to buy, which was conditional on clear signals of a market turn obtaining. This has however been in line with the trend observable among its Nigerian peers. Indications now are that the decline could be bottoming out with support building at current levels.

We relied on a DCF to establish a target price for Ashaka. The company’s relatively lower valuation still makes it a compelling investment. Our model led us to NGN 14.6 as being the intrinsic value for Ashaka. The target price is lower than our previous estimate. We have become less optimistic about the LPFO-to-coal substitution program and toned down cost savings estimates. Nevertheless our target still represents 56%

upside from current levels, hence our constructive stance. BUY

10

CCNN

EQUITY RESEARCH

NIGERIA

AUGUST 2012

CEMENT

CCNN is the smallest amongst its Nigerian peers covered in this report and is further disadvantaged by its anchor shareholders who are not as financially endowed as those of its peers, a fact that has worked against the company’s efforts to increase production capacity. The company plans to increase its cement capacity to 1.7mtpa and to fund this it is targeting to raise NGN 45bn via a rights, public and convertible debenture offer. Apart from these initiatives coming late relative to competition, we believe they are also dilutive and hence place equity holders at a disadvantage. Given the significant slide in the share price over the past two years we had looked at CCNN positively especially in light of plans to add capacity. However, the aforementioned dilution has led us to tone down our optimism especially given competing options in the Nigerian cement space, and more so SSA as a region. CCNN thus makes a good Speculative Buy. � To fund expansion, the plan remains to raise NGN

15bn each from a rights offer, public offer and convertible debenture offer. The public offer entails issuing shares upfront which will be dilutive and will be exacerbated further by the proposed convertible debenture.

� We however believe CCNN needs this investment to survive. The flip side is that its energy bills will remain the highest amongst its peers, with efficiency continuing to suffer owing to lower volumes at a time that increased supply in Nigeria will bring cement prices down. Its haven in the north is also becoming more easily accessible to competition as lower production costs makes it economic to move cement by road over a relatively longer distance.

� From a peak of NGN 22.65 in 2010, the company currently trades at close to NGN 5.00 and indications are that support has been found at these levels. Any positive change in the outlook is likely to trigger a retracement hence our belief that the CCNN makes a good speculative purchase.

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Nature of business CCNN is a 51% owned subsidiary of the BUA group, an indigenous conglomerate with interests in sugar and flour milling. Its major market is in northern Nigeria where isecluded existence and hence dominates. The company has struggled with its expansion plans as capital has been hacome by and has since taken a route that we believe is dilutive and not in the best intereststhe case with Ashaka, competition in iincreasing as improving efficiencies amongst peers, notably WAPCO and DCP, is making it more viabletrucked to the north at competitive prices. We see plans for expansion and investment in alternative energy sources now being vital for survival. Anchor investor... The BUA Group started business over 24 years ago as a Private Limited Liability Company specialiimportation and marketing of iron & steel, agricultural and industrial chemicals. Since then it has rapidly developed into a fully-fledged, diversified business with a stake in a wide range of business sectors. Today, the companbusiness interests span from manufacturing to port concessions, real estate development, oil & gas and shipping. Its acquisitions and business interests include the Cement Company of Northern Nigeria (CCNN), Edo Cement, BUA Cement PH, BUA Flour Mills, BUA Oil Mills, BUA Ports & Terminals and real estate businesses. CCNN’s acquisition took place in 2010, when BUA International Limited acquired Damnaz Cement Company Limited and became indirectly the majority shareholder in CCNN and its technical Damzan is seeking technical partnershipleading cement manufacturers in the world in a bid to raise its competence. The company disclosed that it is in discussions with Ultratech Cement of very meaningful technical and managerial coAdditionally it is entering into similarHeidelberg Cement Group in areas of has signalled its intention to accept.from these arrangements, which is vital for survival in the highly competitive Nigerian market. Q1 12 financials review The Q1 12 performance came in worse than we expected. Revenue was largely flat and gained a marginal 1.4% whilCOGS soared 86% to NGN 2.74bn. Gross margins consequently slumped from 52.4% to 12.8%. Operating cost also grew ahead of revenue and saw the company’s operating profits halving compared to Q1 11. Profit for the year ended 48% lower at NGN 268m. CCNN is located in northern Nigeria an area that has recently been rocked by political violence. The muted growth in revenue reflects the impact of product to the market. Gas supply constraints across the whole country weighed onhowever believe that the decline is too steep to be sustained. We expect a recovery in the margins as the year progresses, but still anticipate 2012 net income to end significantly lower

than 2011.

CCNN is a 51% owned subsidiary of the BUA group, an conglomerate with interests in sugar and flour

milling. Its major market is in northern Nigeria where it has a secluded existence and hence dominates. The company has struggled with its expansion plans as capital has been hard to

n a route that we believe is s of equity holders. As is

the case with Ashaka, competition in its backyard is increasing as improving efficiencies amongst peers, notably

more viable for cement to be trucked to the north at competitive prices. We see plans for expansion and investment in alternative energy sources now

BUA Group started business over 24 years ago as a Company specialising in the

importation and marketing of iron & steel, agricultural and industrial chemicals. Since then it has rapidly developed into

fledged, diversified business with a stake in a wide range of business sectors. Today, the company’s areas of business interests span from manufacturing to port concessions, real estate development, oil & gas and shipping. Its acquisitions and business interests include the Cement Company of Northern Nigeria (CCNN), Edo Cement, BUA

r Mills, BUA Oil Mills, BUA Ports & state businesses. CCNN’s acquisition took

place in 2010, when BUA International Limited acquired Damnaz Cement Company Limited and became indirectly the majority shareholder in CCNN and its technical partner.

Damzan is seeking technical partnerships with some of the leading cement manufacturers in the world in a bid to raise its competence. The company disclosed that it is in

of India aimed at having a echnical and managerial co-operation.

similar cooperation with Cement Group in areas of its competence which it

intention to accept. CCNN is set to benefit from these arrangements, which is vital for survival in the

in worse than we expected. Revenue was largely flat and gained a marginal 1.4% while

Gross margins consequently slumped from 52.4% to 12.8%. Operating cost also grew ahead of revenue and saw the company’s operating profits halving compared to Q1 11. Profit for the year ended 48% lower at

ocated in northern Nigeria an area that has recently been rocked by political violence. The muted

revenue reflects the impact of challenges in moving constraints that were felt

across the whole country weighed on gross margins. We however believe that the decline is too steep to be sustained. We expect a recovery in the margins as the year progresses, but still anticipate 2012 net income to end significantly lower

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Outlook, Valuation and Recommendation � We do not see CCNN improving its performance

significantly without investment in alternative sources of energy and an increase in its production capacity. The company has however been slow to implement a capital raising exercise and it has settled for an option that dilutes shareholders’ interest in the company.

� Nonetheless, we see CCNN’s planned strategic partnerships with some of the biggest names in the cement industry as value adding. We however do not expect the arrangements to improve earnings in the short term and as such we expect the company to continue lagging its peers. CCNN’s profitability margins are the thinnest and we expect the situation to remain so until the planned expansion project is fully implemented.

� We expect FY 12’s performance to be disappointing judging by performance in Q1 12. We are forecasting a small improvement from Q1 12 in which net income halved on a y-o-y basis. Nevertheless, CCNN’s share price has declined significantly and any improvement on the outlook can see a bounce back in the share price. Our speculative buy call reflects our opinion that the worst seems to have been discounted in the price and the company can only improve from the current levels. In estimating the fair value, we assume that the company will revert back to its historic performance with no added uplift from new expansion. We see the share price being capable of more than doubling at the sight of a

better outlook for CCNN. Speculative Buy.

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EQUITY RESEARCH

NIGERIA

AUGUST 2012

CEMENT

Lafarge WAPCO, (WAPCO)’s story hinges on the successful implementation of production increases at its Ewekoro plant, dubbed Lakatabu. Q1 12 showed spirited intent to succeed in the otherwise delayed ramping up of production and we see continued improvement in both volumes and efficiency going forward. With 4.5mtpa cement capacity, 90MW own generated electricity and a retooled distribution network, the future can only be bright for WAPCO. We have previously been less constructive on WAPCO as we felt the company was not moving fast enough to capitalise on its first mover advantage in as far as capacity additions is concerned. As stated, indications are clear that we should be entering a period of rapid volume growth for the company and as such revise our call from hold to Buy. � Production ramp up is reportedly going on well and by

our estimates capacity utilisation is closer to 80%, way ahead of DCP which we estimate to be around 65%. We see this improving further in 2012 which should translate into a huge jump in revenue growth and profit margins.

