Imara African Cement Report - Feb 2011

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Imara African Cement Report Africa, the last cement frontier

February 2011
Analysts Nontando Zunga +263 772 772 755 nontando.zunga@imara.co Anthony Lopes-Pinto +244 921 647 045 anthony.lopes-pinto@imara.co
CONTENTS African Cement Companies - Fast facts................................................................................................... The cement production process............................................................................................................ Global Executive Summary.................................................................................................................. African Cement Companies Valuation Matrix............................................................................................. West Africa West Africa Cement Industry Overview................................................................................................. Nigeria Ashaka Cement Plc................................................................................................................... CCNN................................................................................................................................... Dangote Cement...................................................................................................................... Lafarge WAPCO....................................................................................................................... Angola - Overview of the Cement Industry....................................................................................... East Africa East Africa Cement Industry Overview................................................................................................. Kenya Athi River Mining...................................................................................................................... Bamburi Cement (Lafarge).......................................................................................................... East African Portland Cement Ltd................................................................................................. Tanzania Tanga Cement......................................................................................................................... Tanzania Portland Cement Company.............................................................................................. Southern Africa Southern Africa Cement Industry Overview............................................................................................ South Africa Pretoria Portland Cement........................................................................................................... Zimbabwe Lafarge Cement....................................................................................................................... Zambia Lafarge Zambia....................................................................................................................... North Africa North Africa Cement Industry Overview................................................................................................ Morocco Ciments du Maroc.................................................................................................................... Holcim Maroc.......................................................................................................................... Lafarge Ciments Maroc..............................................................................................................
PAGE 3 5 7 10 11 12 15 18 21 24 25 26 29 32 35 38 41 42 45 48 51 52 55 58
ACRONYMS
AMC BCC CASE CASE CCNN COMESA DCP EAC EAC CET GDP Asset Management Company Benue Cement Company Cairo and Alexandria Stock Exchange Casablanca Stock Exchange Cement Company of Northern Nigeria Common Market for Eastern and Southern Africa Dangote Cement plc East Africa Community East African Community Common External Tariff Gross Domestic Product JSE KES LIC LuSE MT NSE NSE PPC SSA Johannesburg Stock Exchange Kenyan Shilling Low Income Countries Lusaka Stock Exchange Metric Tonnes Nigerian Stock Exchange Nairobi Stock Exchange Pretoria Portland Cement Sub Sahara Africa TANESCO Tanzania Electricity Supply Company TPA TPD TSE TSE TZS WAEMU ZESA ZISCO ZSE Tonnnes per annum Tonnes per day Tanzania Stock Exchange Tunisia Stock Exchange Tanzania Shilling West African Economic and Monetary Union Zimbabwe Electricity Supply Authority Zimbabwe Iron and Steel Company Zimbabwe Stock Exchange
LPFO Low Pour Fuel Oil
African Cement Companies Fast Facts
Table 1:West Africa: Cement sector in Boom mode 2011 Capacity Nigeria Ashaka Cement CCNN Dangote Lafarge WAPCO (Mt) 0.85 0.70 20.00 4.20 25.75 2011 Capacity Angola Nova Cimangola Secil Lobito (Mt) 1.30 0.70 2.00
1 2
Market Cap (US$m) 427 114 12,842 847 14,231 Market Cap (US$m) 718 387 1,105
1 1
Market Cap/ tonne (US$) 502 163 642 202 553 Market Cap/ tonne (US$) 553 553 553
Valuation estimate based on Nigerian weighted average market valution per tonne of installed The Secil plant in Lobito is currently under construction.
Table 2: East Africa purged by Asias surpluses, but resilient still 2011 Capacity Kenya Athi River Bamburi Cement East African Portand (Mt) 0.65 2.00 1.30 3.95 2011 Capacity Tanzania Tanga Cement Tanzania Portland (Mt) 1.25 1.12 2.37 Market Cap (US$m) 227 878 121 1,226 Market Cap (US$m) 83 222 305 Market Cap/ tonne (US$) 350 439 93 388 Market Cap/ tonne (US$) 66 199 163
African Cement Companies Fast Facts (cont.) c
Table 3: SA battling recession, balanced by strong growth regionally 2011 Capacity South Africa PPC Zambia Lafarge Zambia Zimbabwe Lafarge Zimbabwe 0.45 72 160 1.30 290 223 (Mt) 8.00 Market Cap (US$m) 2,535 Market Cap/ tonne (US$) 317
South Africa's domestic construction slump has been balanced by strong exports into Angola and Mozambique. Botswana continues to focus on infrastructural developments and Zimbawean consumption has rebounded to over 600,000 MT after troughing at 100,000 MT in 2008
Table 4: North Africa, Mostly saturated with overcapacity in Egypt and Morocco Market 2011 Capacity Egypt Alexandria Cement Misr Beni Suef Qena Cement National Cement Sinai Cement South Valley Suez Cement Tourah Cement Morocco Ciments du Maroc Holcim Maroc Lafarge Maroc Tunisia Carthage Cement
1
Market Cap (US$m) 365 276 350 231 367 214 1,071 233 3,106 1,901 1,306 4,115 7,322
1
Cap/tonne (US$) 214 184 184 66 122 143 255 73 152 322 290 623 431 106
(Mt) 1.70 1.50 1.90 3.50 3.00 1.50 4.20 3.20 20.50 5.90 4.50 6.60 17.00 2.30
243
Carthage plant is currently under construction and expected to start production in July 2012.
The cement production process At a glance

Cement is a man-made powder that, when mixed with water and aggregates, produces concrete. The cement-making process can be divided into a few basic steps: Mining limestone Proportioning and grinding limestone with other corrective raw materials Manufacturing clinker in a kiln at temperatures of 1,450C Grinding clinker and other minerals to produce the powder known as cement Distributing cement to clients A more detailed explanation of the process in the diagram is included below:
Cement Production process in detail 1 Quarrying raw materials Naturally occurring limestone deposits, normally located close to a cement plant, provide calcium carbonate (CaCO3), the main raw material for cement manufacture. It is generally necessary to liberate this material in the quarry by drilling and blasting. 2 Crushing The raw material is loaded into trucks in the quarry and hauled to the primary and secondary crushers in which the maximum stone size is reduced to some 25mm. 3 Prehomogenising, proportioning and raw meal grinding Prehomogenisation of the crushed limestone takes place in blending beds to improve its chemical consistency. The limestone is then proportioned and milled to a fine powder, together with relatively small amounts of corrective materials such as iron ore, shale, clay or sand to produce raw meal. This process is very carefully controlled to ensure the correct chemical composition of the raw mix is obtained. The chemistry of the mix also plays an important role in the downstream burning process. The mills used can be ball mills although more efficient vertical roller mills are generally the first choice in modern plants. The raw meal powder is further blended in silos to produce kiln feed. 4 Preheating A preheater is a series of cyclones housed in a tower through which the kiln feed flows, from top to bottom, in countercurrent flow to the hot kiln exhaust gas which is being drawn up through the tower by a fan. In the cyclone tower, thermal energy is transferred from the hot exhaust gas to the kiln feed, which then enters the kiln preheated, so the necessary chemical reactions occur faster and more efficiently. The exhaust gas leaves the tower at a much lower temperature and is then used further for drying raw materials and fuel. Depending on the raw material moisture content, a kiln may have up to six cyclone stages with increasing system thermal efficiency at each additional stage. 5 Precalcining Calcination is the process of decomposing limestone to lime and CO2. In modern kiln systems, most of this reaction takes place in a precalciner, which is a static combustion chamber located at the bottom of the preheater, above the kiln. It is necessary to burn fuel in the precalciner to supply the required energy for this reaction and typically 60% of the total fuel requirement for the burning process is added at the precalciner, and 40% in the rotary kiln. In older systems or smaller plants, calcination takes place in the rotary kiln itself (in which 100% of the fuel is burned). 6 Clinker production in the rotary kiln The preheated or precalcined feed material then enters the kiln which is slightly inclined to the horizontal. Fuel is fired directly into the kiln at the opposite (lower) end. As the kiln rotates, between two and five times per minute, the material slides and tumbles down through progressively hotter zones towards the flame. The intense heat causes chemical and physical reactions that partially melt the feed, and finally the clinker minerals form at a temperature of around 1 450C. 7 Cooling and storing From the kiln, the hot clinker falls into a cooler where it is cooled by ambient air. In modern plants, air is blown through a bed of the clinker in a grate cooler and the heated air is then used for combusting the fuel in the kiln. Many older or smaller plants have satellite coolers where the cooling air is simply drawn through cooler tubes, which are attached to and rotate with the kiln, in the opposite direction to the flow of hot clinker. The cooling air is heated up as it recovers thermal energy from the clinker and it is also used for combustion of the kiln fuel. This process reduces the overall energy loss from the system. A typical cement plant has clinker storage silos between clinker production and grinding. Although clinker is an intermediate product, it is commonly traded. 8 Blending Clinker is proportioned with other materials at the clinker grinding stage where the final cement product is produced. All cement types contain around 45% gypsum to control the setting time. If significant amounts of slag, fly ash, limestone or other extender materials (or a mixture of these materials) are used to replace clinker, the product is called a blended cement.
African Cement Companies - Relative Graphs

Figure 1: Consumption vs GDP per capita
180 160
Per capita Cement consupmtipn (kgs)
1400
Figure 2: Consumption vs GDP per capita

Angola
1200
China
140 120 100 80 Kenya 60 40 20 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Tanzania Malawi Zimbabwe Zambia Uganda
Cement Consumption (kg)
1000
Nigeria
800
600
Egypt
Morocco
Tunisia
400
Brazil 200
Russia
India
South Africa
0 2,000 4,000 6,000

GDP Per Capita (US$)
8,000
10,000
12,000
Source: Lafarge SA, IES, IMF
GDP Per capita (US$)
Source: Lafarge SA, IES, IMF
Figure 3: Ave Price/tonne

250
Capacity, Demand (Millions of Tonnes)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 -
Figure 4: Global demand vs capacity
200
Average Price (Us$)
Capacity
Demand
150 100 50 EAPC Lafarge Maroc Dangote

Lafarge Zimbabwe Twiga Lafarge Zambia PPC
Bamburi
Ashaka
Holcim Maroc
Tanga
CCNN
Ciments du Maroc
Secil Angola
WAPCO
ARML
Latin America
North America
Source: IES
Source: Dangote Cement
Figure 5: EBITDA by company

70%
700
Figure 6: 2011 EV/tonne by company
60%
600
EBITDA margin (%)
50% 40% 30% 20% 10% 0%

Lafarge Maro c Ciments du Maro c Lafarge Zambia Bamburi Dangote
EV/Tonne (US$)
500 400 300 200 100 Athi River Mine Ciments du Maroc Holcim Maroc
NB: We have excluded Dangote from the weighted average for reasons of weighting; Including Dangote the average increases to US$ 555/tonne
Average
Catharge
Dangote
Bamburi
Tanga
Ashaka
WAPCO
Ashaka
CCNN
ARML
Twiga
Holcim Maroc
CCNN
Lafarge Zimbabwe
Lafarge WAPCO Lafarge Zambia
Lafarge Maroc
Figure 7: Capacity by company

Lafarge Maroc 11% Ciments du Maroc 10% Holcim Maroc 7%
Figure 8: Common Size Income statements
120%
Lafarge WAPCO 7% Bamburi 3% EAPC 2% Lafarge 2% Tanga 2%
100% 80% 60%
PPC 13%
40%
20% 0%
Bamburi Dangote
Ciments du Maroc Holcim Ashaka
-20%
Dangote 37%
PAT
PBT
EBITDA
Costs
Larfarge Maroc
Twiga 2% Ashaka 1% Athi River Mine CCNN 1% 1% Lafarge Zim 1%
Wapco
CCNN
EAPC
Twiga
PPC
Lafarge Zam
Lafage Zim
Tanga
ARML
Lafarge Zimbabwe
Twiga
Tanga
PPC
EAPC
EAPC
PPC
Sub-Saharan Africa
China
Western Europe
India
Russia
MENA
Global Executive Summary

Top down Perspective: Africa, the worlds last cement frontier SSA is the worlds last cement frontier, currently with a supply deficit of some 5m MT pa. With stronger economic growth and the worlds highest cement prices, this gap is rapidly being filled and by 2013, we believe the sub continents requirements will be fully satisfied, on the completion of significant investment into capacity expansion, which we calculate to be in the region of 16m MT. It must be noted, however, that the demand/supply balance is intrinsically related to the level of development of the financial markets, hence, while proposed investment more than adequately cover the estimated current deficit, the latter is a moving target. Also, cement prices in SSA are, at the top end, some 200% higher than emerging and developed countries. The expected drop in prices resulting from the eradication of supply bottlenecks should significantly impact on demand. Importantly, a lower cement price will reduce of the cost implications addressing SSAs infrastructural deficit. Expansion projects underway Dangote Cement Industries Lafarge WAPCO Ashaka Cement CCNN Athi River Mine Lafarge Zimbabwe Sub Total Ciments du Maroc Holcim Lafarge Maroc Sub Total Current Capacity 8m MT 2m MT 0.9m MT 0.5m MT 0.7m MT 0.5m MT 12.8m MT 3.7m MT 3.7m MT 6.5m MT 13.9m MT 2013 Capacity 20m MT 4.2m MT 1.3m MT 0.7m MT 2.2m MT 0.8m MT 29.2m MT 5.9m MT 5.2m MT 8.2m MT 19.3m MT % ch 150% 110% 44% 40% 214% 60% 128% 59% 41% 26% 39%
The demand side too is looking positive. Improved political stability, fiscal management and lower sovereign debt levels have availed funds for capital investment, and post the 2008 commodity price shock, economic fundamentals, for the larger part, are improving. According to the IMF, in the last five years, real GDP growth in Sub-Saharan Africa has grown by an average rate of 5.8% while population growth has averaged 1.75% over the same period. In effect, per capita incomes are increasing, and Africans, on the whole are getting wealthier, albeit from a low base. Rising per capita incomes can clearly be seen in increasing mobile penetration rates, beverage and FMCG consumption patterns. Governments have been prioritising increasingly larger portions of their budgets on growing their infrastructural capacity in order to increase trade and ease unemployment, and donors too have played an important role. This is clearly visible in Angola, Botswana, Nigeria, Rwanda, South Africa and Uganda, where government sponsorship has been the main catalyst for infrastructural development. In Morocco, Tunisia, Algeria and Egypt, modelled on similar projects in the Arab Emirates, the creation of new multi-million dollar cities has been the focus. Also to play an increasingly important role, will be Africas newest oil producing countries, Ghana and Uganda. Not to mention the creation of a 54 th African state on the secession of Southern Sudan, which marked the end of Africas longest running civil war. In the latter for example, a whole new country has to be built, all to be funded by its share of the oil revenues. Geo-political forces have also been at play with Chinas strategic focus to dominate Africas resources in exchange for long term financing packages, being the predominant driving force. Across the continent and in exchange for resource wealth, the Chinese Dragon has blazed a trail of infrastructure projects including roads, bridges, dams, airports, skyscrapers, and by a wide margin, Sinoma is the largest cement plant builder on the continent (currently installing around 15m MT by 2013). Deepening banking penetration rates, increasing disintermediation and greater access to bond markets and international credit lines are also having a positive role on the construction industry. South Africa and North Africa remain the most developed financial blocs, however, up and coming financial markets are clearly visible in East Africa with some bright spots in Southern African (Botswana and Namibia). Largely, SSA remains essentially a cash economy and access to long term consumer mortgage products has yet to develop meaningfully. The proposed introduction of a common monetary union in East Africa, and possibly Southern Africa adopting the Rand, will have a significant impact on the development of financial markets and particularly on the cost of funding. Figures 1 and 2 imply a distinct relationship between financial market development and per capita consumption statistics. 7
Bottom up perspective: Anticipated capacity increases largely not priced in Valuation Methodology In our analysis we have valued companies using our forecast Free Cash Flows for 2 years, post the latest set of financials. We have then valued cashflows into the future as a perpetuity, using four or five year compound growth rates as our best guide to future sustainable free cash flow growth. A minimum discount rate of 10% has been used to discount free cash flows, however, we have included a matrix of rates with higher discount rates for investor information purposes. As many of the companies are in a state of growth and expansion, with internal cashflows being a primary source of capital expenditure, required maintenance capex is largely obscured. Consequently we have ignored this requirement, and would use our derived DCF valuations as a proxy for a counters upper limit valuation. We have complemented the first valuation method with the EV/tonne relative valuation method, which more clearly takes into account any planned capacity increases and debt levels. Most of SSAs cement consumption growing ahead of GDP With the exception of South Africa, whose construction sector is still being affected by a weak housing market and high energy costs, selective opportunities abound in the SSA space. Kenya, Zambia, Zimbabwe and Tanzania offer some of the cheapest cement factories. As a region, East Africa is particularly interesting, as its financial markets are deeper and more sophisticated than West Africas ones, and valuations (particularly in Tanzaniaalbeit illiquid) are undemanding. Proximity to rapidly developing Rwanda, Burundi and newly formed, Southern Sudan is a bonus. Zimbawes cement market has recovered strongly and demand has rebounded strongly to 600,000 MT in 2010 from a low of 100,000 MT in 2008. This is still roughly half the level of national consumption in the 90s which averaged 1.2m MT. Dollarisation of the economy has been the major fundamental for the growth and huge investments into platinum, gold, coal and now, diamonds should grow demand. The recapitalisation of the banking sector and re-introduction of mortgage products will contribute a broader based grass roots level push, however this will be in the medium term, and certainly post presidential elections. Summary of the Bull case for Africa GDP growth outpacing population growth-> GDP per capitas are growing Double digit growth in cement consumption outpacing GDP growth Massive infrastructure and housing deficit; Robust demand has been driven by cash and not credit. Increasing financial disintermediation across the continent will continue to drive up cement consumption. Opening up of bond markets is a pre-cursor to large scale infrastructure projects. (Kenya, Ghana, Nigeria) Cement capacity in SSA to go up by between 13-16m MT by 2013 and an anticipated reduction in prices will stimulate quantities demanded Summary of the bear case for Africa Energy constraints: High Low Pour Fuel Oil (LPFO) prices; rising coal demand and prices. Electricity deficit in SSA; need to generate own power leading to higher operational costs Importation of clinker creates susceptibility to exchange losses Stiff competition from China and Pakistan particularly in East Africa High cost of capital stifles investment and mortgage extension. SSA susceptible to commodity price shocks Having identified this investment opportunity from the macro perspective, we have honed into the subject, studying 24 listed cement groups, with a total market capitalisation of over US$30 bn. Our conclusions are as follows: Recommendations and Conclusions Our report indicates that, by and large, Africas cement companies are cheap, and current valuations have not yet taken the 2012/3 capacity increases into account. Exceptions to this would be Dangote, which we believe to be overpriced, Morocco, which already is in a state of oversupply (and fully priced) and EAPC, which is poorly run. Although the markets in Tunisia and Egypt are closed, valuations indicate upside potential, especially in the latter where the market fell significantly due to the ongoing political tensions.
Table 5: Relative Valuation Metrics for SSA Cement Companies
Company Country Parent Shareholder Population (m) Capacity (MT) Per capita consumption (kg) Per capita GDP (US$) Market Cap (US$m) EV/Capacity (US$/tonne) Sales Growth (%) (Hist) (T+1) (T+2) PBV (Hist) (T+1) (T+2) EV/EBITDA (Hist) (T+1) (T+2) Dividend Yield (Hist) (T+1) (T+2) EBITDA margin (Hist) (T+1) (T+2) Weights
Ashaka Nigeria Lafarge 156.0 0.85 94.9 1,111.5 427.1 491.3 -19.6% 10.0% 10.0% 4.9 4.3 3.8 41.8 31.9 12.2 0.0% 1.2% 1.3% 8.9% 10.9% 25.1% 2.3%
CCNN Nigeria CCNN 156.0 0.70 94.9 1,111.5 114.4 159.9 20.2% 14.6% 54.0% 4.1 3.5 2.9 5.7 4.2 2.7 6.4% 6.6% 10.1% 25.5% 30.4% 29.6% 0.6%
Dangote Nigeria Dangote 156.0 20.00 94.9 1,111.5 12,842.3 628.6 206.3% 19.1% 76.2% 10.6 8.6 6.4 14.8 7.5 5.5 3.4% 6.4% 12.2% 59.5% 66.0% 67.7% 68.8%
Lafarge Athi River WAPCO Mine Bamburi Nigeria Kenya Kenya Lafarge Paunrana's Lafarge 156.0 40.0 40.0 4.20 0.65 2.00 94.9 69.0 69.0 1,111.5 818.0 818.0 846.7 227.2 878.1 242.6 418.7 326.2 5.4% 3.9% 55.6% 3.0 2.5 2.0 18.2 18.0 11.6 0.2% 0.6% 1.2% 18.2% 18.2% 18.2% 4.5% 11.4% 11.4% 11.4% 4.2 5.5 4.6 17.6 15.2 13.4 0.8% 0.9% 1.0% 15.3% 14.6% 13.8% 1.2% 9.2% 11.2% 11.2% 3.6 3.2 2.8 7.9 7.2 6.2 2.8% 2.6% 2.8% 28.6% 28.8% 28.5% 4.7%
EAPC Kenya NSSF 40.0 1.30 69.0 818.0 120.6 118.0 16.1% 9.2% 9.2% 1.7 1.6 1.5 7.7 25.7 8.5 0.0% 1.6% 1.8% 5.1% 14.1% 14.0% 0.6%
Tanga Twiga PPC Tanzania Tanzania South Africa Holcim Heidelberg PPC 42.5 42.5 49.1 1.25 1.12 8.00 56.0 56.0 163.1 502.6 502.6 5,855.0 83.1 221.9 2,534.9 74.2 125.9 528.1 -1.2% 7.9% 9.5% 1.3 1.3 1.1 2.3 2.8 2.6 9.4% 9.2% 10.1% 35.5% 28.6% 28.7% 0.4% 20.4% 14.4% 14.4% 2.3 1.8 1.4 4.0 2.9 2.2 7.1% 9.6% 10.9% 36.0% 41.1% 41.3% 1.2% 8.6% 0.4% 5.0% 19.9 20.3 20.8 8.3 8.1 7.4 6.0% 6.5% 7.2% 36.2% 35.9% 35.7% 13.6%
Lafarge Lafarge Zambia Zimbabwe Lafarge Lafarge 12.0 12.0 1.30 0.45 44.0 50.0 1,283.9 666.7 290.0 72.0 226.1 112.1 71.5% 5.0% 5.0% 2.4 2.0 1.7 3.6 4.4 4.1 1.4% 1.4% 1.5% 41.8% 31.9% 31.9% 1.6% n/a 45.0% 50.0% 19.9 20.3 20.8 55.2 6.4 3.2 0.0% -1.0% -1.4% 4.7% 27.7% 37.2% 0.4%
Weighted Average
42 101 1,728 18,658 555 145.1% 14.9% 57.4% 10.6 9.3 7.7 14.1 8.7 6.3 3.5% 5.7% 9.9% 49.9% 54.4% 55.9%
Table 6: Relative Valuation Metrics for North African Cement Companies
Company Country Parent Shareholder Population (m) Capacity (MT) Per capita consumption (kg) Per capita GDP (US$) Market Cap (US$m) EV/Capacity (US$/tonne) Sales Growth (%) (Hist) (T+1) (T+2) PBV (Hist) (T+1) (T+2) EV/EBITDA (Hist) (T+1) (T+2) Dividend Yield (Hist) (T+1) (T+2) EBITDA margin (Hist) (T+1) (T+2)
Ciments du Maroc Morocco 34.9 5.90 416 2,605 1,901 371.7 4.4% 30.2% 20.0% 3.7 3.4 3.0 13.0 10.9 9.1 4.8% 5.8% 6.9% 48.1% 48.1% 48.1%
Holcim Maroc Lafarge Maroc Morocco Morocco Holcim Lafarge 34.9 34.9 4.50 6.60 416.0 416 2,605.3 2,605 1,306.0 4,115 335.4 521.1 12.4% 5.0% 5.0% 5.6 4.8 4.2 11.3 10.9 10.5 3.2% 3.4% 3.6% 34.3% 34.3% 34.3% 10.7% 6.6% 16.0% 5.9 5.2 4.5 12.1 11.4 9.9 0.0 0.0 0.0 56.1% 56.1% 56.1%
Catharge Tunisia 10.5 2.30 564.5 4,150.2 243.4 105.8 85.3% 110.7% 215.0% 1.6 1.5 1.3 679.2 833.1 922.6 0.0% 0.0% 0.0% 79.5% 69.0% 64.7%
Alexandria Cement Egypt Titan 83.1 1.70 601.8 2,263 365 322 n/a n/a n/a n/a n/a n/a 12.3 11.7 11.1 10.8% 11.0% 11.2% 31.0% 31.0% 31.0%
Misr Beni Suef Egypt Titan 83.1 1.50 601.8 2,262.8 275.6 137.7
Qena Cement Egypt 83.1 1.90 601.81 2,263 350 138
National Cement Egypt OCI 83.1 3.50 601.8 2,262.8 230.8 98.8
Sinai Cement Egypt Vicat 83.1 3.00 601.81 2,263 367 138
South Valley Egypt 83.1 1.50 601.8 2,262.8 214.5 214.3 1307.1% 5.0% 5.0% 0.7 0.7 0.6 n/a 23.7 23.7 5.3% 5.4% 5.6% 19.2% 19.2% 19.2%
Suez Cement
Torah Cement
Weighted Ave
Egypt Egypt Italcementi Italcementi 83.1 83.1 4.20 3.20 601.81 601.8 2,263 2,262.8 1,071 233.0 255 109.1
39.80 473.44 1,309 10,671 288 0.0% 12.8% 14.5% 4.1 3.6 3.2 25.3 28.6 29.6 5.3% 5.6% 6.0% 48.1% 48.1% 47.4%
1.6% 34.2% 1.7 1.5 1.4 4.3 4.1 3.1 10.0% 8.6% 12.3% 59.5% 58.3% 55.0%
9.5% -5.3% 3.2 2.9 2.7 4.3 4.1 3.1 9.8% 10.6% 11.5% 53.0% 50.7% 47.8%
29.0% 5.0% 3.9 3.5 3.2 5.1 5.7 5.4 10.3% 10.3% 10.8% 59.5% 58.3% 55.0%
6.7% -18.1% 1.7 1.4 1.2 3.9 3.9 4.7 10.8% 11.0% 11.2% 49.5% 51.1% 50.9%
3.1% -11.6% 0.9 0.9 1.1 2.3 2.1 2.6 9.5% 9.8% 8.0% 34.1% 37.3% 33.9%
5.0% 5.0% 0.9 0.9 1.1 14.7 14.0 13.3 7.6% 8.2% 8.8% 34.0% 34.0% 34.0%
Table 7: Discounted Free Cashflow Valuation Model

