AFRICA: KENYA: Cement share prices firm on rising demand in Kenya

Rising prospects for cement manufacturers and increased demand for the commodity in the region have pushed stocks of listed cement firms in Kenya to a new high.

Athi River Mining’s (ARM) shares are trading at an all time high of $2.4 per share at the Nairobi Stock Exchange, signalling an expansion in the region’s construction sector which has triggered fresh demand.

Since the beginning of the year, East Africa Portland Cement share price has gone up 36 per cent, trading at $1.47 per share on thin volumes.

Likewise, Bamburi Cement’s shares are trading at $2.48 per share reflecting a 5.7 per cent growth since the beginning of the year.

East and Central African countries are pumping billions of dollars into upgrading their infrastructure, raising the demand for building material which could still edge higher as the continent’s newest nation South Sudan begins reconstruction following a successful secession referendum.

The total cement capacity which also includes imported clinker is set to reach 11.6 million tonnes per annum in East Africa by the end of the year, from eight million tonnes per annum at the beginning of the year.

But the question analysts are asking is what investors are seeing in the cement makers to price their stocks so highly.

Take ARM for example. At a price of $2.4, the stock is trading at a price-to-earnings (P/E) ratio of 27, which simply means investors are paying 27 times for every shilling ARM earns to acquire the shares.

Value investors would keep off this stock in belief that a stock trading above 25 times its earnings is grossly overvalued.

But using P/E alone would be taking a one dimensional view of the stock.

“It would be difficult to say whether ARM is overvalued based on the P/E alone although there are indications that it could be, compared with the Bamburi stock which has a P/E of 11.11 and much superior dividend yield,” says Renaldo D’souza an analyst with Genghis Capital. 

“On the other hand one could argue that they have strong upside earning upon completion of their plants in Tanzania which are due to happen this year and next year,” Mr D’souza adds.

The completion of ARM’s Tanzanian plant in Maweni, Tanga, is set for January 2012, according to the company, which would see it add 1.5 million metric tonnes in capacity.

This would take the total capacity to 2.5 million tonnes.

“We will be the biggest player in the market in the next 18 months,” says Pradeep Paurana, managing director of ARM. “There is no capacity in Tanzania hence ARM is putting up such a huge plant.”