� Self-sustenance in power will improve plant availability and act to tone down the energy bill. Gas supply bottlenecks may negate this as the year progresses, but broadly, we expect a positive impact on profit margins from energy savings.

� Imports have also shown signs of significantly slowing down and the authorities also look intent on seeing their backward integration program bearing fruit. We believe this will be key in supporting cement prices in Nigeria, safeguarding the company’s healthy margins in 2012 and beyond.

� In establishing WAPCO’s intrinsic value, we used the DCF method which led us to a target price of NGN 58.2, indicating significant upside from the current price.

WAPCO

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Nature of business Lafarge WAPCO is a member of the Lafarge Group and manufactures Elephant Cement, a formidable brand in Nigeria on two production sites, one in Ewekoro and the other in Sagamu in Ogun State. It is the only company with a plant linked to the national railway network, a feature that we believe will be helpful in transporting its expanded volumes. Apart from expanding cement producing capacity, the company added a ready mix concrete business to its portfolio of offerings in 2010, with operations commencing only in Q4 11. This is in line with the Lafarge group’s stated strategy of seeking to generate more out of its current client base through value added products.

Anchor investor... WAPCO became a part of Lafarge following the acquisition of Blue Circle Industries by the Lafarge group in July 2001. WAPCO is a clear demonstration of Lafarge’s capabilities in funding expansion projects and the focus being given to the frontier market by the group as it seeks exposure in high growth regions. We believe the attention being given to such ventures makes companies like WAPCO more attractive and investors stand to benefit by aligning their investments to this jewel in the world’s leading cement producer’s crown. H1 12 financials review � WAPCO released a set of solid H1 12 results. Revenues

went up 57.1% to NGN 46.84 on the back of increased volumes as ramp up in production continues. By our estimate, the company’s utilisation levels stands at c70% and we expect it to increase as the year progresses. Revenue growth is thus likely to be driven largely by volumes for the rest of 2012.

� Gross margins stood at 38.8% having climbed down from the 57.4% of Q1 12, but an improvement from 31.4% for FY 11. Gross profit resultantly grew 81.1% to NGN 17.97bn. Slower growth in operating expenses which stood at 31.7% saw operating income soar 186.6% y-o-y to NGN 14.70bn. We expect margins to improve as the year progresses, underpinned by improved gas supplies and increasing volumes.

� Net income stood at NGN 8.81bn, 175.7% higher than the comparable period in 2011. Growth ratios in Q1 12 were way higher and we expected them to be toned down as the year progressed. Q1 12 was a particularly low base for comparison while tax rebates that were booked latter on in 2011 will provide a relatively higher comparative base. Added to that is the fact that WAPCO should now start absorbing the full tax impact at 30% in 2012.

� We note also the company’s move to branch from its core market in the south-west region and target the northern region, the Niger Delta, as well as the south east regions. Access to the railway network is making a difference in these efforts in as far as reaching the market is concerned, while a slowdown in imports is also expected to underpin demand.

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Outlook, Valuation and Recommendation 2012 has clearly started on a solid footing for WAPCO and we expect the growth tempo to be carried forward through to year end. We had a hold recommendation on WAPCO, premised largely on the delayed accrual of benefits from its capacity expansion program. H1 12 results have, however, shown that WAPCO’s 15% production capacity share in Nigeria, the rejuvenated distribution system and investment in the 90MW power plant have started to positively impact earnings. � Higher plant utilisation rates…

We expect WAPCO to realise close to 70% utilisation of its 4.5mtpa cement capacity by the end of 2012. As stated earlier, we see revenue being broadly driven by volumes in 2012, premised upon our expectations of success in the production ramp up process.

� Improved plant availability The commissioning of the power plant and expectations that gas supplies will improve for the remainder of 2012 will result in WAPCO recording fewer work stoppages. Apart from positively impacting volumes, we see this as being a key source of efficiency and is the driver behind our optimism on improved profit margins.

� Efficiency gains… We expect economies of scale, access to own generated power - which is cheaper - investments in the distribution channel and the banning of imports all on the back of stable factory gate prices to see profit margins improve significantly in 2012 and beyond.

We therefore expect the above to drive WAPCO’s growth while improving free cash flow generation in future. Using a DCF, we arrived at a target price of NGN 58.15 which is 33.7% above the current price. We thus upgrade our rating from hold to BUY.

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Dangote Cement

EQUITY RESEARCH

NIGERIA

AUGUST 2012

CEMENT

Dangote Cement (DCP)’s growth tempo continues uninterrupted, but the drive to list on the London stock Exchange looks to have stolen the limelight lately. Transparency is growing deep seated roots with disclosure levels well ahead of its Nigerian peers, while reports indicate that the company will soon get a new look board of directors with majority shareholder Aliko Dangote stepping down as the Chairman. We see this as being positive to the tightly held company and should help shore up the valuations even in the face of increased liquidity. The ramp up in production has also commenced and commissioned plants have since doubled capacity. We have previously expressed reservations as regards DCP’s ambitious expansion program, but events on the ground have significantly altered the market’s capacity to consume higher volumes. The protectionist stance taken by the Nigerian government as regards cement imports plays into the hands of DCP and its peers and hence we do not expect cement prices to come down significantly even as DCP increased utilisation levels. We advise accumulating DCP shares as its foray into the region continues to unfold. Accumulate

� Capacity utilisation currently stands at c65% and we expect to see further improvements as the year progresses. We believe DCP will be capable of achieving this while maintaining EBITDA margins well ahead of 50%.

� With WAPCO also increasing deliveries to the market, pressure on factory gate prices is inevitable. However we expect a ban on imports to support higher prices despite increased availability of cement.

� DCP’s share price has remained largely range boundsince listing mainly due to the illiquid nature of the counter. We however expect valuations to move above the prelisting levels as liquidity improves on the back of improved earnings generation and the impending London listing hence

our call to Accumulate shares.

20

Nature of business DCP is the market leader in the Nigerian cement industry with a 63% market share. In Nigeria, since doubled as the Obajana and IbeseProduction ramp up has also commenced and we expect utilisation levels to be above 70% by year end. DCP has the biggest regional expansion plans amongst its African peers. The company has plans to build integrated plants in Senegal, Zambia, Tanzania , Republic of Congo, Ethiopia, Gabon (all 1.5mtpa), as well as South Africa with 3.3mtpa. In Cameroon, DCP wants to install 1mtpa clinker grinding capacity, while import terminals will be constructed in Ghana (Tema&Takoradi -3mtpa), Cote(1mtps) as well as Sierra Leone and Liberia both (0.5mtpa).

Anchor investor… DHL represents the interests of Aliko Dangote, the richest man in Africa, according to a Forbesrepresents Aliko’s prime asset as its listing significantly boosted his net worth. As such a lot of good decisions have been made as regards DCP with transparency and higher levels of corporate governance, when compared to fellow indigenous Nigeria, being the most notable. London Stock Exchange has even seen Aliko considering stepping down as Chairman and hiring replace him. His stated desire to refocus the group’s attention towards infrastructure development can only mean a captive market for DCP. Our opinion is that DHL’s presence in DCP is value adding and a big positive for investors. Dangote is Africa’s richest person for a reason, only be positive to align one’s fortunes with thosomeone who understands navigating Africa’s biggest market and has a history of creating value from it. Q1 12 Financials Review… � Q1 12 production volumes were up by 38%, to

tonnes, and the company managed to significantly reduce imports to negligible figureturnover went up 18.0% to NGN 64,114

� Ibese and Obajana (line 3) commenced production ramp up, achieving utilisation levels of 38% and 75% respectively, and hence negatively affected overall utilisation levels for the whole group. We expect DCP to achieve c65% utilisation levels by year endthe production capacity that was operational at the beginning of 2012.

� Profit margins however came under pressure from energy prices. Unstable gas supplies saw DCP use more LPFO than previously planned, raising the company’s fuel cost significantly. PBT margins eagainst 51% for Q4 11. Management is however confident that the gas supply challenges will be resolved before the end of H1 12. Nonetheless, DCP invested in significant backup fuel reserves which will ensure no stoppages occur to affect tmomentum in volumes in 2012 and beyond.

� Taxable income ended Q1 12 at NGN 30.33bn, up o-y, with net margins sliding to 47% against 50% for the comparable period in 2011. Tax benefits remain intact and the company will continue pleast up to 2014.