Company 3.3 Ashaka Cement CCNN Dangote Cement Lafarge WAPCO Currency NGN NGN NGN NGN Earnings per share 2009 2010F 2011F 0.52 1.69 8.13 1.59 8.50 20.87 N/A 504 296 1.72 0.04 948 53.99 185.41 106.10 1.89 9.78 2.59 11.77 9.59 0.31 7.15 3.88 1.59 2.08 16.07 3.53 9.78 19.37 N/A 525 388 1.86 0.05 928 69.64 194.68 113.12 1.93 8.43 2.59 12.71 10.66 0.32 7.33 4.19 0.19 1.88 3.12 21.22 7.10 11.28 21.36 N/A 575 442 2.07 0.07 979 89.78 204.41 131.17 1.97 11.98 2.72 13.72 10.69 0.33 6.01 4.53 0.26 5% 37.67 62.41 424.37 141.99 225.64 427.26 N/A 11,500 8,847 41.35 1.45 19,580 1,796 4,088 2,623 39.35 239.50 54.47 274.48 213.71 6.54 120.20 90.51 5.23 Sustainable growth rate 6% 7% 31.39 52.01 353.64 118.32 188.03 356.05 N/A 9,583 7,373 34.46 1.21 16,317 1,496 3,407 2,186 32.79 199.58 45.39 228.73 178.10 5.45 100.17 75.43 4.35 26.91 44.58 303.12 101.42 161.17 305.19 N/A 8,214 6,319 29.54 1.04 13,986 1,283 2,920 1,874 28.11 171.07 38.90 196.06 152.65 4.67 85.86 64.65 3.73 8% 9% 20.93 34.67 235.76 78.88 125.36 237.37 N/A 6,389 4,915 22.97 0.81 10,878 998 2,271 1,457 21.86 133.06 30.26 152.49 118.73 3.63 66.78 50.28 2.90 2011F GDP Growth 7.3% 7.3% 7.3% 7.3% 5.8% 5.8% 5.8% 6.7% 6.7% 3.6% 8.0% 6.0% 4.2% 4.2% 4.2% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
23.55 39.01 265.23 88.74 141.02 267.04 N/A 7,187 5,530 25.85 0.91 12,238 1,122 2,555 1,640 24.59 149.69 34.04 171.55 133.57 4.08 75.13 56.57 3.27
Athi River Mine KES Bamburi Cement KES East African Portland Cement KES Tanga Cement Twiga Cement Pretoria Portland Cement Lafarge Zimbabwe Lafarge Zambia Ciments du Maroc Holcim Lafarge Ciments Maroc Alexandria Cement Misr Beni Suef National Cement Qena Cement Sinai Cement South Valley Cement Suez Cement Tourah Cement Carthage Cement TZS TZS ZAR USD ZMK MAD MAD MAD EGP EGP EGP EGP EGP EGP EGP EGP TND
Discount rate Company Ashaka Cement CCNN Dangote Cement Lafarge WAPCO Athi River Mine Bamburi Cement East African Portland Cement Tanga Cement Twiga Cement Pretoria Portland Cement Lafarge Zimbabwe Lafarge Zambia Ciments du Maroc Holcim Lafarge Ciments Maroc Alexandria Cement Misr Beni Suef National Cement Qena Cement Sinai Cement South Valley Cement Suez Cement Tourah Cement Carthage Cement 5.0% 26.47 43.32 296.40 97.41 181.97 345.40 N/A 8,117 6,230 39.37 1.01 15,867 1,699 3,902 2,493 37.61 225.77 51.99 261.65 204.46 6.24 116.27 86.28 4.93 7.5% 33.44 40.52 277.31 91.06 170.22 323.12 N/A 7,598 5,831 36.81 1.28 14,845 1,588 3,649 2,331 35.17 210.99 48.61 244.64 191.19 5.84 108.78 80.67 4.61 10.0% 23.22 37.96 259.89 85.27 159.48 302.78 N/A 7,124 5,467 34.47 0.88 13,912 1,487 3,417 2,182 32.94 197.50 45.53 229.11 179.09 5.47 101.94 75.55 3.19 12.5% 21.80 35.62 243.95 79.97 149.67 284.17 N/A 6,690 5,133 32.33 1.12 13,058 1,394 3,206 2,047 30.90 185.16 42.71 214.91 168.01 5.13 95.68 70.87 4.04 15.0% 20.50 33.48 229.33 75.12 140.67 267.11 N/A 6,292 4,827 30.37 1.05 12,276 1,309 3,012 1,923 29.04 173.86 40.13 201.90 157.87 4.82 89.95 66.58 3.80 17.50% 19.31 31.51 215.90 70.66 132.40 251.44 N/A 5,926 4,546 28.57 0.99 11,557 1,231 2,834 1,808 27.32 163.48 37.75 189.95 148.55 4.54 84.69 62.64 3.57 Price 28.98 14.00 128.00 43.00 185.00 195.00 108.00 1,900.00 1,820.00 29.19 0.90 6,900 1,146 2,701 2,051 12.35 59.99 19.47 101.53 45.60 3.79 34.21 28.36 28.36 (Prem)/ Disc -29% 139% 79% 75% -24% 37% N/A 231% 165% 18.1% -2% 67% 30% 27% 6% 167% 229% 134% 126% 293% 44% 198% 166% -89% Recommendation SELL BUY N/A BUY HOLD BUY SELL BUY BUY HOLD HOLD BUY BUY BUY HOLD BUY BUY BUY BUY BUY HOLD BUY BUY N/A 2011 CPI Inflation 9.5% 9.5% 9.5% 9.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.8% 3.0% 7.5% 2.5% 2.5% 2.5% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 4.5%
10
West Africa Cement Industry Overview Top Down looking good From a top down perspective Nigerias case for investors to seek exposure to the cement sector (albeit selectively) is positive. The brief SWOT analysis for Nigeria is as follows: STRENGTHS Firm oil prices ensuring Naira stability Strong grassroots demand (low per capita consumption of 95kg) Demographic dividend most populous country in Africa at 156m Massive infrastructure deficit (calculated as 919m MT in cement over the next 10 years) Recovery of the local banking sector through the acquisition of NGN 2.04bn in Non Performing Loans (NPLs) by the creation of the Asset Management Corporation of Nigeria (AMCON) on 31/12/2010. Government commitment to increasing capital expenditure. FY2011 budget allocation is for NGN1,005bn (US$6.7bn) 35% import tarrifs to stimulate local production WEAKNESSES Reliance on LFPO, which is more expensive than solid fuels Power and gas shortages Oil price crash reduced momentum of economic activity and oil revenues Margin lending bubble burst and created one of the largest banking crises in Africa (total NPLs of US$16.6bn). Financial sector is still edgy, though on the road to recovery. No large scale mortgage products available and low credit extension; deep seated cash economy. OPPORTUNITIES Deepening and increasing intermediation in the banking sector post the recapitalisation Development of the mortgage sector New entrants into the banking sector to buy failed banks Commitment to invest NGN500bn (US$3.3bn) into developing energy projects. Government commitment to economic growth Massive investment into expansion capex projects by Dangote and Lafarge Potential to export into region. THREATS Short term oversupply; By the end of 2012 national production capacity will be 6m MT more than total consumption in 2010. This is excluding capacity to bag imported cement which for Dangote amounts to 6m MT (about 8m MT in total). Continued electricity shortages Spike in LPFO prices Spike in coal prices Downward price pressures resulting from over-capacity Margin shrinkage as price wars trim margins Political instability, presidential elections in April 2011 Instability in the Niger delta Local currency weakness related to developments in oil markets Comment on valuation and pricing Nigeria offers selective value for investors in the Cement sector. CCNN and Lafarge WAPCO present the best priced entry points. Dangote is overpriced relative to peers, while Ashaka is fully priced.
Figure 9: National Consumption Figure: National Cement Cement Consumption
16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009
Millions of tonnes
Figure 10: Average Cement prices (NGN) Average cement prices (NGN/tonne)
30000
25000 20000
15000 10000 5000 0 2004 2005 2006 2007 2008
Figure 11: Exchange rate Naira vs US$
11
EQUITY RESEARCH NIGERIA FEBRUARY 2011 CEMENT ASHAKA CEMENT COMPANY Looking rather grey Ashaka Cement has maintained market leadership in its isolated market in the North-East of Nigeria. The increased use of thermal energy (as opposed to LPFO) will result in lower energy costs and fatter margins, which will bring EBITDA margins in line with peers. Despite some expansion, Ashaka will remain an underdog. Valuations are now full to slightly overdone; after a strong run in 2010, take profits at these levels.
BLOOMBERG: ASHAKACE: NL Current price (NGN) Current price (US$) Target price (NGN) Upside/Downside 12 month High/Low (NGN) Liquidity Market Cap (NGNm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to NSE index
SELL 28.98 0.19 23.22 -19.87% 12.15-30.10 64,899.3 427.1 2,239.5 5.4 28.4 56.2 48.8 40.7 135.8 97.0 119.7
**Relative to MSCI EM index
Planned capacity expansion to the tune of an additional 400,000 MT pa is expected to boost Ashakas capacity to 1.25m MT pa. After expansion, the EV/tonne equates to US$304. With Dangote and WAPCO significantly increasing capacity in the short term (<3 years), competition and downward pressure on cement prices is anticipated. This may negatively affect Ashaka considering it has one of the lowest operating efficiencies in the sector (EBITDA at 9%) and prices are already some of the highest in the Africa (See fig 3, page 6). Our DCF model ascribes Ashaka a target price of NGN23.22, indicating full valuation. On a relative valuation basis, the counter is trading at a 2011 EV/tonne ratio of US$491 (US$304 at 2012 capacity) significantly higher than our SSA weighted average EV/tonne of US$122/tonne (excluding Dangote). In FY2010 the counter performed superbly, gaining some 90%. YTD the counter has gained a further 9.4%. We would not be against some profit taking.
Financials Fully Diluted EPS (NGN) Free Cashflow per share (NGN) DPS (NGN) NAV/share (NGN) EBITDA Margin
STRENGTHS Sustainable market leadership Operations in an isolated market (N.E Nigeria) Robust technical and brand support from parent co-Lafarge S.A OPPORTUNITIES Plans for additional capacity of 350k tpa to raise total capacity to 1.2m tpa by 2012 Focus on cost cutting Increase in bank lending
2009 0.42 0.52 5.87 8.92%

