Nairobi Securities Exchange listed cement makers Bamburi Cement and Athi River Mining are expected to realise higher cash return from their operations in the next three years, as demand for cement in the region rises.
This, analysts said should help the two firms aggressively fund their expansion and pay shareholders higher dividends by 2013.
East African states are pumping billions of dollars into upgrading their infrastructure, raising the demand for building materials.
Rising cement demand has attracted new firms while established players have either been reinvesting their cash to expand or paying out higher annual dividends to shareholders.
Renaissance Capital, in their latest research report released last week on the two cement makers, expect Bamburi Cement to generate excess cash in 2011 and 2012 which will be paid out to shareholders.
“We expect the operations of Bamburi’s plants to generate excess cash and we believe that this could well be returned to shareholders by way of an attractive dividend yield,” Renaissance Capital analysts said estimating the cement firm will have a dividend yield of 12 per cent for the full year 2012 results.
Currently, Bamburi’s shares are trading at the NSE at $1.5 per share with a dividend yield of 5.3 per cent. The Renaissance Capital analysts expect the dividend yield to increase to 7.7 per cent by the end of 2011 as the firm pays out the excess cash.
French cement firm Lafarge has majority shares in Bamburi which has plants in Kenya and Uganda. The cement firm is dominant in Kenya controlling about 45 per cent of the market.
Bamburi says it will maintain its dividend payout as has been the case in the past. “Our group dividend policy has and will remain the same. We have a standard payout ratio,” the firm said. “We have also always generated cash in the past, this has been our strategy not just for dividend payouts but to raise financing for re-investments, special projects or expansion.”
Athi River Mining is emerging as one of Bamburi’s strongest competitors because it has been able to put a premium on its price, meaning it is targeting the same market as Bamburi, the Renaissance Capital analysts said.
Other players in the market have been engaging in a price war by lowering the cost of their products. A 90 kg bag of Bamburi cement for instance costs $7.2 dollars compared with $7 from East African Portland Cement.
ARM, which is listed at the NSE and has the Paurana family as the largest shareholder, has been seeking to grow its market share by expanding its operations into Tanzania and South Africa.
However, most of ARM’s expansion has been financed by debt which means there is a danger that the firm might experience volatile earnings because it is paying more in interest expense. In 2010, ARM had $1.62 in debt for every $1 it had from its shareholders.
But the Renaissance Capital analysts expect the completion of the Tanzanian plants to improve the firm’s cash flows which should also enable it expand operations.
“We believe that the company can complete the Tanga construction by end 2012 and therefore strong cash generation will reduce the net debt/equity ratio to more acceptable ratios by the end of 2013,” said the analysts.
Better cash flows are expected to translate into a higher dividend yield for shareholders with the yield rising from 1 per cent in 2010 to about 5.5 per cent in 2013, according to the research report.
With more cash in 2013, ARM is expected to expand its cement plant in South Africa with the construction of a one million tonne per annum plant.
ARM bought a 70 per cent stake in Mafeking Cement Company, a South African firm, for $1 million in 2009 and is looking to construct another plant beginning in 2013.
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