DCP is the market leader in the Nigerian cement industry with a 63% market share. In Nigeria, production capacity has

Obajana and Ibese plants came on line. Production ramp up has also commenced and we expect utilisation levels to be above 70% by year end. DCP has the biggest regional expansion plans amongst its African peers. The company has plans to build integrated plants in Senegal, ambia, Tanzania , Republic of Congo, Ethiopia, Gabon

(all 1.5mtpa), as well as South Africa with 3.3mtpa. In Cameroon, DCP wants to install 1mtpa clinker grinding capacity, while import terminals will be constructed in

3mtpa), Cote D’Ivoire Terminal (1mtps) as well as Sierra Leone and Liberia both (0.5mtpa).

of Aliko Dangote, the richest Forbes magazine survey. DCP

prime asset as its listing significantly boosted his net worth. As such a lot of good decisions have been made as regards DCP with its unparalleled transparency and higher levels of corporate governance, when compared to fellow indigenous cement operations in

. The drive to list on the London Stock Exchange has even seen Aliko considering stepping down as Chairman and hiring a professional to

His stated desire to refocus the group’s re development can only mean

a captive market for DCP. Our opinion is that DHL’s presence in DCP is value adding and a big positive for investors.

is Africa’s richest person for a reason, and it can only be positive to align one’s fortunes with those of someone who understands navigating Africa’s biggest market and has a history of creating value from it.

were up by 38%, to c2.2m and the company managed to significantly

ligible figures. As a result, urnover went up 18.0% to NGN 64,114bn.

(line 3) commenced production ramp up, achieving utilisation levels of 38% and 75% respectively, and hence negatively affected overall utilisation levels for the whole group. We expect DCP to achieve c65% utilisation levels by year end with double

duction capacity that was operational at the

Profit margins however came under pressure from energy prices. Unstable gas supplies saw DCP use more

previously planned, raising the company’s fuel cost significantly. PBT margins ended Q1 12 at 47% against 51% for Q4 11. Management is however confident that the gas supply challenges will be resolved before the end of H1 12. Nonetheless, DCP invested in significant backup fuel reserves which will ensure no stoppages occur to affect the anticipated upward

n 2012 and beyond. at NGN 30.33bn, up 11% y-

s sliding to 47% against 50% for the ax benefits remain intact

and the company will continue paying low tax rates at

21

LOCATION CATEGORY Capacity

MTPA

Manufacturing

Senegal IntegratedPlant 1.5

Zambia IntegratedPlant 1.5

Tanzania IntegratedPlant 1.5

SouthAfrica IntegratedPlant 3.0

RepublicofCongo IntegratedPlant 1.5

Ethiopia IntegratedPlant 1.5

Gabon IntegratedPlant 1.5

GrindingPlants

Cameroon GrindingUnit 1.0

ImportTerminal

Ghana(Tema+Takoradi) Terminal 3.0

SierreLeone Terminal 0.5

Liberia Terminal 0.5

CoteD'Ivoire Terminal 1.0

Total 18.0

Outlook, Valuation and Recommendation Q1 12 financials are, at the least, satisfactory, but they do paint a good picture of what is likely to come from DCP for the rest of the year. DCP traditionally generates more towards the end of the year and we do not expect a change in the trend. In addition to history being on its side, we expect the following factors to underpin performance in 2012: � Improving gas supplies which we expect to

significantly cut down the use of the more expensive LPFO. Management stated that LPFO is at least 4x more costly than gas in firing the plant’s kilns.

� Improving utilisation levels across the group as newer plants start running at higher levels. As stated earlier, we expect utilisation to reach 65% by year end, which should point to significant volume growth as the company is now running with more than twice its capacity in 2011.

� Tied to the volume growth discussed above is the price that DCP can achieve at its factory gates. The banning of imports will significantly aid DCP in ensuring that prices remain stable. We expect DCP and its peers to increase deliveries without significantly altering prices in Nigeria and the market to easily absorb all products. A look at the experience in the emerging markets discussed earlier in this report canalso demonstrate that at current consumption levels, it is only but a matter of time before SSA, Nigeria included, creates space for additional capacity as consumption races ahead of production.

� DCP, traditionally, has the fattest EBITDA margins amongst its peers. The company has favourable long term gas supply contracts and newer plants that help in achieving this. However, imports, which normally came in at higher prices than own produced cement used to weigh down the already high margin. With exports due to stop completely for DCP by substituting with local production, we see DCP’s profit margins improving further.

� Lastly, DCP’s focus is now turning to regional operations. Plants in countries such as Senegal have already started to contribute positively. We expect a small contribution in 2012 and a significant improvement from 2013 and beyond.

DCP issued bonus shares at a rate of 1 share for every 10 held which increased shares in issue to 17bn. This is obviously positive for current holders of the shares. With the London listing on the way and the increased liquidity it brings, the move is clearly value adding to shareholders. We applied the DCF method to estimate the fair value for DCP’s shares including the bonus shares and arrived at a price of NGN 131.30, indicating significant upside from the current level. We remain constructive on DCP and thus advise purchasing the shares. We however remain cautious as increased liquidity can sometimes weigh down a share that has previously been tightly held, hence our more cautious Accumulate call.

Dangote Cement in Africa (Outside Nigeria)

22

ARM Cement Limited

EQUITY RESEARCH

KENYA

AUGUST 2012

CEMENT

Athi River Mining (ARM) is executing an ambitious capacity expansion program that will see it dominate East Africa, capacity wise. The company has just completed the first phase of its 1.5mtpa projects in Dar-Es-Salaam that is expected to start producing in August 2012. To complete its expansion, the company has accessed a USD 50m convertible note from the AFC (African Finance Corporation) which will be drawn down in Q3 12. This will add onto the already bloated foreign currency denominated borrowed position of the group. Ratings have appeared dearer relative to peers especially during periods when the shilling had significantly depreciated, but we are of the opinion that added capacity which is coming on line will drive earnings going forward, unwinding the rating. ARM’s exposure to forex denominated loans will maintain volatility in earnings, the positive being that ARM does not crystallise its exchange losses. We thus revise our rating upwards from hold to BUY. � The non-cement portion of ARM’s business

contributes c30% of revenues per year and the bulk of the income is in hard currencies. This, in our opinion, is a good enough hedge to sterilise the impact of its forex denominated debt. Additionally, it reduces the company’s reliance on cement smoothening out earnings that are bound to fluctuate in East Africa’s competitive market.

� Expansion will always be ARM’s trump card. The company is seeking self reliance in clinkering; a move that is positive for profit margins and is a competitive edge against competition that relies on importing clinker.

� ARM’s price is at the highest it has been over the past 5 years. 2011 saw fluctuations that mirrored the loss/profit of the mark to market forex loan positions, but its price remained capped at around the KES 200.00 level. We see the price breaking above this resistance level into unchartered territory

hence or constructive call on ARM. BUY.

24

Nature of business... ARM is the third largest cement manufacturer in Kenya in terms of grinding capacity (1.0 mtpa) and has operations in other SSA market, namely ARM Tanzania, ARM South Africa (PTY) Ltd as well as Maweni Limestone Ltd. Cement capacity is being increased to reach 2.5mtpa from the current 1.0mtpa. The company currently has excess grinding capacity with clinker coming from its 0.65mtpa plant in Kololeni. Its Kenya plant is closer to the main Nairobi market, which makes it highly competitive when it comes to prices. Cement is the core product accounting for 70% of the group’s revenue. Added to that, ARM produces quick & hydrated Lime, sodium silicate, various industrial minerals, fertilisers, special building products such as Sealmaster tile grout, tile adhesive, Wallmasters such as Bayramix and Walltek among others. In Kenya, the company controls 15% of the market and is completing construction of two plants in the Tanzania market, one in Tanga and another in Dar-es-Salam with a combined cement capacity of 1.5mtpa. Anchor investor... ARM was founded in 1974 by the Paunrana family who still control 51% of the company, and was listed on the NSE in 2007. The business started as a producer of agricultural lime and processed minerals but has grown into a force to reckon with in the cement industries of Kenya and Tanzania. The Paunrana family is still active and has been pivotal in driving the regional expansion initiative. The family’s history with the company has been value adding as can be demonstrated by the emergence of ARM as a force in East Africa. H1 12 Financials review... � A 60% surge in sales of Rhino cement during the first

half of 2012 underpinned a good set of results from ARM. Revenue went up 37% as it continues to gain market share with Bamburi being the main loser.

� Efficiency, however, suffered with the group’s PBT margin sliding 1.6 percentage points to 15.59%. One would expect higher volumes to be accompanied by efficiency improvements, but for a company as leveraged as ARM, above the line costs are prone to huge fluctuations.

� After tax income grew by 25% which is commendable and we expect the tempo to be maintained throughout 2012 and to be buttressed by income from the new Tanzania plant that is expected to start coming through from August 2012.