WEAKNESSES
2010F 1.15 1.59 0.34 6.67 10.89%
2011F 1.26 1.88 0.38 7.56 25.09%
High energy costs Low EBITDA margin Market approaching near term saturation THREATS Increasing competition from local and foreign cement companies Short term political risk
FINANCIAL SUMMARY (NGNm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
2009 17,194.0 1,533.0 943.6 7.3% 3.7% 4.9 68.8 41.8 495.9 0.0%
2010F 18,913.4 2,060.0 2,572.2 18.3% 9.5% 4.3 25.2 31.9 508.5 1.2%
2011F 20,804.7 5,220.0 2,829.4 17.8% 9.4% 3.8 22.9 12.2 491.3 1.3%
12
Nature of business Ashaka Cement began operating in 1979 as a joint venture between the Nigerian government and Blue Circle of the UK. In 1990 the government reduced its shareholding, although it remains a significant shareholder. The company is 51% owned by Lafarge S.A. Management and plans to add 400,000 MT pa will increase total capacity to 1.25m MT by FY2012. Current capacity is 850,000 MT. Q2 Financial Performance Overview In Q2 2010, turnover went up 12.7% to NGN 10.1bn while PBT went up 41.7% to NGN 2.3bn. The depressed profit performance was attributed to the fluctuating LPFO (Low Pour Fuel Oil) prices as the company only managed a 30% substitution of its fuel usage through the use of coal. In the next 12 months, the company intends to use coal as a principal source of fuel, its target being to achieve a 90% substitution of LPFO in favour of coal. We expect the EBITDA margin to improve from 11.9% in FY2009 to 25.2% in FY 2010 in line with the regional EBITDA margin level of 39%. Operational Review The companys cement sales have been increasing steadily from circa 650,000 MT in 2004 to 850,000 MT in 2008. Ashakas installed coal capacity utilisation is 300,000 MT p.a. and management targets to increase coal usage to represent 90% of its fuel requirements. In 2009, the company completed exploration in the Maiganga area in Akko Local government of Gombe State which has an estimated proven reserve of 4.5m MT of coal which will satisfy the companys requirements for more than 25 years. Outlook The major gross margin booster for Ashaka would be if the company managed to achieve, the targeted 90% substitution rate of using coal instead of LPFO. Management estimates that it will save up to 60% in operating costs if they manage to run 100% on coal. The operating costs that would accrue from running the coal mine would however lower this saving. The long term outlook still remains positive, because of the likely increase in efficiencies. Operating margins and ROI are thus likely to improve in the long term, though the underlying risk could be the operational efficiency of the coal mine. Valuation and Recommendation Ashaka is currently trading on an EV/tonne ratio of US$491/tonne (US$304 at 2012 capacity) significantly higher than our SSA weighted average EV/tonne of US$122/tonne (excluding Dangote). Our DCF valuation is NGN23.22, indicating downside risk. We recommend investors reduce exposure.
9 month Interim Financial Statements Income Statement Revenue PBT PAT PBT margin PAT Margin Q3 2009 12.7 1.8 1.2 14% 9% Q3 2010 13.6 2.7 1.9 20% 14% % ch 6.8% 53.4% 60.5% 43.7% 50.3%
Figure 12: Nigerian EBITDA margins 70.0% 60.0%
50.0%
40.0% 30.0%
20.0%
10.0% 0.0%
Ashaka
CCNN
Dangote
WAPCO
Figure 13: 2011 Nigerian EV/tonne (US$) 700 600
EV/Tonne (US$)
500
400 300
200
100 -
Ashaka
CCNN
Dangote
WAPCO
Table 8: Nigeria Relative Metrics Ashaka Gross Margin EBITDA margin RoAE RoAA 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2011 EV/Tonne (US$) 31.5% 8.9% 7% 4% 25.2 22.9 4.3 3.8 31.9 12.2 1.2% 1.3% -6.5% 491 CCNN 43.5% 25.5% 44% 19% 9.4 6.1 3.5 2.9 4.2 2.7 6.6% 10.1% 18.0% 160 Dangote 44.2% 59.5% 52% 22% 11.6 6.1 8.6 6.4 14.8 7.5 3.4% 6.4% 0.0% 629 WAPCO 29.6% 18.2% 3% 2% 15.4 2.0 2.5 2.0 18.0 11.6 0.6% 1.2% 48.4% 243
13
NOTES
ASHAKA CEMENT COMPANY - 4 CGR and Forecasts 31 DEC (NGNm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (NGN) DPS (NGN) NAV (NGN) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 4,077 13,224 17,301 8,233 5,130 17,301 8,071 10,403 18,474 11,618 5,670 18,474 12,732 9,528 22,260 10,725 9,081 22,260 16,597 8,441 25,038 12,795 9,434 25,038 19,066 6,553 25,619 13,141 8,654 25,619 2009 422 41.8 0.9 495.9 (0.06) 24,347 11,852 36,199 20,851 (1,013) 6,953 36,199 2010F 432 31.9 0.9 508.5 0.05 27,810 20,292 48,103 28,438 (1,031) 9,271 48,103 2011F 418 12.2 0.9 491.3 (0.09) 13.97% 10.31% 2012F 380 6.8 1.3 303.8 (0.36) 47.05% -16.10% 10.31% 12.40% 15,815 5,948 6,519 4,430 (3,393) 2,240 1.98 1.52 5.2 16,772 4,452 4,016 3,377 (2,194) 2,240 1.51 0.35 5.2 16,474 2,697 2,184 1,101 (915) 2,240 0.72 0.41 4.8 21,378 3,784 3,264 2,068 (672) 2,240 0.92 0.30 5.7 17,194 1,533 1,534 944 2,240 0.42 5.9 18,913 2,060 3,737 2,489 (772) 2,240 1.15 0.34 6.7 20,805 5,220 4,637 2,830 (849) 2,240 1.26 0.38 7.6 0.00% -32.06% -100.00% 3.09% 2.11% -28.75% -30.35% -32.06% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
14
EQUITY RESEARCH NIGERIA FEBRUARY 2011 CEMENT CEMENT COMPANY OF NORTHERN NIGERIA Unfairly Bucking the Cement Bulls Despite solid fundamentals and attractive valuations, CCNNs performance in 2010 was rather lacklustre, significantly underperforming both the NSE and emerging markets. This was largely attributable to the change in control and management teams and subsequent legal disputes that had an unsettling effect. Post the structural changes, CCNN looks on a more stable footing and will be better able to improve operational efficiency and capacity. Looking attractive relative to the sector. Buy. Under new management, CCNN is on a solid footing to undertake the necessary plant conversions and upgrades to ensure that it grows margins and volumes in Nigerias north eastern corner. Primarily a kiln fuel conversion process is necessary, which will enable the plant to use coal as opposed to Low Pour Fuel Oil (LPFO) and is expected to reduce energy costs by about a third.
BLOOMBERG: CCNN: NL Current price (NGN) Current price (US$) Target price (NGN) Upside/Downside 12 month High/Low (NGN) Liquidity Market Cap (NGNm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
BUY 14.00 0.09 37.96 171.16% 12.35-27.19 17,381.7 114.4 1,241.5 19.4% 7.0 0.5 (25.1) (32.5) (40.5) 7.7 (31.1) (8.4)
2009 1.46 1.69 0.9 3.40 25.54%
2010F 1.49 2.08 0.9 3.97 30.36%
2011F 2.29 3.12 1.4 4.85 29.64%
Despite the operational challenges, the financial performance has been solid. 4-year CGRs for revenue, EBITDA and distributable earnings are 19%, 57% and 22% respectively. Cash flows have been strong, with annual dividend payments of around US$7m (6% yield). Valuations too look attractive. On current capacity of 500,000 MT, CCNN is priced at a low 2011 EV/tonne of US$160, taking into account the intended increase in capacity to 700,000 MT. Compared to the simple average for the region of US$381/tonne, CCNN is cheap. We see the integration into Bua International as a positive development, creating depth and greater strategic focus. All is looking good. BUY.
STRENGTHS
WEAKNESSES High energy costs Weak investor sentiment Massive investment in new plants Downward pressure on cement prices Political uncertainty THREATS Oversupply in the future Oil driven economy suject to oil price shocks Electricity shortages
Strong fundamentals, good margins Solid new majority shareholder Increasing capacity, margins Synergies with other group businesses Strong cashflow, healthy dividends OPPORTUNITIES Increased exports into Niger Change from LPFO to coal Nigerian banking sector stabilised post the AMC was set up
2009 11,868.8 3,031.8 1,812.3 44.2% 19.5% 4.1 9.6 5.7 227.2 6.4%
2010F 13,600.6 4,128.6 1,849.7 40.5% 9.7% 3.5 9.4 4.2 227.3 6.6%
2011F 20,944.8 6,208.4 2,848.5 52.0% 9.5% 2.9 6.1 2.7 159.9 10.1%
15
Nature of business Founded by Alhaji Sir Ahmadu Bello, Sardauna of Sokoto, Cement Company of Northern Nigeria Plc (CCNN) was incorporated in 1962 and started operating in 1967 with an initial installed capacity of 100,000 MT, at the Kalambaina operation. The second plant with an installed capacity of 500,000 MT per annum was commissioned in 1985 although in 1986, the first line was shut down due to its uneconomic mode of operation, leaving the plant with a rated output of 500k MT. In July 2000 a public bidding for the company was concluded and Scancem International ANS of Norway, a member of Heidelberg Cement group was elected as the core investor and technical partner of the Company. Heidelberg disinvested from CCNN in March 2008 and Damnaz Cement Company Limited (Nigerian company) then became CCNNs major investor. With effect from 14 January 2010 Bua International Ltd, a diversified Nigerian conglomerate, purchased Damnaz with consequent management changes. Overview of interim results to June 2010 Post take over, the interim financial performance has been less than inspiring. The top line contracted by 3.3% while the bottom line halved for the interim period. We anticipate a recovery in the financial performance once the plant conversion exercise has been completed. Operational Review CCNNs limestone plant has over 200m MT of limestone reserves, large enough to sustain its operations for more than 100 years. The companys cement production capacity currently stands at 500,000 MT although plans are in place to add a second line which will add 750,000 MT per annum, taking total cement production capacity to 1.25m MT. Cement production for 2009 of 408,000 MT resulted in an average capacity utilisation rate of 82%. With more efficient production systems and the conversion of the plant to use solid fuels, we expect an increase in utilisation levels. The company is now using less expensive biomass to replace 30% of its LPFO consumption. A rights issue to be done this year is expected to raise funds to improve efficiency and expansion at the companys plants. Outlook Brighter economic prospects post the oil price crash of 2008 which induced the NSE market crash and demise of several players in the financial sector, the economy is now in come back mode. We estimate cement consumption in the north eastern corner of Sokoto to be about 133kg per capita, which is higher than the Nigerian average of 95kg but nowhere close to emerging markets consumption that is 3-4x higher. Fundamentally, still a sound sector. Valuation and Recommendation At US$160/tonne, CCNN is the cheapest cement company in Nigeria, trading at some 60% discount to the Nigerian average of US$ 381/tonne. Fundamentally strong and now part of a Nigerian conglomerate we anticipate a rerating in 2011. Buy.
Table 9: Top 10 Shareholders' list Damnaz Cement Company Limited Nigerian Public Nasdal Bap Nigeria Limited Dantata Investment & Security Company limited Kebbi State Government Sokoto State Government Kaduna state Government Kano State Investment & Properties Limited Jigawa State Investment & Properties Limited Katsina State Investment & properties Limited Ferrostal A. G. Germany Total
% 50.7% 19.4% 13.3% 5.0% 5.6% 1.8% 1.5% 0.8% 0.9% 0.9% 0.1% 100%
6 month Interim Financial Statements Income Statement Revenue Profit before tax Attributable earnings HEPS (NGN) Balance Sheet (NGNm) Total Assets NAV Net debt Gearing 9,736 4,217 45 1% 9,988 4,417 474 2.6% 4.7% 959.9% H1 2009 H1 2010 6,592 1,386 1,172 0.94 6,374 829 519 0.42 % ch -3.3% -40.2% -55.7% -55.7%
11% 911.9%
50.0%
40.0% 30.0%
20.0%
10.0% 0.0%
Ashaka
CCNN
Dangote
WAPCO
Figure 15: 2011 Nigerian EV/tonne (US$) 700 600
EV/Tonne (US$)
500
400 300
200
100 -
Ashaka
CCNN
Dangote
WAPCO
Table 10: Nigeria Relative Metrics Ashaka CCNN Gross Margin 31.5% 43.5% EBITDA margin 8.9% 25.5% RoAE 7% 44% RoAA 4% 19% 2010 PER (x) 25.2 9.4 2011 PER (x) 22.9 6.1 2010 PBV (x) 4.3 3.5 2011 PBV (x) 3.8 2.9 2010 EV/EBITDA (x) 31.9 4.2 2011 EV/EBITDA (x) 12.2 2.7 2010 Div yield (%) 1.2% 6.6% 2011 Div yield (%) 1.3% 10.1% Gearing (%) -6.5% 18.0% 2011 EV/Tonne (US$) 491.3 159.9
Dangote WAPCO 44.2% 29.6% 59.5% 18.2% 52% 3% 22% 2% 11.6 15.4 6.1 2.0 8.6 2.5 6.4 2.0 14.8 18.0 7.5 11.6 3.4% 0.6% 6.4% 1.2% 0.0% 48.4% 628.6 242.6
16
NOTES
CEMENT COMPANY OF NORTHERN NIGERIA plc - 4 CGR and Forecasts 31 DEC (NGNm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (NGN) DPS (NGN) NAV (NGN) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 2,715 3,605 6,320 1,607 45 2,579 6,320 4,142 3,924 8,066 1,545 4,518 8,066 4,456 4,663 9,119 3,148 3,978 9,119 4,658 4,137 8,795 3,976 1,725 3,094 8,795 5,017 4,787 9,804 4,218 1,178 4,409 9,804 2009 114 5.7 0.5 227.2 18% 22,821 5,485 28,306 4,927 608 22,771 28,306 2010F 114 4.2 0.5 227.3 5% 23,292 8,447 31,739 6,019 730 24,990 31,739 2011F 112 2.7 0.7 159.9 3% 16.59% 7.35% 11.60% 27.28% 126.18% 14.34% 11.60% 2012F 112 2.5 0.7 160.2 4% 1,242 0.18 0.09 1.3 1,242 (0.03) 1.2 1,242 0.11 0.10 2.5 5,916 494 845 827 6,374 25 380 224 8,043 140 (11) (35) 9,878 1,610 174 1,531 1,131 1,242 1.23 0.90 3.2 11,869 3,032 2,317 1,812 1,131 1,242 1.46 0.90 3.4 13,601 4,129 2,720 1,850 1,140 1,242 1.49 0.92 4.0 20,945 6,208 4,189 2,848 1,756 1,242 2.29 1.41 4.8 68.66% 79.35% 27.28% 19.01% 57.40% 28.69% 21.67% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
17
EQUITY RESEARCH NIGERIA FEBRUARY 2011 CEMENT DANGOTE CEMENT Gargantuan growth ambitions
BLOOMBERG: DANGCEM:NL AVOID 128 0.83 128 0.00% 121-135 1,983,235 12,842.3 15,494.0 5% 32.0 0.3 (0.7) 0.0 0.0 0.0 0.0 0.0
In one fell swoop, the merger of listed Benue Cement and Dangote Cement Plc in October 2010 created the single largest corporate entity in Nigeria, and now accounts for a massive 23% stake of the Nigerian Stock Exchange. While Nigerias cement fundamentals are solid we believe the short term growth assumptions to be over-aggressive and would recommend that investors tread with caution.
Current price (NGN) Current price (US$) Target price (NGN) Upside/Downside 12 month High/Low (NGN) Liquidity Market Cap (NGNm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
Production capacity at 8m MT in 2010 is expected to increase to 20m MT, following capacity duplication at Obajana from 5 to 10m MT; Newly merged Benue will increase to 4m MT in 2011 and the Ibese factory at 6m MT will start firing its kilns in the same year. To put this into perspective, DCPs intends to add double PPCs capacity to existing operations in 2011/2. This growth in capacity is to be funded by Global Depository Receipts that will be listed on the London Stock Exchange where about 20% of the equivalent issued share capital will be offered to international portfolio investors. In this way the group will comply with the 25% minimum free float requirement stipulated by the Nigeria Stock Exchange. The regulators have given the group 24 months to sell down the additional 20% worth US$ 2.8b at the listing price of NGN 135 per share. Even after the most bullish volume growth assumptions: sales of 15.7m MT and 20.2m MT in 2012, DCP is still the most expensive cement company in Africa at over US$ 629/tonne for FY2011. We believe there to be better value elsewhere and would AVOID this stock for now.
2009 5.9 8.1 4.4 12.1 59.53%
2010F 11.0 16.1 8.2 14.9 65.99%
2011F 20.8 21.2 15.6 20.1 67.70%
STRENGTHS Strong brand loyalty pioneer tax exempt status till 2017 Balance sheet size and conglomerate structure = stability and clout Regional dominance OPPORTUNITIES Further geographical footprint Strong gvt spending on infrastructure Recovery in Nigerian banking sector will stimulate liquidity Developing bond market
WEAKNESSES One major shareholder Very expensive; High downside risk Cement prices at a peak Increased capacity may create oversupply THREATS Fluctuations in energy costs Inconsistent energy supply Political risk
2009 189,621 77,853 61,392 51.7% 22.2% 10.6 21.8 26.1 1,640 0.0%
2010F 225,874 134,454 90,974 51.6% 26.2% 8.6 11.6 14.8 666 3.4%
2011F 397,939 262,590 170,327 81.5% 41.7% 6.4 6.1 7.5 629 6.4%
18
Nature of business By 2012, should all projects be commissioned by their due dates, Dangote Cement will have a total cement production capacity of 20m broken down as follows: Obajana (Kogi State) 10m MT Ibese (Ogun State) 6m MT Benue Cement Company 4m MT The group also has bulk cement terminals with a bagging capacity of 6m MT at its depots in Port Harcourt, Onne, Apapa, Aliko and Tincan. Financial overview for the 9months in FY2010 Dangotes 9 months results for FY2010 showed impressive growth with volumes increasing by 64% to 5.8m MT, though less than managements expected 6.3m MT. Revenue was up 61% to NGN 146.6bn on the back of a softening in the cement price especially in the South Eastern region. Gross profit margins went down to 60% (9M FY2009: 64%) mainly fueled by higher energy costs after the Obajana plant used LPFO for most of Q1 2010 as gas supply was cut owing to militancy in the Niger Delta. The operating profit was NGN 77.4bn, up 86%, despite margins being negatively affected by an increase in marketing and distribution expenses. Interest costs were contained at NGN 449m and attributable earnings for the period closed at NGN 75.3bn. Comment on Management forecasts Although the cement industry in West Africa remains in boom mode, it is still difficult to swallow the assumptions made by DCP in arriving at their revenue and profit expectations going forward. Despite an increasing trend in GDP per capita and government spending on infrastructure, we have concerns regarding managements cement sales forecasts of 15.7m MT in 2011 and 20.1m MT, at constant US$ prices. While, much of the new production will replace tonnages imported, we anticipate a short to medium term period of oversupply. In total, Nigeria consumed 14.8m MT of cement in 2010 and the industry is expected to increase its capacity to 28.6m MT by the end of 2012. Globally, cement consumption is correlated to GDP growth, and we dont believe that average nominal GDP growth expectations of circa 7% will be sufficient to absorb the 93% increase in national capacity. The 2011 budget shows a 9.5% growth in Capex commitments and while the recovery in the banking sector is positive we believe management forecast to be overcooked. Valuation and Recommendation Being unsatisfied with the overly aggressive revenue and profit forecasts, we have totally disregarded DCF valuations for Dangote, and would rather revisit our models once further information is available. On a relative basis DCP is the most expensive cement counter in Africa and is currently trading on a 2011 EV/tonne value of US$628, which is way above the Nigerian and African averages of US$ 297/tonne (excl. DCP) and US$ 122/tonne respectively. This valuation is based on a capacity of 19.5m MT as per management guidance. Expensive pricing should act to dampen any prospects of future price appreciation, at least for the 24 month duration during which shares will be sold into the global market. Consequently, for the time being, we would avoid this counter.
Capacity Millions of MT
Table 11: Post Merger Shareholders' list Dangote Industries Limited Sheme Shareholders Other shareholders Total
% 95.9% 3.2% 0.8% 100%
30
25 20 15 10
Figure 16: Nigeria installed capacity
5
-
2009 Ashaka CCNN
2010 WAPCO
2011F Dangote
Figure 17: Dangote market share of African capacity

