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Demand for cement in East Africa promises high dividends

World Cement,

As demand for cement in the region rises, 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.

Analysts predict this will help the two companies to aggressively fund their expansions and pay shareholders higher dividends by 2013. 

East African states are investing billions of dollars into upgrading their infrastructure, raising the demand for building materials. This rising cement demand has attracted new companies, while established players have either been reinvesting their cash to expand or paying out higher annual dividends to shareholders.

Renaissance Capital, in its latest research report on the two cement makers, expects 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% for the full year 2012 results.

Currently, Bamburi’s shares are trading at the NSE at US$1.5 per share with a dividend yield of 5.3%. The Renaissance Capital analysts expect the dividend yield to increase to 7.7% by the end of 2011, as the company pays out the excess cash.

French cement firm Lafarge has majority shares in Bamburi, which has a dominant 45% market share in Kenya and plants in Uganda. 

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 company stated. “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.”

According to the Renaissance Capital analysts, Athi River Mining is emerging as one of Bamburi’s strongest competitors as it has been able to put a premium on its price, meaning it is targeting the same market.

Other players in the market have been lowering the cost of their products, effectively engaging in a price war. A 90 kg bag of Bamburi cement costs US$7.2 dollars compared with US$7 from East African Portland Cement.

NSE-listed ARM has been seeking to grow its market share by expanding its operations into Tanzania and South Africa.  However, most of its expansion has been financed by debt, which means there is a danger that the company might experience volatile earnings because it is paying more in interest expense.  In 2010, ARM had US$1.62 in debt for every US$1 it received from its shareholders.

However, Renaissance Capital analysts expect the company’s cash flows to improve after the completion of the Tanzanian plants, which should also enable it to 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% in 2010 to about 5.5% in 2013, according to the research report.

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