� The group generated KES 520m in cash from operations, applied a billion to investments Cash at the end of the period stood at KES 68m compared to KES 1.308bn as at the first half of 201.

� We expect earnings growth momentum to be carried forward into the second half and the fourth quarter in particular to be impressive as the ramp up in Tanzania production occurs. We expect growth ratios to be particularly high owing to the low base set in H2 11 on the back of the significant depreciation of the shilling.

25

Outlook, Valuation and Recommendation ARM’s management is bullish on the second half of 2012 owing to lower interest rates, a stable currency and strong demand coming from the infrastructure sector. We concur with such an assessment, but expect some factors peculiar to ARM to further drive earnings, the notable one being: � Control of the value chain.

Unlike some of its peers who rely on importing clinker, ARM will have capacity to provide all of its grinding mills with own produced clinker. We believe this will be positive for profit margins and can set ARM apart, allowing it to compete on traditionally sensitive items such as pricing.

� Strong demand expected out of Tanzania. Tanzania imports close to 1.5mtpa annually because the country has a deficit in production capacity. We expect ARM to benefit from those gaps which have ensured prices average USD 140 compared to USD 120 per tonne in Kenya. From Q3 12 onwards, ARM will be capable of making efforts towards plugging that gap.

� Low cost producer... ARM has the lowest production cost per tonne compared to competition. The company averages USD 58/tonne compared to more than USD 70 for its Kenyan peers, Bamburi and EAPCC.

We expect earnings to improve significantly between 2012 and 2014 as the commissioning of new plants allows higher volumes. Efficiency will improve in tandem with increasing volumes as economies of scale kick in. We are forecasting net income to quadruple between 2011 and 2013 propelling the share price beyond the highs attained in 2010. We thus upgrade our

rating from hold to BUY.

ARM Holdings - Cement Plants

26

EQUITY RESEARCH

KENYA

AUGUST 2012

CEMENT

Kenya’s largest cement producer now commands a 40% market share, down from 50% some 2 years ago. The company has made significant inroads as regards supplying fellow EAC nations from its revamped Hima plant and has more than made up for the loss of market share in Kenya. Bamburi is an efficient cement company that is endowed with steadily growing earnings compared to its peers. The company is free from the government interference that we find at EAPCC or earnings fluctuation induced by foreign currency denominated leverage as is the case with both Bamburi and EAPCC. We like it further owing to its Lafarge parentage and a diverse portfolio of cement and cement related products that have leadership position in the market. Bamburi has steadily recovered out of the slump on the NSE which bottomed up at the beginning of Q1 12. The share price is clearly on an upward trajectory and having made successive higher lows since the beginning of the year. Our valuation model points to a further 15% upside from the current levels hence our call for investors to hold on to their shares. HOLD. � Its Ugandan subsidiary; Hima Cement has increased

volumes following capacity expansion and we see continued growth in 2012 as the ramp up continues and other regional markets open up. Hima will be vital in maintaining healthy profit margins especially in the face of stiff competition in Kenya.

� The company retails its products at a premium to the competition. As expected, competitors resorted to pricing as a sales promotion tool and over the past two years, they have managed to wrestle a significant portion of market share.

� Bamburi has an added advantage it having a wider product offering that includes cement related items that are not offered by competition. Bamburiblox is growing into a formidable brand and we see it being capable of propping up profit margins even in the face of the stiff competition in Kenya.

28

Nature of business Bamburi is a member of the Lafarge group and engages in the manufacture and sale of cement and cement related products in eastern Africa, principally in Kenya and Uganda. It produces portland cement under the Power Plus, Supa Set, Multi-Purpose, Nguvu, and Plasta Plus brand names. The company also manufactures paving blocks under the brand name ‘BamburiBlox’. It is the largest cement manufacturer in Kenya with an installed annual capacity of 2.2 mtpa. The Hima plant in Uganda has installed capacity of 0.85 mtpa bringing Bamburi’s total capacity to 3.1 mtpa. Despite significant loss of its market share on increased supply and lower pricing by competition in the last 2 years, Bamburi is still the leader controlling 40% of the domestic market in Kenya. Anchor investor… Bamburi is one of Lafarge’s acquisitions that it executed in Africa before taking over Blue Circle. The company has been in the group for a while now and has since been primed to match the group’s ambitions in 2012 and beyond. For the five years prior to 2012, the group’s action has been to “Make Lafarge Ready for Today”. This entailed � Cost reduction, which commenced earlier than

competitors and is being accelerated � Completing significant geographic expansion. SSA has

been a recipient of huge investments from the group as Lafarge’s operations generally pioneered expansion across the region.

� Reinforced and optimised its portfolio globally with the SSA region together with other high growth regions like MENA increasing their influence in the portfolio. Lafarge developed organically 40mtpa capacity in emerging markets, entered new markets in the developing world and exited non-core positions while refocusing its attention on cement and aggregates.

� This was all in preparation for a period of significant focus on sales growth, cash generation, and returns

A closer look at Lafarge’s operation in SSA shows how the group has progressively moved to position itself according to the above roadmap. Our expectations are that Bamburi will from 2012 grow volumes and earn more from higher profit margins on the back of improved efficiency in line with the planning at group level. We are generally positive on Lafarge’s operations that we covered in this report because of the strategic direction from the group. FY 11 financial review… FY 11 financials were weighed down by higher fuel and power costs. Revenue went up 28% on improved volumes, as Hima came on line, but profit margins lowered as costs soared. Gross margins slipped form 34% to 28%, EBITDA margins from 29% to 26%, while net margins ended at 14% compared to 18% previously. As a result, net income stood at KES 5.234bn, a 3.0% improvement on the previous year. We however expect fortunes to turn as Hima reaches optimal production levels and economies of scale drive profitability.

29

Outlook, Valuation and Recommendation We expect a significant rise in volumes and hence profitability and profit margins in 2012 as Hima’s utilisation levels reach the optimal point. We believe that this will tone down any negative impact emanating from intensifying competition in Kenya. Factors critical in determining growth in 2012 and beyond include; � Market leadership …

Notwithstanding the loss of significant market share to new entrants and additional capacities, Bamburi still boasts a 40% share of the market. This has been backed by its strong brands and brand loyalty. The proximity to the virgin Southern Sudan market through its Hima plant, and the Lamu port will boosts its export revenues.

� Lafarge parentage… Lafarge parentage has been the key to early execution of expansion projects for the company. Lafarge took a decision almost a decade ago to seek exposure in high growth regions with Africa and the MENA regions receiving significant injections to execute plant expansion. Lafarge generally enjoyed first mover advantage across the region, and is set to continue dominating in just the same way that it dominates globally.

� Higher transport costs due to distance from market Bamburi’s flagship plant is in Mombasa, far from the main markets in Nairobi and its environs as well as the other parts of the country. Although it has established a plant in Athi River, extra demand is fed from its Mombasa plant. Cement is transported by road ensuring an additional cost to bring cement to the Nairobi. With the competition seeing improving efficiencies and volumes, we expect this to place further strain on profit margins.

� Huge cash pile to make the group more agile As at the end of 2011, Lafarge was sitting on a KES 7.13bn cash pile which we believe will help the group move quickly to stay ahead of competition especially given the tide for capital expenditure among cement companies in SSA. This is in stark contrast with the borrowed positions that its peers; EAPCC and ARM find themselves in.

Using a DCF to estimate Bamburi’s fair value, we arrived at KES 206 which is 15% above the current level. However, given that the company is flirting with the share price highs achieved in 2010, there are chances that there could be resistance around the KES 190 level, which could make

buying shares at these levels risky. HOLD

30

East Africa Port

The 25% government ownership down EAPCC, especially as regards valuations. On January 2012, the company’s shares were suspended, and remained so for two months, as the board and government were locked in a dispute. Government wanted to dissolve the board citing an imprprocess for clinker, a move that prompted Capital Markets Authority to suspended EAPCC from trading in a bid to protect shareholdershigh court later ruled that government had no power to order the board's dissolutionadmittance of the shares on the bourse. As if government interference is not doing enough to inhibit performance, EAPCC remains hamstrung by a long term Yen denominated loan which has been the driver of its poor performance for somopinion remains that the company privatised but for as long as the status quo remains, we remain averse to encouraging company. SELL. � EAPCC relies on clinker supplies from third parties,

a fact that has always negatively impacted itsprofit margins. We also note the entrance of newer and more efficient factories that are likely to use pricing as a tool to promote sales, which can only point to continued pressure on margins going forward.