Africa 80%
Dangote 20%
Source: IES
Table 12: Nigeria Relative Metrics Ashaka Gross Margin 31.5% EBITDA margin 8.9% RoAE 7% RoAA 4% 2010 PER (x) 25.2 2011 PER (x) 22.9 2010 PBV (x) 4.3 2011 PBV (x) 3.8 2010 EV/EBITDA (x) 31.9 2011 EV/EBITDA (x) 12.2 2010 Div yield (%) 1.2% 2011 Div yield (%) 1.3% Gearing (%) -6.5% 2010 EV/Tonne (US$) 491.3
CCNN 43.5% 25.5% 44% 19% 9.4 6.1 3.5 2.9 4.2 2.7 6.6% 10.1% 18.0% 159.9
Dangote 44.2% 59.5% 52% 22% 11.6 6.1 8.6 6.4 14.8 7.5 3.4% 6.4% 0.0% 628.6
WAPCO 29.6% 18.2% 3% 2% 15.4 2.0 2.5 2.0 18.0 11.6 0.6% 1.2% 48.4% 242.6
19
NOTES
NB: These forecasts have been prepared by management of Dangote Cement PLC and not by the Imara group. The rationale and basis for these forecasts has been outlined in Scheme of Merger information memorandum that was published prior to the groups listing in October 2010.
DANGOTE CEMENT PLC - 4 CGR and Forecasts 31 DEC (NGNm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (NGN) DPS (NGN) NAV (NGN) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 130,519 168,482 299,001 58,071 77,245 33,166 299,001 135,622 236,720 372,341 72,512 64,926 99,281 372,341 186,393 316,339 502,732 164,915 60,076 91,347 502,732 2009 195,713 377,548 573,261 187,659 65,610 124,279 573,261 2010F 13,364.5 14.8 8.0 1,640.3 31% 205,499 439,357 644,856 230,241 71,673 137,443 644,856 2011F 13,122.4 7.5 19.5 665.7 24% 215,774 536,872 752,646 310,914 78,318 147,640 752,646 2012F 12,980.6 5.5 20.0 628.6 19% 14.46% 30.86% 24.23% 47.84% -5.30% 55.32% 24.23% 34,596 21,420 12,253 11,622 0 15,500 0.75 0.00 3.75 61,906 38,382 26,625 17,960 0 15,500 1.16 0.00 4.68 189,621 77,853 63,776 61,392 3,915 15,500 3.98 0.26 10.57 225,874 134,454 118,827 90,974 68,231 15,500 2.53 5.75 12.5 397,939 262,590 246,006 170,327 127,745 15,500 2.05 11.98 15.9 510,803 345,788 328,181 322,693 242,020 15,500 14.58 15.57 20.2 49.56% 49.97% 86.90% 84.47% 113.25% 98.55% 2007 2008 2009 2010F 2011F 2012F 4 Yr CGR
20
EQUITY RESEARCH NIGERIA FEBRUARY 2011 CEMENT
LAFARGE WAPCO NIGERIA Consolidating in West Africa 2012 marks the doubling in capacity of Lafarges Nigerian subsidiary to position the company for a rebound in the economy, post the 2009/10 economic slowdown. With stiff import tarrifs now in place, like DCP, Lafarge will experience a gain in market share as imported cement is substituted. Valuations for the company are undemanding relative to peers, especially as EV/tonne halves post the planned capacity expansion. Buy.
BLOOMBERG: WAPCO: NL Current price (NGN) Current price (US$) Target price (NGN) Upside/Downside 12 month High/Low (NGN) Liquidity Market Cap (NGNm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
BUY 43.00 0.28 75.12 74.70% 30.00-46.70 129,068.8 846.7 3,001.6 30.0% 23.7 0.6 (6.7) (14.1) (22.2) 35.3 (3.5) 19.2
Lafarge WAPCOs expansion programme is expected to double production capacity to 4.2m MT by FY2011 from the current 2m MT. An additional 225m will be needed to complete the project. Margins are on an upward trend as the companys cost savings initiatives bear fruit. We expect the energy cost component to slowly decline in the future as the company increases the use of coal and gas. From an EBITDA margin of 21.6% for FY2009, we expect a steady increase to 31.9% for 2012F. While 2010 revenues are expected to be in line with 2009, there has been a marked improvement in operating margins from 23% to 28% as LPFO has been substituted by coal. The new Lakatabu plant will have its own power plant, that can use either gas/coal, which should provide a measure of protection against any energy price fluctuations. WAPCO is trading on a 2011 EV/tonne of US$243/tonne on the expanded capacity augmentation. The low valuation is corroborated by 2011 relative PBV and PER ratings. Our DCF model using cash flows unadjusted for maintenance capex sets a high upper limit of NGN 75. Buy.
2009 45,589.8 8,276.6 5,055.8 3.0% 1.7% 3.0 25.5 18.2 494 0.2% 2010F 47,362.7 8,598.5 8,384.3 4.4% 2.2% 2.5 15.4 18.0 508 0.6% 2011F 73,718.7 13,383.3 15,371.3 6.6% 2.9% 2.0 8.4 11.6 243 1.2%
2009 1.68 1.59 0.10 14.56 18.15%
2010F 2.79 3.53 0.28 17.08 18.15%
2011F 5.12 7.10 0.51 21.69 18.15%
STRENGTHS Strong brand name Monopoly in South Western part of Nigeria New production line 'Lakatabu' to be operational by 2011 Technical and brand support from Lafarge Inc. OPPORTUNITIES Strong demographics; low consumption NGN 1 trillion capex spend in 2011 budget Recovering financial sector and increased capacity to lend for mortgages Increasing GDP/capita
WEAKNESSES Exchange rate risk for Yen denominated debt Increase in tax liabilities due to expiration of pioneer tax status Insufficient energy production; high costs Shortage of mortgage financing THREATS Massive increase in capacity by Dangote Oil price shocks affecting GDP Devaluation and currency instability Political risk due to election in 2011 Downwards pressure on cement price
21
Nature of business Lafarge Cement WAPCO Plc was established in 1960 when its first plant at Ewekoro, Ogun State was commissioned. The companys second factory in Sagamu was commissioned in 1978. The company has the capacity to produce 2m MT, and is the leading supplier of cement to the S.W region of Nigeria. Lafarge S.A became the majority shareholder in 2001 after acquiring Blue Circle Industries Plc in 2001. The name was changed to Lafarge Cement WAPCO in February 2008. Q3 2010 Interim Results Overview Third quarter top line declined slightly, however improved operational efficiencies, emanating primarily from the increased substitution with more expensive LPFO fuel with coal and gas. Back at a healthy 28%, operating margins should further be augmented once the 2.2m MT Lakatabu plant is fired up in August 2011. The new plant has its own onsite power station a variable coal/gas/LPFO combustion capability. Operational Review Current capacity utilisation stands at 75% at both plants on the back of electricity shortages and disruptions in power supply. The companys management is thus investing in dual firing options for the two operational plants so that (Low Pour Fuel Oil) LPFO is used in the event of disruption to gas supplies. We have modelled for 75% capacity utilisation in 2012 on the expanded capacity on operating margins of 21%. While there are several risks specific to this project, one of the most significant external risks relates to Dangotes massive investment in increasing their capacity by 12m MT which will significantly impact on pricing and demand. While the cement demand has been resilient, even accounting for the comeback of credit extension as the Nigerian banking sector recovers post the successful introduction of the AMCON, we believe there will be a lagged market response which could result in lower than expected capacity utilisation rates. Valuation and recommendation WAPCO remains the most attractive play in the Nigerian cement sector for several reasons. First of all their growth ambitions are more attainable than Dangotes, by mere virtue of its scale i.e. a capacity increase of 2.2m MT is more deliverable than an increase of 12m MT. Secondly and more importantly, an EV/Tonne of US$ 243 on expanded capacity compares well to both Ashaka (US$ 491) and Dangote (US$ 629). Nigerias gargantuan infrastructural deficit provides a massive backlog of rehabilitation and expansion projects and, while the price of oil is high and stable, as it is, governments continued strategic investment into investment capital should provide sustainable demand. With the top down looking good, the challenge ahead will be to protect and grow market share and margins as we expect medium term over-capacity in the domestic market. WAPCO is a more formidable punt on Nigerias growth story, with no share potential share overhang and significant upside.
Table 13: Top Shareholders' list Lafarge Odua Group of companies Public shareholders Total
% 60.0% 10.0% 30.0% 100%
9 month Interim Financial Statements Income Statement Revenues Operating profit Exceptional items Financial charges PBT PAT Q3 2009 35,099 8,156 214 (1,055) 7,315 4,023 Q3 2010 33,046 9,276 (248) 9,028 5,687 % ch -6% 14% -100% -76% 23% 41%
50.0%
40.0% 30.0%
20.0%
10.0% 0.0%
Ashaka
CCNN
Dangote
WAPCO
Figure 19: Nigerian EV/tonne (US$) 700 600

EV/Tonne (US$)
500
400 300
200
100 -
Ashaka
CCNN
Dangote
WAPCO
Table 14: Nigeria Relative Metrics Ashaka Gross Margin EBITDA margin RoAE RoAA 2010 PER (x) 2011 2010 2011 2010 PER (x) PBV (x) PBV (x) EV/EBITDA (x) 31.5% 8.9% 7% 4% 25.2 22.9 4.3 3.8 31.9 12.2 1.2% 1.3% -6.5% 491.3 CCNN 43.5% 25.5% 44% 19% 9.4 6.1 3.5 2.9 4.2 2.7 6.6% 10.1% 18.0% 159.9 Dangote 44.2% 59.5% 52% 22% 11.6 6.1 8.6 6.4 14.8 7.5 3.4% 6.4% 0.0% 628.6 WAPCO 29.6% 18.2% 3% 2% 15.4 2.0 2.5 2.0 18.0 11.6 0.6% 1.2% 48.4% 242.6
2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$)
22
NOTES
LAFARGE WAPCO - - 4 CGR and Forecasts 31 DEC (NGNm) 2005 Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (NGN) DPS (NGN) NAV (NGN) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 30,960 11,614 42,574 14,338 14,923 13,313 42,574 3,002 0.62 0.3 4.8 26,626 7,243 3,195 1,864
2006 39,518 14,263 12,119 10,946 3,002 3.65 1.0 8.5
2007 38,665 11,877 12,536 10,678 3,002 3.56 1.2 10.9
2008 43,274 13,673 13,033 11,252 3,002 3.75 0.6 13.5
2009 45,590 9,853 9,238 5,056 3,002 1.68 0.1 14.6
2010F 51,061 20,879 16,456 12,342 3,002 2.96 1.1 18.1
2011F 4 Yr CGR 72,762 28,786 24,823 18,618 3,002 3.79 1.4 20.8 14.39% 8.00% 30.40% 28.33% 0.00% 28.33% -24.02% 32.14%
32,425 16,329 48,754 25,547 7,234 15,973 48,754
33,416 17,180 50,596 32,806 2,536 15,254 50,596
43,181 18,587 61,768 40,456 3,955 17,357 61,768
69,741 17,422 87,163 43,711 33,500 9,952 87,163 2009 887 13.7 2.00 494.4 48%
77,006 26,780 103,786 54,287 35,063 14,426 103,786 2010F 887 8.3 2.00 507.9 49%
82,381 36,521 118,902 62,363 35,873 20,646 118,902 2011F 887 7.0 4.20 242.6 40%
22.51% 10.67% 19.62% 32.14% 22.40% -7.02% 19.62% 2012F 887 7.0 4.20 243.4 32%
23
Overview of the Angolan Cement Industry

Angola consumed in the region of 3m MT of cement in 2010 and while growth was sluggish (+4% on 2009) this was as a result of the tail end effects of the global crisis. Recent increases in local capacity, particularly by Nova Cimangol, have reduced the local supply deficit to under 1m MT, however with the oil price now firmly back in the black, demand is increasing and the gap is likely to rise further. The backlog for infrastructure projects runs into the billions of dollars and includes new roads, airports, oil and gas refineries and a commitment to build 1m houses among many others. Thus far about a tenth of the target has been delivered. Angolas increasing oil fortune, growing middle class and a commitment to developing the non-oil economy will ensure that cement demand keeps growing. Overview of Nova Cimangola Nova Cimangola is the largest cement company in Angola, located on the outskirts of Luanda. After a successful plant expansion, cement capacity has been increased to 1.8m MT of Portland cement and the company expects to produce 1.2m MT in 2011 entirely devoted to the Angolan market. Capacity expansion is ongoing and Nova Cimangola is projected to reach a production capacity of 3m MT per year by 2013 to meet rising domestic consumption. Over view of Secil Angola (Lobito) Secil Angola which is based in the port city of Lobito is the second cement factory in the country jointly owned by Secil of Portugal and the Angolan government in the ratio 51:49 respectively. Having expanded its capacity in recent years, the factory made sales of 307,000 MT in 2009, which increased slightly due to the hangover effects of the local slump in construction activities. EBITDA margins improved significantly, due primarily to lower clinker import costs and the EBITDA margin increased to 18%. A memorandum of understanding was signed with the Angolan government to increase capacity further by building a new cement plant, which will have a production capacity of 700,000 MT. This will increase Secils capacity to over a 1m MT, probably by 2013. Outlook for the Cement Sector The oil boom and oil backed loans ushered in a new era of growth for Angola, which has registered the highest GDP CGR of all the SSA countries in the last decade, at over 10% p.a. After a slowdown following the oil price crash in 2008, the economy has now stabilised and the momentum is building for a second wave of frantic expansion. The major stumbling block to date has been the government debt, primarily to the construction sector that is estimated at some US$6bn (7.5% of nominal GDP). The government has, however, pledged to clear these areas by the end of H1 FY2011. With the oil price back in the black and the global capital markets on the mend, construction and infrastructural development should recover strongly and we are likely to see the entry of more players into the cement industry.
Figure 20: Estimated Angola Market share Cimangola 12%
Imports 48%
Nova Cimangol 40%

Source: Imara Securities Angola SCVM
Figures 21: Per capita Cement Consumption by country

7,000 6,000
GDP per capita (US$)
180 160 140

Consumption Per capita (US$)
5,000 4,000 3,000 2,000 1,000 Zimbabwe Uganda Tanzania
120
100 80 60 40 20 Zambia
Angola
Kenya
Per capita gdp
Per capita Consumption
Table 15: Secil Angola Financial details 2008 Sales volume (MT) Revenues ( 000) EBITDA ( 000) EBITDA margin Capex ( 000) employees Price/tonne () Price/tonne (US$) 295,000 45,576 5,855 13% 4,701 284 154 212 2009 % ch 307,000 48,504 8,915 18% 2,321 302 158 216 4% 6% 52% 43% -51% 6% 2% 2%
South Africa
Nigeria
Malawi
24
East Africa Cement Industry Overview

Infrastructural expansion driving EA cement sector The cement market in East Africa grew by 13.5% to 6m MT in 2009 compared to 11% growth in 2008 (East Africa Cement Producers Association, 2009). The growth was higher in the second half of the year indicating positive regional recovery from the effects of the global recession. The Kenyan market grew by 14.3% to 2.7m MT mainly due to increased government investment in infrastructure construction, rehabilitation activities and Constituency Development Fund (CDF) projects. In Uganda and Tanzania, the market grew by 9.5% to 1.3m MT and by 6.5% to 1.8m MT respectively. Ugandan growth was stimulated by the ongoing 250 MW Bujagali hydro power project. The Rwandan and Burundi cement markets grew by 43% to a combined supply of 0.25m MT. The brief SWOT analysis for Kenya is as follows: STRENGTHS Increasing government investment in infrastructural expansion and rehabilitation Increased economic integration under East African Community 300m strong catchment population Low cement consumption at under 60kg pp Strong population growth Stable top down fundamentals; region experiencing steady economic growth Deepening financial sector encouraging mortgage lending Emerging middle class with ambition for better housing Large infrastructural investment deficit EA, darling of the donor community US ally in war against terror. Oil in South Sudan and emergence of a new country a positive for the region. WEAKNESSES Increasing competition from Asian imports that are heavily subsidised Reduced import tarrifs are hurting local industry High inflation due to weak currency fundamentals Disposable incomes growing but from a low base Region prone to drought which has a negative impact on GDP growth Dumping by Asian countries stifling local cement firms and ensuring that players are price takers OPPORTUNITIES Scope for increasing exports to fast developing heart of Africa: Rwanda, Burundi, Uganda and South Sudan. Further trade promotion on the creation of a monetary union Improved clinker capacity could result in greater efficiencies Improved energy generation and better operating efficiencies Plant conversions from LPFO reducing energy costs THREATS Local currency depreciation caused by commodity price shocks, contagion, drought and high local inflation Increasing competition from cheap subsidised imports from Asian countries with surplus capacity Political instability could affect region; Sudan and Kenya are the main hot spots
Table 16: Kenya Relative Metrics ARML Bamburi Gross Margin 36.1% 45.2% EBITDA margin 15.3% 28.6% RoAE 21% 42% RoAA 10% 26% 2010 PER (x) 24.2 11.8 2011 PER (x) 21.7 10.6 2010 PBV (x) 5.5 3.2 2011 PBV (x) 4.6 2.8 2010 EV/EBITDA (x) 15.2 6.2 2011 EV/EBITDA (x) 13.4 5.5 2010 Div yield (%) 0.9% 2.6% 2011 Div yield (%) 1.0% 2.8% Gearing (%) 106.8% 43.8% 2011 EV/Tonne (US$) 418.7 326.2 Capacity (MMT) 0.65 2.50
EAPC 21.6% 5.1% -5% -3% 19.2 16.5 1.6 1.5 8.5 7.9 1.6% 1.8% 43.6% 116.8 1.30
Figure 22: KES/USD exchange rate
25
EQUITY RESEARCH KENYA FEBRUARY 2011 CEMENT
ATHI RIVER MINING LIMITED Concrete solid performance As the fulcrum to the East African hub, with a captive market of over 300m people, the prospects for the Kenyan cement industry are healthy. This is corroborated by aggressive expansion, by the three major players in the sector, underpinned by solid domestic fundamentals, low per capita consumption and a deepening financial sector. Valuations are full for now, HOLD for 2012 boost to capacity. The new Tanzania plant will increase group cement capacity to 2.1m MT by Q1 2012 from the current 650,000 MT. The group has managed to secure funding for this project as reflected by the high gearing levels of 107%, and post completion, EV/tonne will decrease from US$418 presently to US$128. Following the divisionalisation of the groups activities at the beginning of 2010, ARM is planning to spinoff the fertilizer unit, by selling about 30-50% to a private equity firm. This will further concentrate the groups activities in the cement segment, freeing up cash flow to expand the cement portfolio. In 2010 the IMF has committed US$500m to Kenya for infrastructural developments. The continued development of Kenya as a regional hub, should result in higher cement consumption rates (currently at 56kg per capita). Massive potential exists to export to neighbours, including oil booming Southern Sudan, Uganda and Rwanda. Our DCF valuation of KES 141, indicates overvaluation, especially considering the 76% 12 mth appreciation. On an EV/tonne basis, the counter is again relatively overvalued relative to regional and African averages (US$ 221; US$122 respec. exc. Dangote). EV/tonne will drop to US$128 in 2012 following capacity expansion though. We recommend that shareholders HOLD.
FINANCIAL SUMMARY (KESm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield 4.2 26.9 15.2 415.6 0.8% 5.5 24.2 13.4 412.6 0.9% 4.6 21.7 11.7 418.7 1.0% 20.6% 9.7% 19.7% 8.0% 22.9% 8.4% 2009 5,144.8 1,241.2 645.8 2010F 5,729.3 1,424.2 719.1 2011F 6,380.1 1,640.7 800.8
BLOOMBERG: ARML: KN Current price (KES) Current price (US$) Target price (KES) Upside/Downside 12 month High/Low (KES) Liquidity Market Cap (KESm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to NSE20 index
HOLD 185.00 2.29 140.67 -23.96% 90-185 18,333.5 227.21 99.1 32.2% 6.3 2.8 37.2 35.5 14.5 84.6 45.8 69.8
Financials Fully Diluted EPS (KES) Free Cashflow per share (KES) DPS (KES) NAV/share (KES) EBITDA Margin
2009 6.87 8.50 1.50 43.92 15.35%
2010F 7.65 9.78 1.67 33.87 14.61%
2011F 8.52 11.28 1.86 40.40 13.76%
STRENGTHS Strong cashflow and balance sheet Strong demand locally and regionally tion risk Excellent credit rating OPPORTUNITIES New plant in Tanzania to add 1.3m tonnes to group capacity Unbundling of group to create value US$500m IMF commitment into infrastructure Coal fired plant to lower operating costs and increase margins
WEAKNESSES High debt levels leaves balance sheet iliquid Aggressive competition from China and prices THREATS Inconsistent energy supply Increasing competition Foreign exchange risk as about half of debt is US$ denominated. Political situation could increase uncertainty and retard capital projects
Diverse portfolio of products reduces concentra Pakistan that exert downward pressure on
26
Overview of the company Athi River Mining Limited was formed in 1973 with the focus of extracting and processing mineral resources in Kenya for use as raw materials. The company began by mining limestone for use as agricultural lime. In the 1990's the company expanded its operations to include value added processing of minerals and manufacturing of lime and cement. Besides lime and cement, the company also trades in sodium silicate, minerals and fertiliser. The company is split into three divisions: ARM Cement Ltd, ARM Minerals and Chemicals Ltd and Athi River Mining Limited. ARM also has three subsidiaries in Tanzania, South Africa and Zambia which specialise in lime, sodium silicate and cement. H1 2010 Results Overview Revenue went up 19% to KES 2.9bn from KES 2.4bn mainly driven by strong regional demand for cement and sodium silicate. The operating profit margin was maintained at 18%, as the companys use of coal to fire its kilns continues to give them an edge at the operating cost line. Distributable earnings amounted to KES 348m and dividends of KES 141m (US$ 1.75m) were paid out. Operational Review The pice de resistance for the ARM group is twofold: Firstly the strategic positioning to unbundle the non cement businesses will generate cash for further investment into the cement sector. Secondly and more importantly, the group raised over US$ 20m in 2010 which will be invested into a new 1.5m MT pa cement plant in Tanzania which is scheduled for completion in early 2012. They have also commissioned a cement expansion plant in Mombasa, and intend to commission the Athi River plant in Q4 2010. Competition in the cement space domestically has been increasing, particularly from Pakistan and China, which has dampened prices. Outlook Improved cement sales in H2 2010 are expected to result in an even stronger performance for the full year. Export sales are also expected to go up whilst the local market share is on the increase. The companys cash flow is expected to remain healthy as a result of efficient working capital management and increased profitability. The business also intends to make use of cash received from the fertilizer unit spin off to build a new fertilizer plant that will increase annual fertilizer production to 150,000 MT. Management estimates the fertilizer market will grow at an average rate of 25% p.a. and that demand for fertilizer to double in 5 years. Valuation and recommendation On an EV/tonne basis, at US$ 418/tonne ARM is not cheap, particularly taking into account the strong share price performance (+78%) in 2010. Regardless, once the Tanzanian factory starts production in early 2012, this valuation will decrease to US$128/tonne. While there may be some profit taking in the short term, ARML is founded on solid fundamentals and has a definitive role to play in the infrastructural development of the EA economic bloc. We see the single largest risk for the group being their exposure to exchange rate risk, as about half of the debt taken on for the expansion is dollar denominated. With continued positive fundamentals, we would recommend that investors HOLD their positions.
Interim Financial Statements Income Statement (KESm) Revenue Profit before tax Attributable earnings HEPS (KES) Balance Sheet (KESm) Total Assets NAV Net debt Gearing 12,141 4,129 4,658 113% 15,170 24.9% 4,481 8.5% 8,371 79.7% 187% 65.6% H1 2009 H1 2010 2,404 449 300 3.03 % ch 2,850 18.6% 519 15.6% 348 16.0% 3.51 15.8%
Figure 25: Divisional Turnover breakdown - 2009 Sodium Silicate 21%
Minerals 10% Cement 53%
Lime 9%
Fertiliser 7%
Source: ARML Annual Report 2009
Figure 26: Regional Turnover breakdown - 2009 Kenya 89%
Source: ARML Annual Report 2009
Tanzania 7% South Africa 4%
Athi River Mining Ltd

