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Kenya: Exotix says cement stocks overpriced


Kenyan cement stocks remain overpriced in comparison to African peers, with projected lower earnings for the 2017 financial year expected to put downside pressure on the stocks this year.

A new cement sector report by UK-based investment bank Exotix partners says local producers are facing cost-side pressure on higher clinker cost due to rising coal prices in the global markets.

They are also facing increased competition from cheaper imports from the region and a growing gap between production and demand in a slowing economy.

In 2017, global coal prices on average rose 34 per cent following a cutback in production in China for environmental reasons, Exotix says.

“Kenya cement is overvalued, in our view, at a 23 per cent premium to sub-Sahara Africa (cement) stocks on average. We think that this premium is unjustified, particularly in the context of the lower earnings quality of the companies in that market relative to Nigeria and Tanzania, as well as our weak earnings outlook for the sector and increasing competition,” said Exotix in the report.

“The Kenyan cement sector is more fragmented and exposed to cheap imports from within East Africa…we expect 2017 earnings  to be weighed down by lower prices, weaker volumes, higher imported clinker and coal costs, higher interest expenses and forex losses on foreign currency liabilities for ARM Cement and EAPCC.”

Of the three listed cement firms, Bamburi has been assigned the lowest downside on its stock, at 2.2 per cent on its prevailing price of Sh180 per share, mainly due to its reliance on imported clinker whose impact will become more prominent once its planned additional grinding capacity comes online.

ARM Cement has a downside of 22.7 per cent on its current price of Sh13.45, Exotix says, with concern on the execution of risks relating to capital restructuring and turnaround plans for the business, its high-interest burden and foreign exchange exposure on dollar-denominated debt.

EAPCC has the highest downside of up to 52 per cent on its current price of Sh27, according to the report.

Credit: CNBC Africa

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