� The KES 3.0bn loan is only 30% hedged leaving the company vulnerable to fluctuationmarkets. EAPCC is not strong relies on KES denominated inflows to loan.

� On a positive note, EAPCC is switching to coal from the more expensive LPFO. We expect this to mitigate margin compression as competition heats up.

� EAPCC is trading at half its January 2011 price, but ratings still look demanding, indicating the subdued earnings growth over the past twelve months. We thus reiterate our

overnment ownership has always weighed

down EAPCC, especially as regards valuations. On 17 2012, the company’s shares were suspended,

and remained so for two months, as the board and government were locked in a dispute. Government

citing an improper tender process for clinker, a move that prompted Kenya's

suspended EAPCC from protect shareholders. The Kenyan

government had no power to order the board's dissolution, leading to the re-admittance of the shares on the bourse. As if government interference is not doing enough to inhibit performance, EAPCC remains hamstrung by a long term Yen denominated loan which has been the main driver of its poor performance for some time now. Our opinion remains that the company can benefit if fully

for as long as the status quo remains, encouraging investment in the

supplies from third parties, negatively impacted its

profit margins. We also note the entrance of newer and more efficient factories that are likely to use pricing as a tool to promote sales, which can only point to continued pressure on margins

oan is only 30% hedged leaving the company vulnerable to fluctuations in the currency markets. EAPCC is not strong in exports and thus relies on KES denominated inflows to service the

EAPCC is switching to coal from nsive LPFO. We expect this to

mitigate margin compression as competition heats

at half its January 2011 price, but demanding, indicating the

subdued earnings growth over the past twelve We thus reiterate our call. SELL.

EQUITY RESEARCH

KENYA

AUGUST 2012

CEMENT

32

Nature of business EAPCC’s history dates back to the 1930s, as it started off as a trader in imported cement from England, a grinder of clinker imported from India and the operator of a 0.12mtpa Athi River cement plant in 1958. Capacity has since been upped to 1.3mtpa which makes it Kenya’s second largest producer. The company produces the Blue Triangle Cementadditionally, manufactures concrete pavers, kerbstones, cement slabs, and cement fence posts. It also makes cement tiles, culverts, panels, and tubes for the industry. Its main plant is in Kitengela, less than 30Nairobi. Anchor investor... The government owns a majority stake (52%) in the firm (25% directly and 27% through the National Social Security FundNSSF). Lafarge has a 14.6% stake. Government generally directs the strategic thrust which brings in both positives and negatives. As regards the positivelucrative government infrastructure developments and previously accessed lines of credit on the back of government backing. Government has served as a guarantor to the aforementioned Yen denominated The cons, however, eclipse the prosto stringent public procurement procedures that take away any agility it might have in moving faster thacompetition. Secondly, as evidenced by its suspension, government interference is often undesirable and counterproductive. The counter is thus shunned by the investing public largely because of Financials Review (FY 12 profit warning)

� EAPCC issued a profit warning stating that earnings for the year will be at least 25% lower than the previous year. Management cited high production costs and intensifying competition as the prime reasons. EAPCCposted a profit of KES 561m for FY 11

� Loss before tax in H1 12 was KES 175.4 m compared to a profit of KES 254.9 m for H1 11. A tax credit of KES 87.0m toned down the loss for the half year to KES 88m. The company did not pay an interim dividend.

� Management stated that to cope with the harsh outlook it will launch a recovery strategy to restore longgrowth and take advantage of demand for cement in the country and the region which it said was strong. however do not share their optimisbe slow to the market compared to peers because of its counterproductive tendering system. Furthercompany failed to capitalise on the more efficient coal fired production system, there is limited room for it to manoeuvre and bring cost down.

� We note the boardroom wrangles that we believed to have been disruptive and the prime reason behind the losses. Additionally, a plant breakdown in November 2011 should have aggravated the situation.

� The rising cost of electricity, packaging matunfavourable movements in the foreign currency exchange rates also weighed in to dampen performance. The company will remain vulnerable to a depreciating KES because of its Yen denominated loan.

EAPCC’s history dates back to the 1930s, as it started off as a trader in imported cement from England, a grinder of clinker imported from India and the operator of a 0.12mtpa Athi River cement plant in 1958. Capacity has since been upped to

Kenya’s second largest producer. Blue Triangle Cement brand and

manufactures concrete pavers, kerbstones, cement slabs, and cement fence posts. It also makes cement tiles, culverts, panels, and tubes for the construction

Its main plant is in Kitengela, less than 30km from

majority stake (52%) in the firm (25% directly and 27% through the National Social Security Fund, NSSF). Lafarge has a 14.6% stake. Government generally

the strategic thrust which brings in both positives and As regards the positive, EAPCC has access to

government infrastructure developments and has es of credit on the back of government

backing. Government has served as a guarantor to the aforementioned Yen denominated debt.

pros. Firstly, EAPCC is subject stringent public procurement procedures that take away

gility it might have in moving faster than the competition. Secondly, as evidenced by its suspension, government interference is often undesirable and

. The counter is thus shunned by the investing public largely because of these factors.

(FY 12 profit warning)...

EAPCC issued a profit warning stating that earnings for the year will be at least 25% lower than the previous year. Management cited high production costs and intensifying competition as the prime reasons. EAPCC had

ofit of KES 561m for FY 11

Loss before tax in H1 12 was KES 175.4 m compared to a profit of KES 254.9 m for H1 11. A tax credit of KES 87.0m toned down the loss for the half year to KES 88m. The company did not pay an interim dividend.

cope with the harsh outlook it will launch a recovery strategy to restore long-term growth and take advantage of demand for cement in the country and the region which it said was strong. We

share their optimism. EAPCC will always be slow to the market compared to peers because of its counterproductive tendering system. Furthermore, if the company failed to capitalise on the more efficient coal fired production system, there is limited room for it to

ost down.

We note the boardroom wrangles that we believed to have been disruptive and the prime reason behind the losses. Additionally, a plant breakdown in November 2011 should have aggravated the situation.

The rising cost of electricity, packaging materials and the unfavourable movements in the foreign currency

also weighed in to dampen performance. The company will remain vulnerable to a depreciating KES because of its Yen denominated loan.

33

Outlook, Valuation and RecommendationAs stated earlier, we do not see EAPCC’s outlook changing for as long as government interference remains note the mention of plans to fully we expect it to take a while and manner that is not value adding to minorities. We however note the following factors that are likely to have an influence on future performance at EAPCC. � Undervalued EAPCC land

EAPCC has 12,000 hectares of land KES 166m. Land in comparable areas cKES 1.0m per hectare compared to Kthe books. This value will eventually be unlocked under the current setting with the company selling it to private developers or if EAPCC is privatised andmanagement seeks to unlock value from the land.

� Coal as a primary source of fuelThe introduction of coal as a primary source of fuel is likely to see pressure on profit margins ease off and if this happens on the back of exchexpect the company to grow its earning significantly.

� Proximity to the market...

Kenya’s largest producer, Bamburioperations closer to the coastal city of Mombasa. EAPCC is closer to Nairobi which is the the country.

We however remain unconvinced that recover from its current doldrumssuspension all but acted to cement investor scepticism. We expect earnings and earnings growth to remain subduedwhich, when applied to our DCF modelvaluation at current levels. We advise selling firstly because there are clearly better opportunities in the cement sector, and secondly, to avoid a company ridden with government

interference and lastly on the basis of

Outlook, Valuation and Recommendation earlier, we do not see EAPCC’s outlook changing for

as long as government interference remains apparent. We fully privatise the company, but and it may be executed in a

manner that is not value adding to minorities. We however note the following factors that are likely to have an influence on future performance at EAPCC.

EAPCC has 12,000 hectares of land with a book value of m. Land in comparable areas currently fetches

compared to KES 0.01m carried in This value will eventually be unlocked either

under the current setting with the company selling it to EAPCC is privatised and new

to unlock value from the land.

Coal as a primary source of fuel The introduction of coal as a primary source of fuel is likely to see pressure on profit margins ease off and if this happens on the back of exchange rate stability, we expect the company to grow its earning significantly.