100% 100% 100% 100%
ARM Tanzania Ltd ARM South Africa (Pty) ltd Maweni Limestone Ltd (Tanzania) Mavuno Fertilizer ltd (dormant)
Table 17: Top 10 Shareholders' list Amanat Investments Cfc Stanbic Nominees ARM Employee Share Option Scheme Barclays Nominees Orthodox Archbishopric of Kenya & Irinoupolis Wilfred Murungi Barclays Nominees National Social Security Fund Barclays Nominees Barclays Nominees Others Total
% 46% 8% 6% 2% 2% 1% 1% 1% 1% 1% 32% 100%
27
NOTES
ATHI RIVER MINING COMPANY - 4 CGR and Forecasts 31 DEC (KESm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (KES) DPS (KES) NAV (KES) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net Debt/Equity ratio 2,169 1,057 3,226 1,162 1,353 711 3,226 3,185 1,057 4,242 1,325 1,510 1,407 4,242 3,304 1,182 4,504 1,734 1,169 1,066 4,504 4,372 1,885 6,352 2,128 1,653 1,843 6,352 8,688 3,363 12,141 4,129 3,014 3,354 12,141 2009 270 17.6 0.65 415.6 106.8% 9,557 2,038 17,460 3,184 2,310 2,506 17,460 2010F 268 15.2 0.65 412.6 133.5% 10,513 2,032 18,501 3,798 2,310 2,582 18,501 2011F 272 13.4 0.65 418.7 120.3% 41.47% 33.55% 39.28% 37.30% 22.17% 47.37% 39.28% 2012F 275 11.7 2.15 127.9 106.9% 2,209 524 296 196 71 94 2.09 0.75 12.36 2,605 662 388 258 94 94 2.74 1.00 14.10 3,882 1,012 621 422 118 94 4.49 1.25 18.45 4,620 1,173 705 503 118 94 5.36 1.25 22.63 5,145 1,241 949 646 141 94 6.87 1.50 43.92 5,729 1,424 1,056 719 157 94 7.65 1.67 33.87 6,380 1,641 1,177 801 175 94 8.52 1.86 40.40 34.73% 18.92% 37.30% 23.54% 24.06% 33.80% 34.73% 18.92% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
28

BLOOMBERG:BMBC: KN Current price (KES) Current price (US$) Target price (KES) Upside/Downside 12 month High/Low (KES) Liquidity Market Cap (KESm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
BAMBURI CEMENT COMPANY Setting a high standard in EA Lafarges EA subsidiary, Bamburi, is Kenyas largest cement company by capacity, a position it is consolidating with the expansion projects underway. Bamburis market dominance in Kenya remains a certainty and the group continues to expand regionally with key footholds now established in neighbouring Uganda and Rwanda.
BUY 195 2.42 267 36.98% 150.09-220.00 70,777.1 878.1 363.0 11.0 5.3 2.2 (1.5) (3.1) (24.2) 23.1 (15.7) 8.3
Deregulation, high inflation and a weak local currency have negatively affected local cement producers in the interim. Medium term prospects however, are quite rosy, underpinned by strong regional infrastructural development, increasing investment and rising per capita incomes. Regional demand has been robust with strong growth in Uganda (+9.5%), and from a lower base, Rwanda and Burundi (+43%). On commencement of oil production in 2012, Ugandas cement consumption will rise in tandem with increased GDP, as well as in nearby South Sudan. Bamburi has the most impressive profitability ratios, with a 42% RoAE ratio the highest for the countrys cement sector. It also has a consistent dividend payment policy although the ongoing expansion projects have lowered the dividend payout ratio. Our DCF model ascribes a top end valuation of KES 267, showing significant upside potential. The EV/tonne valuation at US$326/tonne is more attractively priced than ARML, but not a bargain. Our fair valuation implies an EV/tonne ofS$462/tonne. BUY
2009 29,990.0 8,568.0 6,649.0 41.7% 25.7% 3.6 10.6 7.2 336.7 2.8% 2010F 33,360.9 9,593.0 6,754.5 27.1% 27.5% 3.2 11.8 6.2 340.2 2.6% 2011F 37,110.6 10,587.5 7,579.7 22.9% 22.5% 2.8 10.6 5.5 326.2 2.8%
2009 18.32 20.87 5.5 53.71 28.57%
2010F 16.59 19.37 5.0 61.75 28.76%
2011F 18.43 21.36 5.5 70.69 28.53%
STRENGTHS Low transport costs as plants are located near large markets Strong cashflow and balance sheet Lucrative export market potential Strong double digit growth in regional volumes OPPORTUNITIES Growing per capita consumption Energy cost rationalisation by the intro of Petcoke to replace coal (25% substitution) 250MW Bujagali hydro power plant (2011)
WEAKNESSES High energy costs Local currency weakness High Shilling inflation increasing competitive space deregulation increasing imports from India, China and Pakistan THREATS Inconsistent energy supply and rising energy prices Increasing competition Drought and its negative impact on GDP Further decrease in EAT CET
FINANCIAL SUMMARY (KESm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
29
Overview of the company Bamburi Cement has a cement production capacity of 2.5m MT pa, from production plants in Mombasa and 1m MT pa in its clinker plant in Nairobi. Bamburi is the largest player in the Kenyan cement industry with a 41% shareholding in East African Portland Cement. The company also owns Hima Cement in Uganda. H1 2010 Results Overview A decline in market share, following the increase in capacity and lower selling prices by rivals impacted turnover which went down 19.5% to KES 13.0bn (H1 2009: KES 16.2bn). The operating profit was also lower at KES 3.3bn, down from KES 4.2bn as a result of higher power prices in Q1 2010 which also adversely affected operating margins. PBT amounted to KES 3.5bn, down 22%, which translated to an attributable profit of KES 1.9bn and EPS of KES 6.52. The company declared an interim dividend of KES 1.50. Operational Review Domestic cement demand has been buttressed by the Kenyan governments continued investment in infrastructural rehabilitation and expansion projects, which is an underlying theme across the east African bloc. The company has room to increase gearing to fund its expansion projects, with gearing currently at 44% of shareholders funds. The weak Shilling has encouraged exports to regional markets while higher efficiencies at the clinker plant have reduced import requirements positively impacting on operating efficiencies. For FY2009, clinker production was a record 1.14m MT. High energy costs remain an albatross and profitability margins continue to be eroded by the high cost of power. 25% of coal consumption has now been substituted with cheaper pet coke, however energy costs will continue to be a major challenge. Outlook Following stronger market growth from Q3 2010 in Kenya and higher sales volumes in Uganda, the group is optimistic of stronger top-line performance in the second half versus H1 2010 and FY2009. Management intends to continue with cost reduction and cash generating initiatives, while improving industrial productivity. A capacity increase project at Kasese Plant in Uganda is expected to positively impact performance. Valuation and recommendation Our DCF model ascribes a value of KES 267, showing significant upside potential. The EV/tonne valuation at US$326/tonne is on the high side, but still reasonable. Longer term fundamentals remain solid. EAs deepening capital markets and the regions rising disposable incomes for the 300m strong catchment area continue to be an attraction. Most importantly, per capita cement consumption at 69kg pp, remains very low compared to the weighted average for our SSA sample of $101kgs/capita. Being the most dominant and stable play in the region, Bamburi remains our preferred stock for exposure to the region. BUY
Interim Financial Statements Income Statement (KESm) Revenue Profit before tax Attributable earnings HEPS (KES) Balance Sheet (KESm) Total Assets NAV Net Current Assets Non Current liabilities Gearing 27,167 19,496 1,401 6,227 32% 26,554 18,450 (1,001) 6,731 36% -2.3% -5.4% n/a 8.1% 14.2% H1 2009 16,199 4,474 2,975 8.19 H1 2010 13,045 3,504 2,366 6.52 % ch -19.5% -21.7% -20.5% -20.4%
Figure 27: Bamburi Cement Sales 2,500 2,000
1,500
1,000
500
2005 2006 2007 2008 2009 2010F
Source: Bamburi Annual report 2009
Figure 28: Bamburi Regional sales
Uganda 20%
Kenya 67%
Other inland Africa 13%
Source: Bamburi Annual Report 2009
Figure 29: Bamburi direct cost breakdown
clinker 23%
Freight 16%
Energy 29%
Additives 12%
Maintenance 8%
Other 6%
Source: Bamburi Annual Report 2009
Packaging 6%
Table 18: Kenya Relative Metrics Gross Margin EBITDA margin RoAE RoAA 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) Capacity (MMT) ARML 36.1% 15.3% 21% 10% 24.2 21.7 5.5 4.6 15.2 13.4 0.9% 1.0% 106.8% 418.7 0.65 Bamburi 45.2% 28.6% 42% 26% 11.8 10.6 3.2 2.8 6.2 5.5 2.6% 2.8% 43.8% 326.2 2.50 EAPC 21.6% 5.1% -5% -3% 19.2 16.5 1.6 1.5 8.5 7.9 1.6% 1.8% 43.6% 116.8 1.30
30
NOTES
BAMBURI CEMENT COMPANY - 4 CGR and Forecasts 31 DEC (KESm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (KES) DPS (KES) NAV (KES) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 4,768 2,950 7,718 2,253 4,570 895 7,718 5,570 3,482 9,052 3,077 4,577 1,398 9,052 5,768 3,170 8,939 3,607 3,896 1,435 8,939 6,412 2,662 9,073 4,027 3,870 1,176 9,073 8,923 3,131 12,054 6,115 4,427 1,512 12,054 2009 842 7.9 2.5 336.7 44% 11,374 9,411 20,785 9,259 7,925 3,444 20,785 2010F 851 7.2 2.5 340.2 39% 12,115 10,436 22,551 10,310 8,052 3,829 22,551 2011F 816 6.2 2.5 326.2 35% 16.96% 1.50% 11.79% 28.36% -0.80% 14.02% 11.79% 2012F 811 5.5 2.5 324.3 32% 14,393 3,838 3,147 2,004 1,924 363 5.52 5.30 25.0 16,488 4,397 3,838 2,614 1,997 363 7.20 5.50 34.2 22,111 5,629 5,443 3,596 2,178 363 9.91 6.00 40.1 27,467 6,646 4,889 4,227 2,178 363 11.64 6.00 44.7 29,990 8,568 9,596 6,649 3,426 363 18.32 5.50 67.9 33,361 9,593 8,690 6,021 3,103 363 16.59 4.98 102.9 37,111 10,588 9,657 6,691 3,448 363 18.43 5.53 114.6 34.96% 0.91% 28.36% 20.15% 22.23% 32.14% 34.96% 15.52% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
31
BLOOMBERG: EAPC: KN
SELL 108 1.34 N/A N/A 80.00-133.00 9,720.0 120.6 90.0 6% 59.0 44.0 8.0 6.4 (14.7) 35.0 (3.8) 20.2
EAST AFRICAN PORTLAND CEMENT COMPANY Down in the dumps EAPC is the quintessential example of the Rule of two in practice. While the sector is challenged by exogenous factors, several of the shortcomings are a direct result of strategic shortcomings. The US$37m Yen denominated loan creates a structural rigidity for the company, ensuring successive exchange losses due to local currency weakness. Fundamentally flawed. Sell.
Current price (KES) Current price (US$) Target price (KES) Upside/Downside 12 month High/Low (KES) Liquidity Market Cap (KESm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$ '000) Ave monthly volume traded ('000) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
For FY 2010, the company broke its profit making trend by registering a KES 292m loss compared to an attributable profit of KES 1.8bn in the prior year. Revenue had however gone up from KES 8.1bn to KES 9.4bn for the full year. Production and administration costs have been rising steadily. The main contributor has been the groups use of expensive fuel oil as compared to its peers ARML and Bamburi who use coal.
2009 (3.33) 0.52 63.35 5.05%
2010F 5.64 9.80 1.7 67.04 14.08%
2011F 6.54 11.03 2.0 71.33 14.03%
Coal prices have remained largely unchanged, for the year, compared to the more volatile fuel prices. Thus the company is facing thinner margins in the competitive market as sales have been growing albeit at reduced prices due to external competition from Asian imports. Although EAPCs EV/tonne is attractive at US$118/ tonne versus the regional average of US$300, the high cost structure dampens future prospects. Structurally inefficient. We see better upside potential in peers, Athi and Bamburi. SELL
2010 9,408.7 475.2 -299.9 -5.1% -2.9% 1.7 (32.4) 25.7 116.4 0.0% 2010F 10,274.3 1,446.3 507.4 8.6% 4.8% 1.6 19.2 8.5 116.8 1.6% 2011F 11,219.5 1,574.2 588.2 9.4% 5.3% 1.5 16.5 7.9 118.0 1.8%
STRENGTHS Diverse shareholders base East Africa's growth story and potential markets in the heart of Africa:- Rwanda, Burundi, Southern Sudan, Eastern DRC OPPORTUNITIES Switch to coal to improve cost efficiencies Access to government funded projects Potentially greater trade with regional countries through bi-lateral accords
WEAKNESSES Limited free float Management and gvt bureaucracy Yen denominated debt resulting in perennial exchange losses Poor cost control and lowest efficiencies THREATS Inconsistent and expensive energy supply Increasing competition and loss of market share Dumping of susidised cement by China,Pakistan Civil strife in export countries eg Southern Sudan and DRC Local currency weakness
FINANCIAL SUMMARY (KESm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
32
Nature of business East African Portland Cement Company Limited engages in the manufacture and sale of Portland cement in Kenya under the brand name Blue Triangle. Its other products include concrete pavers, kerbstones, cement slabs, and cement fence posts. It also makes cement tiles, culverts, panels, and tubes for the construction industry. The company was incorporated in 1933 and is based in Nairobi, Kenya. It has a capacity of 1.3m MT located in Athi River. FY2010 Results Overview Performance for FY2010 was dire in view of the high production costs, which saw cost of sales going up 33% from FY2009. Revenue had gone up 16% to KES 9.4bn on the back of higher sales volumes encouraged by lower selling prices. The increase in costs lowered the gross profit by 25% to KES 2.0bn (FY2009: KES 2.5bn). Profit from operations stood at KES 90m (FY2009: KES 1.2bn) after additional administration, selling and other operating costs totalling KES 2.0bn. Unlike in the prior period there was no fair value adjustment of investment property to pull the company back into positive territory. On the balance sheet borrowings amounted to KES 3.0bn, largely made up of the Yen denominated loan (US$ 37m equivalent) whilst total assets were largely unchanged at KES 12.0bn. The current ratio weakened from 2.1x to 1.6x on the back of a weakening in the cash generating ability and cash held at the end of the period more than halved to KES 444.8m from KES 1.9bn. Operational Review In addition to the expensive fuel costs, EAPCs operating cost line was adversely affected by the high clinker import requirement. The company plans to convert its kilns to be fuelled by solid fuels (coal/coke) by June 2011. The Yen denominated debt continues to adversely affect earnings, with huge foreign currency losses being made on the back of the strengthening of the Japanese currency against the Kenya Shilling (17% devaluation ytd). The initial loan of KES 7.6bn was drawn down in 1990 but runs to FY2020. For FY2010, exchange losses of KES 451m (US$ 5.6m) accrued from this long term liability. The outstanding amount on the loan is KES 3.0bn (US$ 38m) Outlook Increasing competition on the Kenyan cement market threatens any potential market share growth. However management is optimistic that it will garner more sales in terms of volumes as a result of improved production and organic market demand growth. On conversion to coal firing, the plant will become more efficient. The outstanding yen denominated loan may constrict financing options. Valuation The company is in a loss position and is fundamentally much weaker than its peers. While a low EV/tonne valuation may indicate speculative potential, we would not advise this. SELL
Table 19: Top 5 Shareholders' list NSSF GOK Cementia (Lafarge) BCI Bamburi (Nominees) Others Total
% 27.0% 25.3% 14.6% 14.6% 12.5% 6.0% 100%
Figure 30: Cost of sales breakdown

