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Market Report – 23rd April 2021


Faida Research - April 26, 2021 - 0 comments

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Market Commentary:

  • The All Share Index (NASI) and the NSE 20 Share Index rose by 0.3% w/w and 0.3% w/w to close the week at 165.61 and 1,888.25 respectively, characterized by an increase in both market turnover (2.9% to KES 2.4 billion) and volume of shares traded (15.5% to 74.9 million shares).  We attribute the gain in the index partly to gains on a number of large cap counters; Equity (+0.6% w/w to KES 39.10) and Safaricom (1.0% w/w to KES 38.80).
  • Bamburi edged up by 6.0% w/w to close at KES 40.60 following the release of the full year 2020 results this week. The company registered a growth of 214.5% y/y in after tax profits to KES 1.1 billion) and announced a first and final dividend of KES 3.0(FY2019: nil).  In the coming week, we expect price stability. Please note that KCB’s book closure for the KES 1.0 first and final dividend is on Monday 26th April.

News Highlights:

Bamburi Posts a 214.5% y/y Rise in After Tax Profit for FY2020

  • Bamburi Cement reported a 214.5% y/y surge in after tax profit to KES 1.1 billion for FY2020 from KES 359.0 million posted in FY2019. The increase in profitability was primarily due to lower operating costs.
  • Revenue decreased by 5.2% y/y to KES 34.9 billion. According to management, this was driven by:
    • A 13.0% y/y decline in revenue in 1H2020. This was attributed to a challenging business environment owing to the stringent COVID-19 containment measures, particularly at the border crossing points. However, the second half saw top-line growth of 3.0% y/y owing to the easing of restrictions.
    • Lower average selling prices. This was attributed to both a change in the product mix and competitive pressure driven by over-capacity in the cement market. The Group launched HEYa more affordable product – Fundi cement – in 1H2020 which lowered the average selling price across the product portfolio.
  • Operating costs declined by 7.0% y/y to KES 33.2 billion. According to management, this was due to significant cost savings in both variable and fixed costs which offset imported cost inflation from the devaluation of the Kenyan shilling.
  • Other gains grew by 130.9% y/y to KES 344.0 million.
  • Impairment losses eased by 43.0% y/y to KES 118.0 million.
  • As a result, the operating profit increased by 77.5% y/y to KES 2.0 billion (FY2019: KES 1.1 billion). According to the Group, the Uganda subsidiary Hima cement contributed to a higher turnaround in profitability compared to FY2019.
  • Net finance costs fell by 46.8% y/y to KES 207.0 million. According to management, this was a result of actions taken as part of the “Cash” pillar of the Health, Cost and Cash (HCC) strategy. Actions taken included the release of cash tied up in trade receivables and inventories. The Group lowered inventories and trade receivables by KES 1,554.0 million (FY2019 1,041.0 million) and KES 885.0 million (FY2019: KES 138.0 million) respectively. This cash could have been invested to earn interest which lowered the finance costs.
  • The Group recommended a first and final dividend of KES 3.00 per share (FY2019: nil).

Commentary:

  • Bamburi’s topline performance is worrying. It seems the competitive pressures especially in Kenya are yet to abate even with the higher cement demand. The construction sector in Kenya had a stellar 2020 (compared to other sectors) even with COVID-19 pandemic (see the section on GDP for more details). Kenya’s cement consumption in 2020 grew by 23.7% to 7.3 million tonnes (Mt). In the 1H2020 and 2H2020 cement consumption grew by 11.1%y/y and 35.0% y/y to 3.2Mt and 4.1Mt respectively. The company’s best performance came in the second half where revenues only grew by 3.0% y/y.
  • However, in our view, launching more competitively priced products is better in the long term. Cement is a standardized product and customers, particularly in the retail segment (accounts for about 70.0% to 90.0% of sales) are unlikely to perceive any differences other than in price of the product.
  • When it comes to operational efficiencies, we still hold the view that it’s not a sustainable way to deliver growth – at some point you’ll run out of costs to cut or areas to make efficiency improvements on.
  • The recommendation is under review.

 

Recommendations:

EABL – Long-term Buy

Equity – Hold

KCB – Neutral

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