Kenya’s largest producer, Bamburi, has its prime operations closer to the coastal city of Mombasa. EAPCC is closer to Nairobi which is the largest cement market in

unconvinced that the company can current doldrums, especially as the

suspension all but acted to cement investor scepticism. We expect earnings and earnings growth to remain subdued which, when applied to our DCF model, points to full valuation at current levels. We advise selling firstly because there are clearly better opportunities in the cement sector,

to avoid a company ridden with government

y on the basis of its full valuation. SELL

-2 4 6 8

10 12 14 16 18

ARM

PER(2012F)

Source: IAS/company reports

EAPCC

Bamburi

PER Mean

Source: IAS/company reports

34

Cement

EQUITY RESEARCH

KENYA

AUGUST 2012

CEMENT

Tanga has announced plans to invest USD 165m to upgrade its plant with the aim of boosting output for exports. The company, which upped its grinding capacity to 1.2mtpa in 2010, is looking at upgrading clinker capacity to 1.1mtpa. Tanga has also invested in establishing a presence in both Rwanda and Burundi and management’s plan is to increase output so as to be capable of serving these markets. Cement consumption in East Africa has historically grown at a faster pace compared to other regions in SSA, and as such we expect Tanga’s enhanced capacity, which is scheduled to come on line in 2015, to come into a market with significant cement appetite. We see Tanga registering significant improvement in profit margins coming out of this investment. Own produced clinker tends to be cheaper, while increased volumes generally bring efficiency owing to economies of scale. We thus maintain our constructive call on Tanga. BUY. � Tanga relied on the more expensive clinker

imports to fulfil grinding requirement while its plant was shut down for an upgrade. This was aggravated by unreliable power supplies, rising fuel prices and a weak TZS which all acted to negatively impact earnings generation in 2011. Most of these bear factors have however since reversed and we thus expect Tanga to register solid growth for FY 12.

� Exports into inland nations such as Rwanda and Burundi often generate wider margins than domestic sales. We expect the increased focus on exports to buttress profitability especially on the back of increased clinkering capacity in 2015.

� Competition from cheaper imports, however, remains problematic. Authorities are yet to re-enact the import duty barrier as promised. We, however, still expect cement producers to generate decent profits given that cement margins

in the region are among the highest world over.

36

Nature of business… Tanga Cement, which trades as Simba Cement is 62.5% owned by AfriSam Mauritius, an investment company. In Tanzania, it has the second largest cement plant with 1.25mtpa grinding capacity which accounts for 42% of installed capacity. Market share stands at 34% and the company has made inroads in exporting into the region, starting with Rwanda and Burundi.

FY 11 financials review… � Sales went up 8% driven largely by the release of

government funding for infrastructure projects. Exports to Rwanda and Burundi also improved and we expect the trend to be carried forward into 2012.

� Profit margins, however, declined significantly. Gross margins slipped to 27.3% against 33.9% in 2012 driven in the main by clinker imports whose landed cost is significantly higher than clinker produced by the company.

� EBITDA margins, likewise, declined from 23.6% to 17.00% with higher energy costs (electricity and fuel) driving operating costs. Additionally, the depreciation of the TZS pushed the cost of imported raw materials up. Of note was the use of diesel, whose price has also risen significantly, to fuel backup generators during power outages. EBIT consequently went down 16% to TZS 39.69bn.

� A higher tax rate of 40% compared to 29% in 2010 saw attributable income ending the period 33% lower than for the previous year. Tanga paid a dividend of TZS 86.20 pe share, lowering the payout ratio to 24.6% compared to 48% for the previous period. The dividend yield works out to 3.62% at the current trading price.

Outlook, Valuation and Recommendation

Our optimism as regards Tanga’s performance is hinged not only on the reversal of 2011’s negatives, but a host of factors that we believe can enhance the company’s ability to grow earnings. Like its peers in East Africa, the company is exposed to fast growing consumption, low per capita consumption rates and comparatively lucrative prices, unmatched by any other region in the world. Key drivers peculiar to Tanga include: � New clinker capacity that will make the company 100%

reliant on its own production. This will have a significant and durable positive impact to profit margins. Twiga, which relies on its own clinker, has fared better over the past years than Tanga on profit margins, a fact that reflects the potential benefits to Tanga.

� Tanga took the initiative to push sales in the region. The East African community is making solid progress towards integrating and it will not be long before trade barriers along political boundaries are broken and cement companies will have an opportunity to market to the region’s 133m residents. We believe Tanga’s move will be value adding as it can entrench its position ahead of the competition.

In establishing Tanga’s intrinsic value, we used the DCF method. Key considerations included our expectations that the moderate growth on revenues will stay intact, but profit margins will improve significantly. We have thus maintained our rating on the company. BUY

37

EQUITY RESEARCH

KENYA

AUGUST 2012

CEMENT

Twiga was due to commission its upgraded clinker kiln (no. 3) in May 2012 that would bring Tanzania’s current largest producer’s integrated capacity to 1.4mtpa. Volumes have already been improving, spurred mainly by improved plant availability as the company’s investment in alternative power sources started bearing fruits. Profit margins were, however, negatively impacted by a higher energy bill that was aggravated by a sliding shilling. Growth in 2011 was thus curtailed, but we believe conditions have since changed and the company is poised to post strong growth in 2012 and beyond, underpinned largely by volume growth and robust demand in Tanzania. Twiga remains one of our favourite cement stocks owing to compelling valuations, notwithstanding prohibitive restrictions for foreign participation on the DSE. Our Buy call thus remains intact.

� Kiln 3 was brought on line in May 2012 and we expect the impact of the ramp up in production to be significantly felt in Q4 12. Apart from the expected increase in output volumes, the upgraded kiln will make Twiga 100% reliant on own clinker which should have a profound impact on profit margins.

� Own power generation capability and the expected completion of gas infrastructure, notably the Songo-Songo extension and the Mnazi Bay pipeline, will all act to dampen the impact of energy costs going forward. When this is added to efficiency improvements on the back of the capacity upgrade, we see Twiga’s profit margins improving significantly.

� Tanzania remains vulnerable to imports, especially from Asian nations - principally Pakistan, as the import duty that previously protected East African producers is yet to be reinstated.

� Our call thus indicates our confidence in the ability of the company to grow its volumes while exploiting the positive changes in the Tanzania energy sector. We see 39.6% upside on current valuations. BUY

39

Nature of business Twiga has a strong hold on Tanzania’s foremost cement market of Dar-es-Salaam. Management estimates the company’s market share at 46%. Twiga now has 1.4mtpa of integrated capacity following the commissioning of a refurbished clinkering line, which added 0.25mtpa. Its share of cement capacity stands at 47% and is due to decline with the completion of ARM’s investment as well as DCP’s planned foray into East Africa. The company manufactures the Twiga Ordinary and Twiga Extra brands which are formidable brands that are marketed via an extensive distribution network. Anchor entrepreneur The company is 69.25% owned by Heidelberg Cement, a multinational Norwegian cement company that has several operations in SSA. The parent’s history in Africa dates back as far as the mid 1960s, when its operations were then run by Scancem International which eventually became part of Heidelberg Cement in 1999. Today the company has sizable operations, especially in West Africa, with a total of 13 production sites, 4 clinkering plants and 9 grinding factories. In Tanzania, it owns Twiga and has been instrumental in funding and implementing the 0.25mtps expansion programme at the company. Heidelberg, however, owns 69.25%, which is above the 60% foreign ownership threshold. This acts largely as a value trap as holders of the shares are allowed only to sell to locals, thus dampening valuations. FY 11 Financials review FY 11 sales volumes grew by a moderate 2% y-o-y, while turnover added 8.8%, indicating benefits from exploiting pricing opportunities in 2011. Volumes were impacted negatively by slower activity in the construction industry and management notes this was driven primarily by power shortages which affected the whole economy. Price adjustments were largely to pass on cost of production to customers as costs rose in line with the depreciating currency. Alternative energy sources are paid for in hard currency and a weaker shilling impacted the cost line negatively. Gross profit suffered further as the company imported relatively more clinker than in 2010 to enable refurbishment at its clinkering plant. Erratic power supply additionally forced more work stoppages which were aggravated by breakdowns that were also related to power outages. The result was a surge in production costs with gross profits declining 1.7% to TZS 100.0bn and gross margins sliding from 51% to 46%. Attributable income, nonetheless, closed flat at TZS 50.6bn, with Twiga converting 23% of its revenue to the bottomline. Cash generation improved, with cash from operations closing at TZS 75.57bn compared to TZS 42.67bn previously. Cash and cash equivalent at the end of the period consequently went up by TZS 19.0bn to TZS 46.24bn. The total dividend payment of TZS 180 per share was therefore easily affordable and worked out to a pay-out ratio of 64% and a dividend yield of

7.38%.

40

Outlook, Valuation and Recommendation We have been constructive on Twiga and its peer Tanga, because of the relatively lower valuations and the strong consumption growth in East Africa. We believe those factors still remain in play and make Tanzania cement companies in general very attractive. For Twiga, we can, however, add the following, which are peculiar to the company: � Increased production capacity

Twiga now has 1.4mtpa integrated capacity which places it in a good position to benefit from the aforementioned fast paced growth of cement consumption in East Africa.