3,500
3,000
2009
2010
% change (RHS)
120% 100% 80%
COS (KESm)
2,500 2,000 1,500 1,000
60%
40% 20% 0%
500
-
Furnace Oil/Power
Maintenance
Transport
Factory staff costs
Raw Materials
Source: EAPC 2010 Annual
Figure 31: Kenyan Shilling vs Japanese Yen
Table 20: Kenya Relative Metrics ARML Gross Margin 36.1% EBITDA margin 15.3% RoAE 21% RoAA 10% 2010 PER (x) 24.2 2011 PER (x) 21.7 2010 PBV (x) 5.5 2011 PBV (x) 4.6 2010 EV/EBITDA (x) 15.2 2011 EV/EBITDA (x) 13.4 2010 Div yield (%) 0.9% 2011 Div yield (%) 1.0% Gearing (%) 106.8% 2010 EV/Tonne (US$) 418.7 Capacity (MMT) 0.65
Bamburi 45.2% 28.6% 42% 26% 11.8 10.6 3.2 2.8 6.2 5.5 2.6% 2.8% 43.8% 326.2 2.50
Other
EAPC 21.6% 5.1% -5% -3% 19.2 16.5 1.6 1.5 8.5 7.9 1.6% 1.8% 43.6% 116.8 1.30
33
NOTES
EAST AFRICAN PORTLAND CEMENT - 4 CGR and Forecasts 30 JUNE (KESm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (KES) DPS (KES) NAV (KES) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 5,570 3,482 9,052 3,077 4,577 1,398 9,052 5,768 3,170 8,939 3,607 3,896 1,435 8,939 6,412 2,662 9,073 4,027 3,870 1,176 9,073 8,923 3,131 12,054 6,115 4,427 1,512 12,054 11,374 2,912 20,785 9,259 7,925 3,444 20,785 2010 151.3 25.7 1.3 116.4 44% 12,115 2,951 22,551 10,310 8,052 3,829 22,551 2011F 151.9 8.5 1.3 116.8 42% 12,115 3,012 22,551 10,310 8,052 3,829 22,551 2012F 153.5 7.9 1.3 118.0 41% 19.54% -4.37% 23.10% 31.71% 14.71% 25.28% 23.10% 2013F 154.2 7.3 1.3 118.6 40% 6,181 1,138 924 412 234 90 1.15 2.60 34.2 6,403 1,179 1,113 764 234 90 5.08 2.60 40.1 44.7 7,204 1,326 716 537 90 10.57 8,101 1,491 2,122 2,074 117 90 3.78 1.30 67.8 63.3 9,409 475 (346) (300) 90 (3.33) 10,274 1,446 585 507 152 90 5.64 1.69 67.0 11,220 1,574 679 588 176 90 6.54 1.96 71.3 n/a n/a 16.67% 11.08% -19.61% n/a n/a n/a 2006 2007 2008 2009 2010 2011F 2012F 4 Yr CGR
34
EQUITY RESEARCH TANZANIA FEBRUARY 2011 CEMENT TANGA CEMENT COMPANY Solid foundation Tanga Cements alliance with Holcim has provided the company with a competitive edge over its local peers. Prospects for growth driven by organic augmentation in the local population and increased infrastructural investment have been dampened by the lowering of import duties and the subsequent increase in imports. On the positive this has incentivised a leaner, meaner ideology and has forced local players to strive towards global standards in order to compete effectively. This part of Africa possesses some of the cheapest cement plays in the world which we see significant upside to.
BLOOMBERG: SIMBA:TZ Current price (TZS) Current price (US$) Target price (TZS) Upside/Downside 12 month High/Low (TZS) Liquidity Market Cap (TZSm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$ '000) Ave monthly volume traded ('000) Share Price Performance 6 months (%)
BUY 1,900 1.3 6,292 231% 1,680-1,900 120,975.0 83.1 63.7 19% 43.1 33.00 10.5 8.8 (12.3) 9.2 (29.6) (5.6)
A new cement mill and packing plant were commissioned during FY2009 and resulted in a 500,000 MT increase in the installed cement grinding and packaging capacity, increasing the installed cement capacity to 1.25m MT. For FY2009, a final dividend of TZS 179 per share was declared (Total: TZS 11.4bn/US$ 7.8m) indicating a dividend yield of 9.42% and dividend cover for the full year of 2.7x. For FY2010, we forecast the dividend yield to stay constant at 9.4% whilst the cover should grow to 3x. We are optimistic about prospects for FY2010, with the cement market expected to grow, the new plant will tap into this expected growth to increase sales volumes and market share. The EV/tonne ratio lags the regional average at US$ 74/tonne against the SSA and Kenyan weighted averages of US$ 151/tonne and US$ 300/tonne respectively showing the underlying upside potential. Our DCF valuation of TZS 6,292 indicates a significant rerating, despite low liquidity. STRONG BUY
2009 119,898 47,445 30,420 39.7% 35.2% 1.3 4.0 2.3 60.9 9.4% 2010F 129,346 47,846 29,642 32.5% 27.0% 1.3 4.1 2.8 73.6 9.2% 2011F 141,668 52,321 32,540 31.6% 27.5% 1.1 3.7 2.6 74.2 10.1%
Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
Financials Fully Diluted EPS (TZS) Free Cashflow per share (TZS) DPS (TZS) NAV/share (TZS) EBITDA Margin
2009 478 504 179 1,443 35.48%
2010F 466 525 174 1,425 28.60%
2011F 511 575 191 1,807 28.65%
STRENGTHS Technical assistance from Holcim Strong cash flow; fat dividend policy Low per capita consumption Exports markets opening up in central Africa OPPORTUNITIES Continued GDP growth
WEAKNESSES Inadequate energy suppy by Tanesco Ineffefient rail service and need to use more expensive road transportation Dumping of subsidised cement by Pakistan THREATS Increased imports and competition Local currency weakness Power outages affecting production Instability of rail transport system adversely affecting transportation
FINANCIAL SUMMARY (TZSm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
35
Nature of business Commissioned in 1980, Tanga Cement Company Limited was built largely from funds donated by Danish Government and in 1989 Holcim, the world's second largest cement company, took over management of Tanga Cement Company. Holcim Mauritius in 1996 successfully acquired the majority share of the company, and currently it holds 62.5% of the company while 36.9% is owned by the Tanzanian public and local institutions. H1 2010 Results Overview Tanga revenue for the interim period went up 8% to TZS61.1m, although sales volumes had gone up 16%. The limited growth was mainly on the back of increased imports and competition within the industry. The cost of sales was driven mainly by the high cost of imported clinker as the companys factory had been closed .The gross profit thus declined by 7% to TZS 22.9m while the PBT stood at TZS 14.6m (H1 2009: TZS 18.3m) . The companys working capital ratio weakened as a result of a 25.5% increase in current liabilities versus a 7.4% decrease in current assets which was due to a TZS 1.4m increase in debt. On the cash flow statement, funds raised from financing activities amounted to TZS 1.4bn although the closing cash flow position was a negative TZS 8.4m after TZS 16.4m was spent on financing working capital and capex projects. We expect the cash flow position to remain strained due to high working capital requirements. Operational Review Tanga cement consumption in the northern region of Tanzania shrank by 3% in FY2009, despite growth in cement demand in and around Dar es Salaam. 706,000 MT of cement were produced and sold, resulting in a revenue figure of TZS 119.9m, down 1% from the prior year. The company was profitable despite increased competition and the economic crisis in its core markets. Operational efficiency was however hampered by power shortages, as supply of electricity from Tanesco (Tanzania Electricity Supply Company) deteriorated and back-up generators had to be used, increasing production costs. Use of rail for the transportation of cement came to a standstill affecting the movement of goods to the Lake Zone, and now the goods are being moved through the more expensive road transportation. Outlook Performance in H2 2010 is expected to be positive on the back of growing cement demand and the recent capacity expansion is expected to tap into this growth with a positive impact on sales. Plant efficiencies are also expected to improve thereby lowering production costs. Valuation and Recommendation The EV/tonne ratio at US$74/tonne is in bargain territory compared the SSA and Kenyan averages of US$122/tonne and US$287/tonne respectively showing the underlying upside potential. Our DCF derived target price of TZS6,292 indicates 231% upside potential. STRONG BUY
Interim Financial Statements Income Statement (TZSm) Revenue EBITDA Profit before tax Attributable earnings HEPS (KES) Balance Sheet (TZSm) Total Assets Shareholders' Equity Net debt Gearing 116,146 91,882 0% 127,786 90,739 13,013 14% 10.0% -1.2% n/a n/a
% 62.5% 7.2% 6.5% 1.8% 0.8% 0.6% 0.5% 0.4% 0.4% 0.3% 19.1% 100%
H1 2009 H1 2010 56,381 19,468 18,302 12,811 201.00 61,090
% ch 8.4%
17,292 -11.2% 14,641 -20.0% 10,254 -20.0% 161.00 -19.9%
Table 21: Top 10 Shareholders' list AfriSam Mauritius Investment Holdings Public Service Pension fund National Social Security fund Social Action Trust fund Employee Share option Scheme Sajjad Rajabali Aunali Rajabali Government employees Provident Fund Local Authorities Provident fund BP Tanzania Provident Trust Other Total
Table 22: Tanzania Relative Metrics Tanga Gross Margin EBITDA margin RoAE RoAA 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) 47% 35% 40% 35% 4.1 3.7 1.3 1.1 2.8 2.6 9.2% 10.1% 14.3% 73.6 Twiga 52% 36% 39% 34% 5.1 4.5 1.8 1.4 2.9 2.2 9.6% 10.9% -6.8% 142.0
36
NOTES
TANGA CEMENT COMPANY - 4 CGR and Forecasts 31 DEC (TZSm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (TZS) DPS (TZS) NAV (TZS) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 22,475 16,113 38,589 24,618 10,425 38,589 28,897 23,133 52,030 35,456 9,062 52,030 41,327 27,460 68,787 50,515 14,427 68,787 59,286 29,544 88,830 61,407 (6,078) 21,028 88,830 84,319 31,156 115,475 91,882 10,913 115,475 2009 76 2.3 1.3 60.9 n/a 93,722 28,857 122,579 90,739 10,000 13,697 122,579 2010F 92 2.8 1.3 73.6 14% 101,220 30,460 131,680 115,061 10,000 14,615 131,680 2011F 93 2.6 1.3 74.2 12% 39.2% 17.9% 31.5% 39.0% n/a 1.2% 31.5% 2012F 92 2.2 1.3 73.8 9% 67,169 16,933 10,575 7,330 1,846 64 113.60 386.7 77,619 31,674 23,027 15,994 8,596 64 251.26 556.9 93,778 42,727 34,379 23,709 64 370.51 793.4 121,349 44,153 43,219 30,253 7,641 64 475.15 120 964.4 119,898 47,445 43,835 30,420 11,397 64 477.77 179 1,443.1 129,346 47,846 42,713 29,642 11,106 64 465.55 174 1,425.1 141,668 52,321 46,889 32,540 12,191 64 511.07 191 1,807.1 0.0% 43.2% n/a 39.0% 15.6% 29.4% 42.7% 42.7% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
37
EQUITY RESEARCH TANZANIA FEBRUARY 2010 CEMENT

BLOOMBERG: TWIGA:TZ Current price (TZS) Current price (US$) Target price (TZS) Upside/Downside 12 month High/Low (TZS) Liquidity Market Cap (TZSm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$ '000) Ave monthly volume traded ('000) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
TANZANIA PORTLAND CEMENT COMPANY Slowly but surely Having successfully completed the expansion of the clinker and cement production and packing facilities, TPCC is now in an excellent position to benefit from the boom in infrastructural development in Tanzania. This, despite the opening up of the market to imports that came with the reduction in tarrifs. Strong internal cash flows financed the expansion and now shareholders can expect an even higher payout. Attractively priced, and another Strong Buy. Sales and production increased by 28% in FY2009, increasing TPCCS market share to around 45% of the domestic market. 1m MT of cement was produced out of a total capacity of 1.4m MT. In June 2009, the company effected an 11% price reduction in order to fight competition, which had the effect of boosting total revenue by 20% from the prior period whilst cost of sales increased by 8%. Cement consumption improved during the year by about 18% as a result of the removal of supply bottlenecks. The commissioning of the new clinker plant in FY2009 increased capacity from 400,000 MT to 1.15m MT. We value the counter at TZS 4,827, implying 165% upward potential. We recommend the counter a BUY on the back of the good dividend payout and upbeat future prospects. The EV/tonne valuation of US$125/tonne is in line with the SSA weighted average of US$122 but at a 56% discount to the average for Kenya (US$287). Still undergoing strong double digit volume growth we expect a rerating as YTD share price performance has been negative relative to MXEF and the NSE20, unjustifiably so, we would believe.
BUY 1,820 1.23 4,827 165.24% 1,620-1,820 327,459.9 221.9 179.9 17.1% 217.1 176.0 4.6 2.9 (3.5) 9.7 (29.1) (10.9)
Financials Fully Diluted EPS (TZS) Free Cashflow per share (TZS) DPS (TZS) NAV/share (TZS) EBITDA Margin
2009 267 296 130 787 36.03%
2010F 357 388 174 1,015 41.12%
2011F 408 442 199 1,276 41.34%
STRENGTHS Increased capacity and efficiency Strong local and regional demand Low per capita consumption Massive infrasctructure developments double digit growth in demand regionally OPPORTUNITIES Growth in sales supported by growing cement consumption in the country Increasing stable economic growth to push for higher infrastructure and housing development needs.
WEAKNESSES High energy costs Stiff competition from subsidised imports Price taker environment Local currency weak THREATS Increased imports from Asia increase in coal and electricity costs
STRONG BUY
2009 179,000 79,479 47,993 38.8% 33.9% 2.3 6.8 4.0 155.9 7.1% 2010F 204,776 100,388 64,218 39.6% 34.5% 1.8 5.1 2.9 142.0 9.6% 2011F 234,263 114,325 73,491 35.7% 31.9% 1.4 4.5 2.2 125.9 10.9%
FINANCIAL SUMMARY (TZSm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
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Nature of business Established in 1959, Tanzania Portland Cement Company Limited (TPCC) engages in the manufacture, retail and distribution of cement in Tanzania. It manufactures two brands of cement, Twiga ordinary and Twiga extra, through which it controls 45% of the countrys total cement market. H1 2010 Results Overview For H1 2010, Tanzania Portland Cement Company (TPCC) recorded revenues amounting to TZS 86.4bn, 2% lower than in H1 2009. Price reductions were effected during the period to push higher sales volumes and compete against cheaper product imported from China, Pakistan and India. The additional cost of imported clinker and high depreciation costs from the capitalisation of the new production facility negatively affected the operating profit line. Consequently, the net profit fell by 20%. Operational Review The company is carrying out extensive rehabilitation work with 2 old kilns temporarily shut for refurbishment while it operates the new one. The oldest of the kilns is currently being refurbished whilst the other will be rehabilitated in 2011. Increased cement imports are posing a threat to the East African cement industry. The removal of duties on cement came at a time when the regional cement companies were making investments to ensure that local capacity matches demand and the resultant local substitution has caused a glut on the market. Outlook Although unfair competition is being faced from imported products a steady growth in demand for cement is expected in the medium to long term given the countrys need for infrastructural development and new housing. Valuation and Recommendation Our DCF value for the counter is TZS 4,827, implying potential upside of 165%. The strength of the companys cash generating capacity is brought into perspective when it is noted that the US$ 20m plant expansion activities undertaken in 2009 were completely financed from internal cash flows, and paid for in 6 months! The EV/tonne valuation is in line with the SSA weighted average (excluding Dangote) at US$142/tonne. Coming from a lower base, Tanzanias growth fundamentals are even stronger than those for Kenya, from an upside perspective. Kenyas average per tonne valuation of US$287 would be a good proxy for Tanzanian companies of comparative strength. This would result in upside of at least 100% on current market valuations, which we believe would not be unreasonable. We recommend the counter a BUY on the back of the good dividend payout and upbeat future growth prospects.
Table 23: Top 10 Shareholders' list Scancem International Ans Parastatal Pension Fund Public Service Pension Fund Aunali Rajabali Sajjad Rajabali Umoja Unit Trust Scheme Wazo Hill Saccos Cypy Masawe National Social Security Fund Sayed Basharat, Mehboob, Khalid, Muzamil Other Total
% 69.6% 3.1% 2.7% 2.3% 2.2% 0.9% 0.8% 0.6% 0.5% 0.4% 17.1% 100%
Table 24: Tanzania Relative Metrics Tanga Gross Margin EBITDA margin RoAE RoAA 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) 47% 35% 40% 35% 4.1 3.7 1.3 1.1 2.8 2.6 9.2% 10.1% 14.3% 73.6 Twiga 52% 36% 39% 34% 5.1 4.5 1.8 1.4 2.9 2.2 9.6% 10.9% -6.8% 142.0
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NOTES
TANZANIA PORTLAND CEMENT COMPANY - 4 CGR and Forecasts 31 DEC (TZSm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (TZS) DPS (TZS) NAV (TZS) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 27,019 25,009 52,027 37,441 6,320 52,027 29,416 39,422 68,839 53,816 6,731 68,839 60,201 42,766 102,967 78,890 16,842 102,967 121,927 46,513 168,666 106,116 529 51,384 168,666 142,136 49,953 192,336 141,514 478 26,653 192,336 2009 218 4.0 1.4 156 (0.07) 153,507 83,641 263,693 182,599 478 41,925 263,693 2010F 199 2.9 1.4 142 (0.21) 165,787 122,759 308,399 229,616 478 45,693 308,399 2011F 176 2.2 1.4 126 (0.31) 51.45% 18.88% 38.66% 39.43% n/a 43.30% 38.66% 2012F 150 1.7 1.4 107 (0.39) 69,039 26,161 22,326 15,628 3,125 180 86.9 17 208.1 80,203 31,020 27,857 19,500 5,038 180 108.4 28 299.1 119,765 48,147 43,017 30,112 7,737 180 167.4 43 438.5 148,710 56,481 50,193 34,962 12,595 180 194.3 70 589.8 179,000 79,479 68,788 47,993 23,390 180 266.7 130 786.5 204,776 100,388 92,043 64,218 31,298 180 356.9 174 1,014.9 234,263 114,325 105,333 73,491 35,817 180 408.5 199 1,276.2 32.38% 65.40% 39.43% 26.89% 32.02% 32.49% 32.38% 65.40% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
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Southern Africa Cement Industry Overview

