Building boom to spur cement firms’ share rally at NSE
Bags of cement at a warehouse in Nairobi. PHOTO | FILE
What you need to know:
The counters have been on an upward trend over the past one month, led by EAPC with a gain of 20 per cent to Sh66 a share.
Bamburi has gained 9.3 per cent over the period to Sh153, while ARM is up 3.7 per cent to Sh85.
The price highs for the past one year for EAPC, Bamburi and ARM are Sh110, Sh214 and Sh96.50 respectively.
Recent gain by listed cement stocks is likely to continue in the coming months as investors factor in potential of supplying major infrastructure projects.
Analysts say the counters already went through a price correction in the second half of 2014, bringing down valuations relative to their peaks over the past one year.
The counters have been on an upward trend over the past one month, led by EAPC with a gain of 20 per cent to Sh66 a share.
Bamburi has gained 9.3 per cent over the period to Sh153, while ARM is up 3.7 per cent to Sh85. The price highs for the past one year for EAPC, Bamburi and ARM are Sh110, Sh214 and Sh96.50 respectively.
“In 2013 going into the first half of 2014 the counters did very well in the wake of the construction boom, but we saw the price rally cool off in the second half of last year when there was nothing much to excite investors following payment of dividends,” said Old Mutual Securities analyst Eric Munywoki.
“Going forward, as they supply cement for the infrastructure projects and expand capacity, we should see investor interest go up again and hence the upside in their valuations.”
Genghis Capital analyst Mercyline Gatebi said while the shares are gaining on positive investor sentiment that has pushed up demand, the rise may not be as steep as seen during the last rally in 2013 due to their high trading multiples.
“ARM is trading at high trading multiples with a price to earnings (P/E) ratio of 30.29 which is above both the industry and market P/E of 16.76, making the share overvalued. Bamburi is trading at a P/E of 15.92 which is slightly undervalued compared to the market,” said Ms Gatebi.
Cement firms in Kenya have been producing above the market’s absorption capacity, meaning supply to projects in the region such as the standard gauge railway, Amu power and Lamu Port Southern Sudan-Ethiopia Transport corridor are key to future supply.
The Kenya National Bureau of Statistics data shows cumulatively, the six cement makers in Kenya produced 5,229,016 metric tonnes by end of November compared to consumption of 4,554,846 metric tonnes.
The installed capacity of the cement firms in Kenya is around nine million metric tonnes.
“With the planned infrastructure projects and the construction boom, it is expected the cement market demand will steadily tend to the installed production capacity in the coming years with the effect of stabilising cement market prices,” EAPC managing director Kephar Tande told the investors in a statement.
In the longer term, according to ABC Capital corporate finance manager Johnson Nderi, there is still some underlying risk to the valuation of these firms due to stiff competition, and in the case of EAPC, the shareholding structure of the company.
“Bamburi have refused to be drawn into a price war and as a result this may ultimately cost them some of their market share. Portland’s large shareholding by the government also tends to hold back the stock,” said Mr Nderi.
The reported planned entry of Dangote Cement — owned by Africa’s richest man Aliko Dangote — into the Kenyan market is likely to cause the biggest shift in market share dynamics in recent times, posing an additional risk to the established players.