� Now 100% reliant on own produced clinker

Performance in 2011 showed the importance of owning an integrated plant. Twiga now has the capacity to produce 100% throughput to its grinders and we expect this to be hugely positive for profit margins going forward.

� Possible improvement in power supply East Africa is gaining prominence as a gas and oil hub and we expect this to positively impact power generation. For Tanzania projects such as the Songo-Songo gas to electricity project will reduce electricity costs, while providing industrial users of gas such as cement producers a cheaper source of fuel for their kilns.

� Cheap valuations Our DCF model yields a target price of TZS 3,405, which is 39.6% higher than the current price. We applied a WACC of 16.27% and expect 6% perpetual growth for Twiga. The biggest risk to our valuation remains the lifting of restrictions on foreign participation on the DSE. If that happens, we believe there will be further potential upside on the share price. We were positive on the counter in our last update and are maintaining that

stance. Buy

41

Lafarge (Zimbabwe)

EQUITY RESEARCH

ZIMBABWE

AUGUST 2012

CEMENT

Lafarge Zimbabwe has been on a recovery path since Zimbabwe dollarised. The use of hard currency brought a lot of positives to the company. On the one side, the company can now undertake significant capex which was not possible during the hyperinflationary environment, while on the other hand, purchasing capabilities of its customers has been enhanced by dollarisation. Refurbishments have allowed higher plant utilisation levels which brought about efficiency and significant profitability improvements. A recovery in the retail market has also ensured all cement produced finds takers at factory gate prices of cUSD 185/tonne, which is close to the top end in SSA. Our bullish view on the stock is thus hinged on the opportunity that Lafarge has to increase both volumes and efficiency without significant capex, while maintaining its lucrative pricing. Buy.

� Current capacity utilisation stands at 67% due to operational constraints such as inconsistent power supply. The company’s clinkering capacity of 0.35mtpa has the potential to support a 0.56mtpa plant. Lafarge exports excess clinker to Malawi.

� Zimbabwe’s cement capacity stands at 1.9mtpa from the three main players, Lafarge Zimbabwe (0.45mtpa), Sino Zimbabwe (0.25mtpa) and PPC (1.2mtpa). However, due to limited capacity utilisation, cement is not being produced at optimum capacity making the product scarce and often subject to price manipulation.

� Per capita consumption currently stands at 60kg, which falls below the regional average of 92kg. Demand is driven largely by retail buyers, but we envisage significant construction projects taking off especially in the post elections period. The mining sector in particular is likely to be a key driver in providing projects for the construction industry. We see this as a particularly significant area of growth going forward.

� Our DCF model led us to a target price of USD 1.45,

which points to significant upside. Buy.

43

Nature of business Lafarge Cement Zimbabwe Limited, formerly Circle Cement Limited, is a Zimbabwe-based manufacturer and distributor of cement and allied products. Its plant is the second largest in the country and the closest to Zimbabwe’s capital Harare, which affords it control of a lion’s share of the nation’s foremost cement market. Clinkering capacity stands at 0.35mtpa while grinding capacity is at 0.45mtpa. The company has excess clinkering capacity and often exports clinker to Malawi where Lafarge’s plant there sits on an exhausted limestone deposit mine. Anchor shareholder… The Company is majority-owned by the Lafarge Group, which controls 76% of its issued share capital. Lafarge in 2011 expressed its interest in increasing cement capacity to 1.0mtpa and placed a five year time frame on the program. We, however, believe that Zimbabwe’s indigenisation laws may impact that commitment negatively as the 76% control is in excess of the 49% foreign ownership stipulation. Nonetheless, like its major competitor PPC, the company has a ZSE listing which places it on a better footing as shares held by the public broadly qualify as indigenous. Our opinion is that, while full compliance will obviously hurt Lafarge, it will start at a much better position than many other foreign owned companies in Zimbabwe. Q1 2012 Results overview…

Volumes driven revenue growth… Revenue for Q1 2012 grew by 35.2% to USD 21.9m as capacity utilisation improved to 67% owing to better plant availability. Refurbishments in 2011 and improved electricity supply were the major drivers. We expect continued improvements in utilisation which should also act positively on profit margins as economies of scale kick in. Domestic demand growing… There is no concrete estimate of the size of the Zimbabwean market, but what is clear is that everything being produced is currently being consumed. Management estimates that the domestic market grew 28% in Q1 12 (q-o-q) with the retail section remaining the most dominant, while the construction sector maintained its 18% contribution. Improving efficiencies supporting margins growth The operating profit margin increased to 14% despite the annual kiln shutdown that was undertaken in the quarter - prior period operating margin was 10%. Kiln utilisation stands at a high of 90% up from 84% for the prior period. Minimal borrowings guaranteed by the Lafarge group The group is set on on increasing its market share from last year, while also focusing more on the local market with excess product being exported to Malawi. Consequently, export volumes for Q1 2012 were 26% below last year, as more cement was supplied to the more profitable domestic market. The company is finalising the re-organisation and rightsizing of its business. Current local and offshore borrowings amounted to USD 3.2m and are guaranteed by the Lafarge group.

44

OUTLOOK FY 2012 targets revised upwards Management revised upwards its FY 2012 revenue target to USD 62.0m (initial target USD 60.0m), up from USD 50.0m for FY 2011, while the operating profit margin is expected to improve to 20% compared to 11% for 2011 as efficiencies continue to improve. The 2012 capex budget of USD 4.0m is expected to result in better plant reliability and improved efficiencies. Cash flow generation is also expected to improve in line with improved operating margins. Lafarge group continues to lend support, despite indigenisation threats The company continues to receive technical and financial support from the Lafarge Group. An indigenisation plan was submitted and management is confident that all stakeholders’ expectations will be met. Plans to increase capacity and distribution network The company also has plans to increase its production capacity to 1.0m tonnes, and to increase its distribution to cover the more inaccessible areas within the country. Mr F.F.O Essan, who was recently appointed the Chief Executive Officer for Lafarge South East Africa, expressed confidence in the Zimbabwe operation, and reiterated that besides growing cement sales it is also looking at improving sales for speciality products and aggregates. Valuation and recommendation Using a DCF valuation we derive a target price of USD 1.45. The counter is tightly held limiting downside. At an undemanding forward PER of 6.6x, and also considering the prospects of improving activity in the construction industry by government, private players and the mining sector, we rate the counter a BUY.

The aggregates that are sold by Lafarge Cement Zimbabwe

include:

• 20 mm or 3/4 stones

• 6 mm

• Washed sand

• Quarry dust / unwashed sand for prefabricated

units, perimeter walls and brick moulding

• Crusher run, and

• Iron stone for road surfacing

45

Lafarge (Zimbabwe)

EQUITY RESEARCH

ZAMBIA

AUGUST 2012

CEMENT

On the back of broader macroeconomic growth, which saw the Zambian cement industry grow by 20% in 2011, FY 2011 was an exceptionally strong year for Lafarge Cement Zambia (“LCZ”). Following its successful expansion efforts, which saw the commissioning of the Chilanga II cement mill and packaging plant in November 2008, the company increased its production capacity from 0.65 to 1.23 mtpa. Over the past 5 years, cement produced has increased from 0.5 mtpa to 0.9 mtpa in FY 2011, with exports emerging from zero to 0.30m tonnes, representing 31% of total production. Revenues have grown at a 5-year CAGR of 22.1% whilst net profits have grown at a 5-year CAGR of 29%, representing a 6 percentage point increase in net margins from 19.5% to 25.8%.

� The company reached record levels of production, revenue and profitability. Total production reached 0.99 (representing 80% capacity utilisation), total revenue was ZMK 879bn (USD 172m), and a net profit after tax of ZMK 227bn (USD 45m) was achieved.

� The company remains the dominant cement producer in the Zambian market, with a production capacity of 1.23mtpa and a market share of over 80%. In FY 2011, 303,000 tonnes of cement or 30% of its total production was exported, which combined with 57,000 tonnes of clinker exports, accounted for 32% of total revenue.

� In July 2011, the company introduced a new cement product dubbed “SupaSet” Cement targeted at Zambian concrete and block consumers.

� LCZ is currently trading at a PER of 7.06x, which is lower than our sample average PER of 7.26x. Using a DCF valuation, we arrive at a target price of ZMK 9,229

per share representing 15% upside. BUY.