The Southern African region is split into two: South Africa, and everything else ex-SA. Cement demand in SA has faced a third year of slumping sales and volumes have declined by an estimated cumulative 20%. The outlook continues to be uncertain, on the back of stalled government infrastructure projects, post the World Cup. Out of SA, the region is booming, fuelled by various factors including economic stabilisation and boom times in Zimbabwe, recovery in mining in Zambia, strong demand from Botswana and Mozambique which are expanding infrastructure, and resilient exports into Angola and DRC that are undersupplied. The broad SWOT analysis is as follows: STRENGTHS Strong infrastructure spend in Botswana (the Morupule B power station, the Dikgathlong and Lotsane Dam projects, which will continue for the next 12 to 18 months) Economic recovery in Zimbabwe on dollarisation (100% growth in volumes demanded); sales now at 600,000 MT representing 40% of installed capacity Increased investment in platinum mining in Zimbabwe led by Angloplats, Zimplats, Rio Tinto and Unki Platinum in excess of US$ 2bn Very low levels of consumption out of SA, especially in Zambia (44kg pp) and Zimbabwe (50kg pp) WEAKNESSES Inadequate power and high energy costs, a universal theme Weak consumer credit markets with little or no access to mortgage lending. Stressed mortgage lending market in SA Inefficient distribution via rail which is the most cost effective method of distribution Low, albeit growing disposable incomes High cost of capital increases project risk Massive housing shortage across the region OPPORTUNITIES Increasing infrastructure spend to sustain growth; especially in Mozambique, Botswana and Zimbabwe Stabilisation of banking sector post global financial crisis will increase depth. Pan-Africanisation of African banking space will deepen markets Dollarisation in Zimbabwe has stabilised the economy and cement demand has recovered significantly. Also an important hub into DRC and Central Africa THREATS Local currency weakness. This is less of a risk in the short term as commodity markets have stabilised High import requirement for spares, clinker etc. Power cuts affecting output and inefficiencies; pervasive problem regionally Increasing competition, especially from China. Figure 32: US$ vs ZAR Exchange rate
Figure 33: US$ vs ZAR Exchange rate
Figure 34: US$ vs BWP Exchange rate
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EQUITY RESEARCH SOUTH AFRICA FEBRUARY 2011 CEMENT PRETORIA PORTLAND CEMENT Resilient, through the recession In 2010, PPC celebrated its centenary as a JSE-listed company, joining an extremely small and elite group of listed centenarians, not only in South Africa but worldwide. The construction depression in SA has seen cement sales drop to 10 year lows and the outlook is murky. Regional sales have buoyed demand, but the dynamics remains in oversupply mode. A bell-weather stock, whose pan African expansion strategy will reinforce the concrete solid fundamentals. HOLD. Local cement demand has now declined for three successive years and the cement industry is down to capacity utilisation levels last seen a decade ago. However, this is not the first recession PPC has had to endure. PPC has withstood the test of time and should remain a core holding. Although South Africa has now reported modest GDP growth for four consecutive quarters, this has not yet filtered through to building and construction activity, which has historically been slower to respond to economic recovery. The decline in South African cement sales was partially offset by ongoing infrastructural expansion in Botswana, exports to Angola and Mozambique and rising cement demand in Zimbabwe (now 9% of full year EPS). A strong recovery in lime sales to the South African steel industry was also recorded. Aggregate sales in Gauteng declined by 7% mainly due to a slowdown in construction activity and aggressive competition in the latter half of the financial year. This was partially offset by higher demand in Botswana for new infrastructure expenditure, especially roads. PPCs increased focus on the region will bear fruit as the smaller regional countries develop. Out of South Africa, the infrastructural deficit provides much scope for growth. Good time to consolidate holdings.
FINANCIAL SUMMARY (ZARm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield 19.9 16.9 8.3 520.9 6.0% 20.3 15.7 8.1 528.1 6.5% 20.8 14.1 7.4 507.3 7.2% 76.8% 18.6% 85.7% 19.5% 97.5% 21.0% 2009 6,807.0 2,464.0 1,010.0 2010F 7,147.4 2,566.5 1,089.0 2011F 7,880.0 2,811.4 1,212.0
BLOOMBERG: PPC:SJ Current price (ZAR) Current price (US$) Target price (ZAR) Upside/Downside 12 month High/Low (ZAR) Liquidity Market Cap (ZARm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to JALSH index
HOLD 29.19 4.32 34.47 18.08% 28.78 - 35.60 17,110.3 2,534.9 586.2 30.8% 95.1 22.0 (6.7) (28.7) (28.8) (16.6) (32.6) (32.9)
Financials Fully Diluted EPS (ZAR) Free Cashflow per share (ZAR) DPS (ZAR) NAV/share (ZAR) EBITDA Margin
2009 1.72 2.35 1.8 1.46 36.20%
2010F 1.86 2.46 1.9 1.43 35.91%
2011F 2.07 2.71 2.1 1.40 35.68%
STRENGTHS Lions share of the domestic market Increasing regional diversification Strong balance sheet; dividend payout Developed capital markets in SA and increasing pan-African strategy OPPORTUNITIES Strong recovery in Zimbabwean market Strong exports into Angola and Mozam. Strong infrastructure spend in Botswana Further regional expansion Low interest rates to spur growth
WEAKNESSES SA construction market in recession High (and rising) energy costs Dependence on government projects Weak housing demand Stressed mortgage market THREATS Further power price inflation due to coal and electricity shortages Transnet Freight Rail strikes and inefficiencies Rand weakness
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Overview of operations PPC is the leading supplier of cement in southern Africa through eight cement manufacturing facilities and three milling depots in South Africa, Botswana and Zimbabwe that can produce around eight million tons of cement products each year. PPC also produces aggregates, metallurgical-grade lime, burnt dolomite and limestone. Overview of South African construction sector Economically this has been a tough year for South African manufacturers, specifically for the local building and construction industry. Although South Africa has now reported modest GDP growth for four consecutive quarters, this has not yet filtered through to building and construction activity, which has historically been slower to respond to economic recovery. Low interest rates support the recovery Despite a 30-year low in South African lending rates, a recovery in residential development has not yet become evident. This has been due to a combination of tighter credit control by financial institutions, a relatively high level of consumer indebtedness and developments that remain unsold since the 2007 downturn in the residential market. Slow recovery of the South African economy reinforces the strategic intent to expand the groups geographic footprint to other emerging economies in Africa. Zimbabwe comes back to life PPC Zimbabwe made a positive contribution to the group in the first half of the financial year which contributed 9% of earnings after tax. Bear in mind this growth has been driven solely by a recovery in cash flows and FDI, as the credit markets are still illiquid and undergoing recapitalisation. The pent up demand after a decade long recession in Zimbabwe should see cement sales exceeding the 600,000 tonnes achieved in FY2010 and in anticipation capacity at Colleen Bawn has been increased to 850,000 MT. Cement demand in Zimbabwe is expected to plateau leading up to elections late in 2011 or early 2012. Future political stability should result in greatly increased cement demand as the country rebuilds and upgrades its infrastructure.
% 14.3% 6.8% 5.9% 3.4% 1.8% 1.0% 0.7% 0.5% 0.4% 63.3% 100%
Figure 35: Revenue by region - Growing regional contribution
7000
Revenues (Millions of Rands)
6000 5000
4000
3000 2000 1000
0
2008
Source: PPC
2009 South Africa
2010 Other Africa
Table 25: Top 10 Shareholders' list Government employee pension fund PPC SBP Consortium Funding Lazard Emerging Markets Portfolio PPC Cement Pty Ltd* PPC Black Managers Trust PPC Education Trust Funding SPV PPC Community Trust Funding SPV PPC Team Benefit Trust Funding SPV The Current PPC Team Trust Others Total *Held as treasury shares on consolidation
PPC Construction Industry Associations Trust Funding SPV 2.0%
Outlook for the Group Our longer-term outlook is still positive and this is reinforced by the South African governments continued commitment to infrastructure development and job creation. Record-low lending rates should encourage demand. Cement demand is a derived demand that has historically shown a high correlation with macroeconomic indicators such as GDP, fixed capital formation and interest rates.
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Other pertinent developments Lime sales volumes increased 23%, driven by stronger demand from the local steel and alloys sector and increased export sales to Zambia and Democratic Republic of the Congo. This, combined with a good operating performance, resulted in a 75% rise in operating profit. Coal and liquid energy costs are expected to rise as the global economy recovers and could exhibit considerable volatility depending on currency exchange rates. While the construction of Medupi and Kusile power stations continues to draw cement, other projects need to begin to reverse current declining demand. While PPC has publically committed to maintaining prices at a level that allows the recovery of input cost inflation, competitors have used price discounting in an attempt to win market share. While this has put pressure on prices, the company has maintained an average 5% increase for the year. After three years of solid growth, demand for cement in Botswana declined during the year. Despite this, cement demand is expected to be underpinned by ongoing infrastructure projects such as the Morupule B power station, the Dikgathlong and Lotsane Dam projects, which will continue for the next 12 to 18 months In the late 1990s, annual cement demand in Zimbabwe was around 1,2m MT and this declined to around 100,000 MT in 2008. Since early 2009, when the economy adopted the US dollar as its primary currency, demand has risen to 600,000 MT in the 2010 financial year. Demand is being driven primarily by retailers and concrete product manufacturers for supply to private housing projects. PPC continued to pursue existing and new export opportunities during the year. Export volumes grew by 30%, but this was offset by lower selling prices due to a stronger rand and increased logistics costs. Mozambique and Angola remain the primary export markets. PPC estimates that the industry ran at around 75% capacity utilisation for the review period. PPCs utilisation levels remained between 70% and 75%, slightly below the industry average due to the fact that PPC absorbs the full impact of the downturn in the Western Cape Province. Electricity costs per tonne of cement produced went up some 30%, in line with the announced national electricity price increase for 2010. A similar increase is planned by Eskom for the coming years
PRETORIA PORTLAND CEMENT - 4 CGR and Forecasts 31 DEC (ZARm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (NGN) DPS (NGN) NAV (NGN) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 1,414 2,941 4,355 2,203 83 1,667 3,953 2,178 2,704 4,882 2,349 68 2,181 4,598 2,813 1,720 4,533 1,713 55 2,310 4,078 3,941 1,878 5,819 915 2,628 1,538 5,081 4,175 1,937 6,112 858 2,645 1,663 5,166 2010F 3,021 8.3 8.0 520.9 382% 4,384 1,782 6,166 841 2,645 1,746 5,232 2011F 3,063 8.1 8.0 528.1 424% 4,603 1,949 6,552 822 2,777 1,878 5,477 2012F 3,089 7.4 8.0 507.3 455% 31.08% -9.91% 8.84% -21.00% 137.59% -0.06% 6.92% 2013F 3,117 6.8 8.0 487.5 491% 4,686 1,968 1,875 1,205 1,059 586 2.07 1.81 3.8 5,566 2,339 2,172 1,428 1,212 586 2.44 2.07 4.0 6,248 2,537 2,264 1,499 1,319 586 2.56 2.25 2.9 6,783 2,237 1,850 1,128 1,172 586 1.75 2.00 1.6 6,807 2,464 1,766 1,112 1,026 586 1.72 1.75 1.5 7,147 2,566 1,851 1,199 1,106 586 1.86 1.89 1.4 7,880 2,811 2,060 1,334 1,231 586 2.07 2.10 1.4 -4.48% -0.79% -21.00% 9.78% 5.79% -1.49% -1.99% -0.79% 2006 2007 2008 2009 2010 2011F 2012F 4 Yr CGR
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EQUITY RESEARCH ZIMBABWE FEBRUARY 2011 CEMENT LAFARGE CEMENT ZIMBABWE Setting new heights on the rebound Post dollarisation, the playing field has been levelled for the Zimbabwean cement players to join their regional and international peers in a growing and lucrative industry. The ongoing rebuilding projects in Zimbabwe post the lost decade and new upcoming projects in the mining and construction sectors will boost the cement producers performance.
BLOOMBERG: LAFARGE: ZW Current price (US$) Target price (US$) Upside/Downside 12 month High/Low (US$) Liquidity Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to ZSE Ind index
HOLD 0.90 0.88 -1.85% 0.80-1.40 72.0 80.0 0.0 0.02 0.02 (0.7) 0.6 (23.5) 50.8 37.5 35.9
Production has increased, with current capacity utilisation at Lafarge Zimbabwe now at 76% and distributing circa 1,000 tpd of cement from its plant, of which about 85% is destined for the local market. Lafarge's Zimbabwe unit plans to increase cement output to 90% of its installed capacity of 450,000 tonnes next year. Lafarge intends to increase its plant capacity over the next five years to 1m MT to meet the countrys growing demand. This will boost national capacity to circa 2.5m MT. Cement sales per capita, have moved up from a low of 10.73kg in 2008 to 50kg per capita in 2010. EV/tonne at US$ 112 compares well against the regional average of US$ 122 (excluding Dangote). Our DCF valuation indicates full valuation on present cash flows. Already at healthy capacity utilisation, the full recovery of the construction sector will determine the speed at which the expansion operations take place. We recommend that investors Hold their positions in Lafarge.
Financials Fully Diluted EPS (USD) Free Cashflow per share (USD) DPS (USD) NAV/share (USD) EBITDA Margin
2009 0.03 0.04 0.22 36.84%
2010F 0.03 0.05 (0.01) 0.24 33.49%
2011F 0.05 0.07 (0.01) 0.28 31.33%
STRENGTHS Sizeable market share Strong brand and majority shareholder Recovering domestic demand Robust technical and brand support High capacity utilisation No Foreign exchange risk - USD exchange OPPORTUNITIES Recovery in the construction sector Reconstruction and refurbishment after decade long recession Growting government revenues Recapitalisation of the local banking sector Construction costs still very cheap in Zim Mining activity on the rise
WEAKNESSES High energy costs; ZESA inefficient Very low liquidity in the counter Low capacity needs to be ramped up Weak banking sector with no mortgage lending just yet Weak middle class, although growing THREATS Increase in imports pose a threat to pricing power and increasing sales Electricity shortages 2012 elections Continued shortage of liquilidity in the economy, slowing down the rate of economic recovery.
FINANCIAL SUMMARY (USDm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
2009 28.33 1.33 2.69 18.0% 3.9% 4.10 26.78 55.21 176.23 0.0%
2010F 41.08 11.37 6.16 27.5% 22.8% 3.71 27.16 6.44 138.11 -1.0%
2011F 61.62 22.93 13.13 37.0% 32.8% 3.27 19.50 3.19 112.05 -1.4%
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Nature of business Lafarge Cement Zimbabwe Limited, formerly Circle Cement Limited, is a Zimbabwe-based cement manufacturer and also a distributor of cement and allied products. Lafarge has a production capacity of 450,000 MT per year, 120,000 MT of which is exported. The companys products include PC16 (a non-drip, thixotropic solvent based pipe cement) and Masonry 42.5 grade (ordinary Portland cement with standard strength development). H1 2010 Results Overview For the interim period to 30 June 2010, Lafarge recorded revenues of US$ 17.2m, up 69% from the comparative period on the back of improving cement demand on the local market, especially from the retail sector. An operating profit of US$ 2.3m was registered compared to an operating loss of US$ 78,188 in H1 09. Profit before tax for the period was US$ 2m after finance costs of US$ 148,000, mainly accruing from the use of short term debt to finance working capital requirements. Attributable profit was US$ 1.5m (H1 09: US$ 807,000) translating to an EPS of US$0.02. On the balance sheet, the current ratio strengthened marginally due to higher inventories to allow for the major kiln shutdown that was planned for H2 2010. The company also managed to mobilise borrowing facilities of US$ 5m (US$ 3m offshore and US$ 2m onshore). To date US$ 2m has been drawn down. Operational Review For FY2009, Lafarge increased its capacity utilization to 72% from 62% the prior year, as dollarisation of the economy and the removal of price controls restored viability to the companys business units. The target for FY 2010 is to increase cement output to 90% (optimum capacity) of the installed capacity of 450,000 MT. The parent company recently pledged to inject US$ 3m into Lafarge Zimbabwe for the recapitalisation of the companys operations. This will be in line with the US$ 15m capital budget the company needs in capex for the next three years. Lack of long term financing at favourable rates on the local money market has resulted in the company looking externally for financing options. Cement exports dropped to 20% from 30% in the prior period due to Malawi stopping the importation of cement as the government seeks to promote local production. Exports to Mozambique continued, however, with potential to increase sales to that country. Export markets include Mozambique, Zambia and the DRC although management intends to concentrate more on the domestic market as the fundamentals continue to improve. Outlook Although improving production capacity in the region may continue to adversely affect exports (down 36% for the half year), strong demand on the local front should propel future growth in sales volumes. Management is optimistic that seasonal demand revenue in the second half should exceed that of the first half, although growth in margins may be limited by the significant PPE maintenance costs.
Interim Financial Statements Income Statement (US$m) Revenue EBITDA Profit before tax Attributable earnings HEPS (KES) Balance Sheet (TZSm) Total Assets Shareholders' Equity Current assets Curerent liabilties 37.78 17.57 11.11 13.03 40.29 19.06 13.95 6.6% 8.5% 7.1% H1 2009 10.18 (0.08) 0.69 0.81 0.01 H1 2010 17.20 2.29 2.00 1.49 0.02 % ch 69% n/a 189% 84% 100%
15.35 38.2%
Figure 36: Revenue Breakdown
Clinker 27%
Cement 70% Special paints 2%
Other 1%
Source: Lafarge Zimbabwe Annual Report
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NOTES
LAFARGE ZIMBABWE - 4 CGR and Forecasts 31 DEC (US$ '000) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (USD) DPS (USD) NAV (USD) Balance Sheet (US$ '000) Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 10,855 4,306 15,161 7,001 2,008 3,811 15,161 7,694 3,398 11,092 6,828 59 1,686 11,092 19,658 3,127 22,785 14,841 760 1,052 22,785 24,780 5,151 29,930 12,335 8,811 8,784 29,930 26,677 11,105 37,782 17,568 7,188 13,026 37,782 2009 73 55 0.45 176 42% 30,672 21,781 52,453 27,250 8,009 15,644 52,453 2010F 73 6.4 0.54 138 13% 36,805 42,446 79,251 43,668 9,216 21,524 79,251 2011F 73 3.2 0.65 112 3% 25.2% 26.7% 25.6% 25.9% 37.5% 36.0% 25.6% 2012F 73 3.2 0.78 92 -1% 0.1 80 (0.02) 0.1 80 0.06 0.2 80 0.11 0.2 80 0.2 80 0.03 0.3 80 0.08 0.5 80 0.16 0.0% n/a n/a 25.9% 18,275 3,557 1,594 (1,466) 14,054 4,674 2,999 4,612 3,971 445 (605) 8,541 28,333 1,326 1,624 2,689 41,082 11,371 10,268 6,161 61,623 22,933 21,891 13,135 11.6% -21.9% 0.5% n/a 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
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EQUITY RESEARCH ZAMBIA FEBRUARY 2011 CEMENT LAFARGE ZAMBIA Copper fortunes drive demand Lafarge Cement Zambia manufactures and provides cement for its local market and also exports to neighboring DRC and Burundi. Infrastructural development in the housing, health and educational sectors in the country still need substantial investment, and with firm copper prices seeing an increase in activity in the mining sector, a stronger economic footing will have a positive impact on cement demand.
BLOOMBERG: LAFARGE:ZL Current price (ZMK) Current price (US$) Target price (ZMK) Upside/Downside 12 month High/Low (ZMK) Liquidity Market Cap (ZMKm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (ZMKm) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to LuSE index
BUY 6,900 1.45 11,557 67.50% 4,500-6,898 1,380,276.0 290.0 200.0 4.2% 100.1 0.01 16.0 2.6 (6.7) 54.7 26.8 39.8
2009 was a record year for Lafarge Zambia in terms of turnover, volume, profit and cash flow. However, the performance in H1 2010 showed a reversal of the positive trend with operating margins dropping to 31% from 38% in the prior period. Domestic demand is set to improve in H2 2010 from a depressed performance in the first half, whilst regional demand from DRC and Burundi is expected to remain strong with higher exports of cement and clinker. The Chilanga II plant became operational in October 2009, and had two unscheduled stops in H1 2010. The significant capex expenditure on the mill and packaging splant is paying off however, with benefits being realised from the improved efficiencies. Using our DCF valuation method, we derive a value of ZMK 11,557. On an EV/tonne basis the counter is trading at US$226/tonne and is still looking cheap in light of the anticipated growth in FY2011. BUY
Financials Fully Diluted EPS (ZMK) Free Cashflow per share (ZMK) DPS (ZMK) NAV/share (ZMK) EBITDA Margin
STRENGTHS Technical assistance from parent company Lafarge France Strong cashflow and balance sheet Strong recovery in mining sector Low per capita consumption Deepening financial intermediation OPPORTUNITIES Cement market expected to grow New export opportunities in Burundi, DRC and Copperbelt
2009 725.36 948.02 100.0 2,855.8 38.4%

WEAKNESSES
2010F 701.34 927.95 96.7 3,471.8 28.3%
2011F 736.41 979.02 101.5 4,119.0 28.2%
High input costs lowering operating margins Soft local currency and high import requirement for raw materials and spares High local interest rates THREATS Weakening Kwacha Power outages affecting production High cost of debt Policy makers's decision in relation to importation of cement
FINANCIAL SUMMARY (ZMKm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
2009 737,479 386,734 145,101 63.2% 61.8% 2.4 9.5 3.6 234.9 1.4%
2010F 774,353 309,741 140,297 39.0% 20.7% 2.0 9.8 4.4 231.2 1.4%
2011F 813,071 325,228 147,312 34.2% 12.8% 1.7 9.4 4.1 226.1 1.5%
48
Nature of business In 1949, the Northern Rhodesian Government and the Colonial Development Corporation, now the Commonwealth Development Corporation (CDC), established Chilanga Zambia after which in 1951 the company commenced cement production and installed two kilns in 1956 and 1967. Under the governments privatisation programme, the company became the first to list on the Lusaka Stock Exchange (LuSE) with CDC being the majority shareholder. In 2001, CDC rearranged its operations in Southern Africa forming Pan African Cement which owned shares in Chilanga, Mbeya Cement in Tanzania and Portland cement in Malawi. In May 2001, Lafarge France acquired PAC from CDC and 34% of Chilanga Cement through a compulsory offer to minorities. In 2007 Chilanga Cement changed its name to Lafarge Cement Zambia, aligning it with its parent company. H1 2010 Financial Overview H1 2010 performance was depressed when compared to the prior period with revenues down 15% to ZMK 261.8bn. EBITDA also declined by 31% to ZMK 80.7bn. The operating profit margin deteriorated from 38% to 31%, pressured by lower volumes and a higher mix of export sales. Profit before tax stood at ZMK 78.6bn translating to attributable earnings of ZMK 55.0bn. The balance sheet remained solid on the back of stringent cost and cash management. Total assets amounted to ZMK 872.0bn while the total cash and cash equivalents amounted to ZMK 117.1bn. Operational Review Power supply shortages continues to affect performance efficiencies at both plants, and during FY 2009 operations at the Ndola line 1 had to be restricted by the Environmental Council of Zambia (ECZ) stance for stoppage of production until the company replaced the Electrostatic precipitator (ESP). The company opened depots in Mpulungu and Chingola in a bid to improve distribution to Burundi, DRC and the Copperbelt. Clinker exports to the region have resumed and the export proceeds are expected to improve foreign currency earnings whilst increasing export volumes should drive up capacity utilisation. Outlook Management estimates that for FY2010 the domestic cement market will be around 940,000 MT, although growth will be dependent on continued positive sentiment in the mining sector. The recovery in copper prices from around US$3,000/tonne in H1 2009 to circa US$8,000/tonne currently, and the firming of the Kwacha should invigorate infrastructural sector spending thus the sectors growth should, at a bare minimum be in line with forecast GDP growth of 6.6%. Valuation Our DCF model values the counter at ZMK11,557 implying 67% upside potential. On an EV/tonne basis the counter is trading at US$226/tonne. We see increased momentum primarily due to the increased activity in the mining sector and see upside to current pricing levels. BUY
Interim Financial Statements Income Statement (ZMKm) Revenue EBITDA Profit before tax Attributable earnings HEPS (ZMK) Balance Sheet (ZMKm) Total Assets Shareholders' Equity Net debt Gearing 497,329 497,229 202,252 41% 625,400 625,300 94,198 25.8% 25.8% -53.4% H1 2009 308,228 116,207 95,597 61,756 309 H1 2010 261,773 80,666 78,621 55,035 275 % ch -15% n/a -18% -11% -11%
15% -63.0%
Figure 37: Lafarge Zambia capacity vs production
1400
Plant Capacity
Cement Production
1200
000's of tonnes
1000 800 600 400 200