47

Background and Nature of Business Formed in 1949 by the Northern Rhodesian Government and the Colonial Development Corporation, now the Commonwealth Development Corporation (CDC), Chilanga Cement Zambia commenced cement production in 1951, installed two kilns in 1956 and 1967, commissioned the Ndola Plant kiln in 1969, and added a second kiln in 1974. The company was later privatised under the government privatisation programme, becoming the first company 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 an additional 34% stake in Chilanga Cement through a compulsory offer to minorities, bringing its total shareholding to 84%. In 2007 Chilanga Cement changed its name to Lafarge Cement Zambia. In November 2008, the then President of the Republic of Zambia commissioned LCZ’s newly installed “Chilanga II” cement mill and packing plant, which saw its cement production capacity increase by 89% from 0.65 mtpa to its current production capacity of 1.23mtpa. The principal business of the company is the manufacture and sale of cement and cement aggregates. FY 2011 Results Overview Top Line and Demand LCZ’s revenue for FY 2011 increased by 19.8% y-o-y from ZMK 734.0 bn to ZMK 879.0 bn, driven by sales in H2 2011 which accounted for 59% of total revenue. Volumes grew 25.4% y-o-y from 0.79 mtpa to 0.99 mtpa, with the company resuming production at its Ndola Kiln and operating at full capacity in H2 2011. Demand was driven by both domestic and export markets, with domestic revenue growing by 38% y-o-y versus a 7% decline in export revenue y-o-y. Key export markets remained the DRC (61%), Burundi (22%) and Malawi (9%) for cement, and Malawi (100%) for clinker. Revenue per tonne (RPT) sold stood at ZMK 871,902 per tonne for domestic sales and ZMK 933,271 per tonne. Gross margins improved by 2.9 percentage points y-o-y from 56.1% to 59.0% in FY 2011 owing to a better product-mix. Operations and Cashflow Owing to significant demand in H2 2011, operations resumed at the Ndola Kiln, which had been offline from June 2010 owing to slower demand at the time. Commensurately, distribution and administrative expenses increased by 3% y-o-y to ZMK 82.0bn and 7% y-o-y to ZMK 113bn respectively. Employee remuneration accounted for 44% of overall operating expenses and increased by 12% y-o-y, whilst the average number of employees reduced by 9.6% y-o-y from 654 employees to 591 employees in FY 2011. Marketing spend increased sharply by 85% to ZMK 11bn, in part driven by advertising and brand awareness of its SupaSet Cement product released in mid-2011. As revenue growth outpaced opex growth, the resultant effect was an increase in the operating margin from 30.1% to 35.6% in FY 2011. Following the full repayment of borrowings related to the USD 120m Chilanga II expansion project in 2010, finance

costs declined by 96% from ZMK 27bn to ZMK 0.95bn.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2009 2010 2011 2012 E 2013 E

ZM

K M

illi

on

s

Domestic Revenue Export Revenue

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2009 2010 2011 2012 E 2013 E

ZM

K M

illi

on

s

EBITDA Operating Profit Including Exceptionals Operating Margin %

0%

5%

10%

15%

20%

25%

30%

35%

2009 2010 2011 2012 E 2013 E

ROaA ROaE

Top Shareholders

Pan African Cement Limited 50.10%

Financiere Lafarge 33.95%

LuSE Central Share Depository 11.92%

Lafarge Share Certificate Holders 4.03%

100%

48

The effective tax rate increased marginally by 2 percentage points to 30% in FY 2011, which netted against lower finance costs, resulted in attributable net profit growth of 60% from ZMK 119bn to ZMK 191bn in FY 2011. Net margins improved from 16.2% to 21.7%; EBITDA margin increased from 35% to 39%; and ROaE increased from 18.9% to 25.5%. Operating cashflows where strong, and grew by 65% from ZMK 198bn to ZMK 327bn. Modest CAPEX of ZMK 25bn was offset by investment inflows of ZMK 7bn from the 14% stake in Mbeya Cement (Tanzania) and interest income. With no debt on its books, and sufficient operating cashflows to finance its working capital and CAPEX, LCZ paid out record dividends of ZMK 115bn, the only financing activity in the year. Despite the significant dividend disbursement, net cash and cash equivalents (CCE) increased by ZMK 194bn, propelling CCE by 118% from ZMK 164bn to ZMK 358bn. As at 31st December 2011, the company had no debt on its balance sheet. OUTLOOK SuperSet In mid-2011, LCZ introduced a new Portland Composite Cement formulation called “SuperSet”, which is targeted at block-making and concrete. Developed in Zambia, SuperSet is a fast-setting and efficient cement product, particularly for the block-maker. It sets in approximately half the time standard cement sets, and uses less water. The development of SuperSet in-part is an attempt to set Lafarge apart from current (and prospective - think Dangote) competition by developing homegrown solutions for the local consumer, whilst leveraging the group’s R&D capabilities. We expect it to be a key performer. New Product Lines Following completion of the significant capacity expansion completed in 2009, and the subsequent move to eliminate all debt owed by the company, Lafarge management has focused on product depth. In FY 2011, the CAPEX bill was largely an investment in Aggregates Crusher equipment, which will enable the company to foray into the aggregates and concrete business. Current Capacity and Export Markets Although further expansion plans are on-hold, with excess capacity exported, LCZ saw operations reach full capacity and the Ndola Kiln reinstated in H2 2011 following strong domestic and regional demand. We expect current capacity to remain sufficiently large for the Zambian market. However, export markets in the DRC and Burundi, which have commanded a premium to domestic sales in terms of average RPT sold, are expected to remain strong but will generate less average RPT owing to recent trends in the ZMK / USD rate. Valuation and recommendation Using DCF valuation, by applying a discount rate of 21% and constant growth rate of 5.0%, we derive a target price of USD 9,229. This represents 15% upside potential, and we expect that dividend payout will remain significant. BUY.

Lafarge Cement Zambia Product Portfolio

Mphamvu

• Flagship product designed for retail users

• General purpose cement for building and structural use

Powerplus

• Designed for contractors

• For use in the pre-cast market, and specialised building applications

SupaSet

• Newest product line, developed in Zambia

• Targeted at block-makers and for concrete

• Fast setting, and reduced water requirement

49

CapitalSecuritiesBotswanaGround Floor,Exchange HouseBlock 6, Plot64511Fairgrounds,Gaborone,BotswanaTel:+ 267 318 8886Cell:+ 267 7 132 1421+ 267 7 162 4390

Imara AfricaSecurities (Adivision of ImaraSP Reid)Imara House,Block 3, 257Oxford Road,Illovo,Johannesburg,2146South AfricaDirect line:+27 11 550 6223Mobile:+27 82 468 8126Tel:+27 11 550 6200Fax:+27 11 550 6295Imara SecuritiesAngolaSCVM LimitadaRua Rainha Ginga74, 13th Floor,Luanda, AngolaTel:+244 222 372 029/36Fax:+244 222 332 340

Imara EdwardsSecurities (Pvt)Ltd.Tendeseka OfficePark1st Floor Block 2Samora MachelAve.Harare,ZimbabweTel: +2634790590Fax:+2634 791435

4 Fanum HouseCnr. LeopoldTakawira/JosiahTongogara StreetBulawayoTel:+263 9 4554Fax:+263 9 66024Members of theZimbabwe StockExchange

Imara S P Reid(Pty)LtdImara House,Block 3, 257Oxford Road,Illovo,Johannesburg,2146South AfricaTel:+27 11 550 6200Fax:+27 11 550 6295Member of theJSE SecuritiesExchange

Namibia EquityBrokers (Pty)Ltd1st Floor CityCentreBuilding, WestWingLevinson ArcadeWindhoekNamibiaTel:+264 61 246 666Fax:+264 61 256 789Member of theNamibia StockExchange

StockbrokersMalawi LtdGround Floor, NBMBusiness Centre,Cnr HannoverStreet& HendersonStreetBlantyreMalawiTel:+265 08 824 327,09 824 32708 202 758Member of theMalawi StockExchange

StockbrokersZambia Ltd2nd Floor(Wing), StockExchangeBuildingCentral ParkCornerChurch/CairoRoadsP O Box 38956LusakaZambiaTel:+260 211232455Fax:+260 211224055Member of theZambiaStock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this reportmay not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara S.P. Reid (Pty) Ltd, (“Imara”)from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to itsaccuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date ofthis report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including theirrespective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arisingfrom any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible formaking its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companiesand their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, fromtime to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have aconsulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicablelaw, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in aninvestment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This reportmay not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed toprofessional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Actof 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for anypurpose. © Imara Africa Securities (A division of Imara SP Reid)

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