0
2006
Source: Lafarge Zambia
2007
2008
2009F
2010F
Figure 38: Lafarge Cement Sales (000 tonnes )
1200
1000
000's of tonnes
Local Export
800
600
400 200
0
2006
Source: Lafarge Zambia
2007
2008
2009F
2010F
Table 26: Top 4 Shareholders' list Pan African Cement Limited Financiere Lafarge LuSE Central Share depository Public institutions and individuals Total
% 50.1% 34.0% 11.8% 4.2% 100%
49
NOTES
LAFARGE CEMENT ZAMBIA - 4 CGR and Forecasts 31 DEC (ZMK m) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (ZMK) DPS (ZMK) NAV (ZMK) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 133,340 182,338 315,678 238,188 104 56,327 315,678 234,520 157,805 392,325 287,496 102 76,336 392,325 487,232 206,553 693,785 350,815 102 116,267 693,785 607,356 199,692 807,048 404,635 202,355 146,502 807,048 680,099 269,627 949,726 571,270 94,253 146,067 949,726 2009 289 3.6 1.23 234.9 -1% 748,109 1,087,597 1,835,706 694,506 98,966 159,509 1,835,706 2010F 284 4.4 1.23 231.2 -4% 822,920 1,207,833 2,030,753 823,968 103,914 174,236 2,030,753 2011F 278 4.1 1.23 226.1 -7% 50.28% 10.27% 31.70% 24.45% 448.68% 26.90% 31.70% 2012F 279 3.9 1.23 227.0 -5% 299,944 83,160 80,434 50,880 201 253.69 1,187.6 282,325 80,017 91,351 54,122 201 269.85 1,433.4 324,596 96,213 91,196 63,437 201 316.30 60 1,749.2 430,133 139,402 125,494 74,017 12,002 201 369.05 30 2,017.5 737,479 308,413 255,471 172,636 20,004 201 860.76 100 2,848.3 774,353 247,013 247,013 166,920 19,342 201 1,187.83 178 4,308.5 813,071 259,363 259,363 175,266 20,309 201 1,697.16 212 6,073.6 24.45% 0.00% 35.72% 25.22% 38.77% 33.50% 35.72% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
50
North Africa Cement Industry Overview

North Africa boasts some of the highest cement consumption rates in Africa, viz: Morocco 416kg pp; Tunisia 564kg pp and Egypt 601k gg pp. For historical reasons, the Maghreb is essentially plugged in to Mediterranean Europe and trade and financial services sectors are very closely integrated. Massive investments have been made into the development of new cities, particularly in Morocco, Tunisia and Algeria and much of these investments have been driven driven by the governments, in partnership with the private sector. North Africa possesses some of the deeper and more sophisticated capital markets, and with their integration into the Middle East and North Africa (MENA) bracket, have welcomed investment from their wealthier Arab allies, particularly in Arab Emirates. Recent political developments have shaken the regions capital markets in Tunisia and Egypt. Consequently these markets were closed, but only after significant falls. Despite the politics, the north African Economic block remains well placed for continued expansion and we see speculative value, particularly in Egypt and Tunisia. Overview of Cement Sector in Morocco Domestic consumption of cement in 2009 registered an increase of 3.4% to 14.5m tonnes compared to 2008. Morocco has one of the highest per capita cement consumption ratios at 470kgs per person, which has about doubled in ten years from around 240kg per person in 1998. Governments main priority has been the development of social housing projects, and new town are being built in Tamensourt and Tamesna, with a defined focus on job creating and easing social tensions. Morocco is already in a state of oversupply, and while cement consumption continues to grow, it is mostly organic and valuations are at the top end. Overview of Cement Sector in Egypt Egypt has for over 40 years had the most prolific cement sector on the Continent. Famous for some of the most impressive engineering projects like the Suez Canal and the Aswan Dam, Egypts cement industry is second to none. With clear emerging market credentials, Egypt plans to increase cement output by 54 percent to 77m MT by 2015. The latest political developments have shaken the country somewhat and led to the closure of the Cairo and Alexandria Stock Exchange, after foreign investors flew en masse. Despite the political risk, Egypt has some of the most attractively priced cement factories on the continent, and we see the turmoil as an excellent entry point to mop up the oversold market.
Figure 39: Morocco Cement consumption
18.0 16.0 14.0
Millions of tonnes
12.0 10.0 8.0 6.0

4.0 2.0 -
Table 27: Morocco Relative Metrics CM 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) 11.7 9.9 3.4 3.0 10.9 9.1 5.8% 6.9% 0.0% 372.9 Holcim 15.9 15.1 4.8 4.2 10.9 10.5 3.4% 3.6% 118.7% 355.6 Lafarge 18.1 15.6 5.2 4.5 11.4 9.9 3.4% 4.0% 17.9% 646.3
Figure 40: US$ vs MAD exchange rate
Figure 41: US$ vs EGP exchange rate
51
2011F
2010F
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
EQUITY RESEARCH MOROCCO FEBRUARY 2011 CEMENT Ciments du Maroc is the second largest cement producer in Morocco with three cement factories in Agadir, Safi and Marakech and, with a total production capacity of 5.9m MT/year. In 2006 the government availed funds amounting to MAD 3.6bn (US$ 413m) to be invested into the production of the new dAt Baha plant in Agadir, which came on line in November 2009. The group boasts pole position in the ready to use concrete segment with 23 concrete plants through its subsidiary, Betomar. Ciments du Maroc is a subsidiary of Italcimenti, the Italian cement giant which owns a 62% stake in the Moroccan entity. Morocco is a modern day success story that has been the direct result of the proactive measures taken by the kingdom to encourage public/private partnerships and foreign investment in order to diversify the economy. Ambitious plans to build new cities in Tamensourt on the outskirts of Marrakech and Tamesna have spurned economic growth and led to a boom in the cement and construction industries. Despite already having one of the highest per capita consumption statistics in Africa at 445kg per capita, the continued expansion of the economy has resulted in buoyant demand for cement. The new cement plant at dAt Baha increased the companys capacity by 2.2m MT and was commissioned in November 2009. The board has ratified the decision to construct a new factory, north of Marakech to meet growing demand. Ciments du Maroc has outperformed both the local index and EM index by a margin of at least 25 percentage points year to date. Prospects for the cement industry remain positive and valuations indicate further upside of up to 31%. Shaky investor sentiment in Tunisia, Algeria and Egypt is likely to see some selling pressure, which should create an opportune entry point. ACCUM.
BLOOMBERG: CMA:MC Current price (MAD) Current price (US$) Target price (MAD) Upside/Downside 12 month High/Low (MAD) Liquidity Market Cap (MADm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
*Relative to MCSINDEX
ACCUM 1,146 132 1,487 29.72% 2,766-1,774 16,552.9 1,901.1 14.4 17.0 43.4 0.3 (4.5) (3.2) (12.5) 45.1 31.8 24.5
Financials Fully Diluted EPS (MAD) Free Cashflow per share (MAD) DPS (MAD) NAV/share (MAD) EBITDA Margin
STRENGTHS Housing backlog and ambitious plans to fill this - circa 140k 2 new cities being built new ports, highways and other infrastructure projects OPPORTUNITIES increased public investment into infrastructure projects EM credentials Stong demand in West Morrocco Expansion of Western Sahara
2009 81.3 54.0 55.0 308.8 48.1%

WEAKNESSES
2010F 98.3 69.6 66.5 340.6 48.1%
2011F 116.1 89.8 78.6 378.2 48.1%
Lull in construction/property sector Short term drop in remittances Cement consumption per capita already at a peak at 416 kg/capita THREATS Cement sector already at peak High valuations and strong share price appreciation recorded YTD
FINANCIAL SUMMARY (MADm) Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield
2009 2,804.3 1,347.9 1,174.5 29.8% 20.4% 3.7 14.1 13.0 545 4.8%
2010F 3,652.0 1,755.4 1,420.2 32.7% 18.8% 3.4 11.7 10.9 373 5.8%
2011F 4,382.3 2,106.4 1,677.5 36.1% 18.7% 3.0 9.9 9.1 372 6.9%
52
Overview of the Group Ciments du Maroc, a member of the worlds fifth largest cement group, Italcementi Group, and is a Moroccan producer of Portland cement, ready-made concrete and pellets. Its products include artificial Portland cement 35, Portland cement 45 and Super White Cement. The Company's industrial complex consists of four factories (Agadir, Safi, Marrakech and dAt Baha), a crushing unit (Laayoune) and a packing unit (Jorf Lasfar). Ciments du Maroc operates through several subsidiaries, including Betomar and Indusaha, engaged in the production of building materials. At Baha came on stream in November 2009 following the initiation of the project in 2007 at a total cost of MAD 3.3bn (US$ 379m) with a capacity of 2.2m MT of cement per year. Overview of the Interim results to June 2010 Revenues from operations increased by 8.6% to MAD 1,563m (US$ 179m), and sales volumes increased by 5.8% compared to June 2009 as the additional capacity from At Baha came on-stream in November 2009. Net income for the period reached MAD 560m (US$ 64m). The company also reported cement consumption growth in Morocco of 1.1% in H1 2010, and announced plans to invest in another cement plant to the north of Marrakech in the coming years. Outlook for the Moroccan cement sector Despite the significant growth of the Moroccan cement industry over the past 10 years, the countrys bull case is supported primarily by a massive public housing project and the construction of two new towns in Tamensourt and Tamesna. The following major infrastructure projects will ensure a buoyant domestic market:
Table 29: Morocco Relative Metrics CM 2010 PER (x) 11.7 2011 PER (x) 9.9 2010 PBV (x) 3.4 2011 PBV (x) 3.0 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) Capacity 10.9 9.1 5.8% 6.9% 0.0% 371.7 5.9 Holcim 15.9 15.1 4.8 4.2 10.9 10.5 3.4% 3.6% 118.7% 335.4 4.5 Lafarge 18.1 15.6 5.2 4.5 11.4 9.9 3.4% 4.0% 17.9% 521.1 6.5
Table 28: Top 4 Shareholders' list Ciments Franais (Italcementi) CDG CIMR Abu Dhabi Fund for Development Others Total
% 61.82 8.73 7.05 5.38 17.02 100.0
Interim Financial Statements Income Statement Revenue EBITDA PAT H1 2009 1,439 720 513 H1 2010 % ch 1,563 782 562 8.6% 8.6% 9.5%
Social housing programme to construct 140 000 new houses Construction of new bridges at Tasskourt and Zerrar Continued hotel infrastructure expansion for the tourism sector. Residential housing projects in Agadir, Marrakech and Essaouira The El Jadida Safi highway project Dualisation of the roads between Safi, Essaouira and Marrakech Expansion of the port and phosphate factories at Jorf Lasfar.
Valuation and Recommendation Group revenues have grown at a four year compound growth rate of 10%, while, due to greater efficiencies, attributable profits have grown by 22% and dividends by 32%. Intrinsically we value the counter at MAD 1,487, and our target price indicates 31% upside. Accumulate, especially into any weakness caused during the political tensions in the Maghreb and Egypt. Notes 53
Notes
CIMENTS DU MAROC - 4 CGR and Forecasts 31 DEC (MADm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (MAD) DPS (MAD) NAV (MAD) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 844 1,446 2,562 2,589 383 2,562 797 1,439 2,508 2,811 406 2,508 1,063 2,428 4,470 3,099 518 854 4,470 1,709 2,729 5,037 3,647 401 987 5,037 3,187 2,549 6,465 4,460 950 1,054 6,465 2009 2,017 13.0 3.7 545 23% 5,078 2,834 8,677 4,920 2,649 1,220 8,677 2010F 2,200 10.9 5.9 373 53% 5,332 3,098 9,233 5,463 2,587 1,453 9,233 2011F 2,193 9.1 5.9 372 47% 39.39% 15.22% 26.04% 14.57% n/a 28.79% 26.04% 2012F 2,193 8.6 5.9 372 42% 1,942 820 774 524 267 14 36 18 179 2,087 863 792 525 325 14 36 22 195 2,379 1,182 1,018 1,018 325 14 70 22 215 2,685 962 904 873 722 14 60 50 252 2,804 1,348 1,282 1,175 794 14 81 55 309 3,652 1,755 1,611 1,420 961 14 98 67 341 4,382 2,106 1,955 1,678 1,135 14 116 79 378 22.36% 31.34% 14.57% 9.62% 13.21% 13.47% 22.36% 31.34% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
54
EQUITY RESEARCH MOROCCO FEBRUARY 2011 CEMENT Holcim Maroc Force. Performance. Passion. Holcim Maroc is a subsidiary of the Swiss cement giant and the third largest cement manufacturer in Morocco with a market share of about 26%. Like its two larger players, capacity has grown exponentially over the past ten years, and continues to expand to meet the countrys seemingly insatiable growth requirements. At an EV/tonne of $335, Holcim is the most attractively priced cement counter on the bourse, and while fully priced at present, we expect organic growth to be in line with broader economic fundamentals. Accumulate. Cement sales for Holcim increased by 7% y-o-y to 3.7m tonnes while aggregates (gravel and sand) increased sharply by 77% to 1.1m MT. Concrete sales were flat at half a million tonnes. This growth has principally been driven by the governments strategy to keep expanding the infrastructure to meet the countrys burgeoning requirements. The group continues to focus on expanding its capacity, with the latest development being the doubling of the capacity of the cement plant at Fes. A total investment of 125m has been made for this expansion. The Deployment of the first Moroccan network of franchise building materials branded Batipro, has created over 100 franchisees enhancing distribution. Investor sentiment has been negatively affected by political developments in the other Maghreb countries i.e. Tunisia and Algeria, as well as in Egypt. The fundamentals for continued growth are solid and we see any price weakness as a buying opportunity. Our target price of MAD 3417 indicates 31% upside. FINANCIAL SUMMARY (MADm) 2009 2010F 2011F
Revenue EBITDA Attributable Profit RATIOS RoAE RoAA VALUATION RATIOS PBV(x) PER(x) EV/EBITDA EV/Tonne (US$) Dividend yield 5.6 17.0 11.3 426 3.2% 4.8 15.9 10.9 356 3.4% 4.2 15.1 10.5 335 3.6% 64.5% 12.2% 58.0% 12.8% 52.8% 12.8% 3,542.7 1,215.0 668.2 3,719.9 1,275.8 717.4 3,905.9 1,339.5 753.2
BLOOMBERG: HOL:MC Current price (MAD) Current price (US$) Target price (MAD) Upside/Downside 12 month High/Low (MAD) Liquidity Market Cap (MADm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
ACCUM 2,701 310 3,417 26.53% 2,790 - 1,774 11,371.2 1,306.0 4.2 35.2 17.1 0.1 9.8 11.1 1.8 47.5 34.3 27.0
STRENGTHS PPn growing by 0.4m per year Strong demand from Emerging middle class EM Credentials Latest technologies in use OPPORTUNITIES Aggressive housing programme massive urban expansion with two new cities being built Expansion into Western Sahara Exports to region
2009 158.7 185.4 86.0 483.6 34.3%

WEAKNESSES
2010F 170.4 194.7 92.3 561.7 34.3%
2011F 178.9 204.4 96.9 643.6 34.3%
One of the highest cement per capita consumption statistics
THREATS Economy succeptible to shocks in the agriculture sector
55
Table 30: Top 3 Shareholders' list HOLCIBEL SA Free float Banque Islamique de Dveloppement Total
% 51.0 35.2 13.8 100.0
Overview of Holcim Maroc Holcim Maroc is the Moroccan subsidiary of the Swiss cement giant, and has roots that stretch back over three decades. The company started up operations in 1972 as a joint venture between the Moroccan and Algerian governments in the border town of Oujda where a 1.2m MT cement plant was built. As part of the governments privatisation initiatives in the 90s, Holcim Group took control of what was then called CIOR. Since then, the group has expanded aggressively and the newest plant at Settat commissioned in 2007 increased the companys capacity to 4.5m MT. In 2010 a project to double the production of clinker at the Cement factory in Fes commenced. Outlook The doubling of the Fes plant capacity at a cost of 125m commenced in FY2009. The plant will be equipped with a combination of European and Chinese machinery and commissioning of the plant is planned for early FY2012. Valuation and Recommendation The growth of the Moroccan construction industry has been nothing short of phenomenal and has been the result of a well planned and coordinated effort to ensure that sustainable momentum is achieved. Having mapped out the next phase of development that is necessary, the industry has been incentivised to continue to grow its capacity in order to stay in line with strategic objectives. We see this as the main difference between the cement companies in North Africa and elsewhere on the continent. The success of Public Private Partnerships has been immense and has resulted in those countries achieving the highest cement consumption rates in Africa. The average cement consumption in Egypt, Morocco and Tunisia as per our sample 489 kg per capita vs 101kg per capita for SSA. Viewed from another perspective, this highlights SSAs relative potential for future growth. Valuations in Morocco are not cheap, however at US$355/tonne, Holcim offers the best value for exposure to the cement industry. Our DCF implies 31% upside to the current price and we would recommend investors to add to existing positions, taking advantage of the price weakness that the Casablanca Stock Exchange is experiencing resulting from the ongoing political tensions in Tunisia and Egypt.
Figure 42: Holcim volume sales

4
3.5
Millions of tonnes
3 2.5 2 1.5 1
0.5
0 cement Aggregates concrete
2007
2008
2009
Table 31: Morocco Relative Metrics CM 2010 PER (x) 2011 PER (x) 2010 PBV (x) 2011 PBV (x) 2010 EV/EBITDA (x) 2011 EV/EBITDA (x) 2010 Div yield (%) 2011 Div yield (%) Gearing (%) 2010 EV/Tonne (US$) Capacity 11.7 9.9 3.4 3.0 10.9 9.1 5.8% 6.9% 0.0% 372.9 5.9 Holcim 15.9 15.1 4.8 4.2 10.9 10.5 3.4% 3.6% 118.7% 355.6 4.5 Lafarge 18.1 15.6 5.2 4.5 11.4 9.9 3.4% 4.0% 17.9% 646.3 6.5
56
Notes
HOLCIM MAROC - 4 CGR and Forecasts 31 DEC (MADm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (MAD) DPS (MAD) NAV (MAD) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 2,101 644 2,745 1,318 463 965 2,745 2,933 631 3,565 1,534 1,305 726 3,565 3,208 887 4,095 1,522 1,512 1,061 4,095 3,514 1,752 5,266 1,729 1,849 1,687 5,266 3,538 1,790 5,329 2,036 1,700 1,593 5,329 2009 1,584 11.3 3.7 426 119% 3,715 1,856 5,571 2,365 1,785 1,421 5,571 2010F 1,600 10.9 4.5 356 108% 3,901 1,949 5,850 2,710 1,874 1,266 5,850 2011F 1,615 10.5 4.8 335 99% 13.92% 29.11% 18.03% 11.49% 38.41% 13.36% 18.03% 2012F 1,630 10.1 5.2 316 92% 1,753 617 488 354 223 4.2 84 53 313 1,995 720 605 439 282 4.2 104 67 364 2,388 664 652 483 282 4.2 115 67 361 3,152 948 857 532 324 4.2 126 77 411 3,543 1,215 1,143 668 362 4.2 159 86 484 3,720 1,276 1,200 717 389 4.2 170 92 562 3,906 1,340 1,260 753 408 4.2 179 97 644 19.23% 18.46% 23.69% 17.21% 12.86% 0.00% 17.21% 12.86% 11.49% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
57
EQUITY RESEARCH MOROCCO FEBRUARY 2011 CEMENT Lafarge Ciments Maroc Built on Excellence In Morocco, Lafarge has a long standing partnership with the state owned conglomerate Socit Nationale de Investissements (SNI), jointly owning 69% of the company. Consequently, Lafarge is the quintessential play on Moroccos impressive state driven infrastructural expansion, controlling a market share of 42%. Having already proven its strategic mettle over the past 10 years, Lafarge will continue to benefit from the strategic alliance with the monarchy. Cement sales increased by 4.2% over FY2008, despite sluggish domestic demand recorded in H1 2009. Improved efficiencies at the newly commissioned second line at the Tetouan plant and the extended use of aeolic (wind) energy partially offset the 18% increase in electricity prices. The group also benefitted from the reduced price of petroleum coke in international markets and the impact of these developments was an increase in operating margins from 47% to 50%. During FY2009, the scope of the company increased following the creation of a new entity, Calcinor Lafarge Maroc, which is a partnership between Lafarge and Cementos Calcinor, whose main activity is the production of lime. The governments commitment to the meeting the housing needs for the low and middle classes of the population is seen as the fundamental basis upon which the cement industry will continue to grow. It is noted that following the entry of new players into the market, 2010 marks the tipping point where the country is now in a state of over capacity, especially in Casablanca. Nonetheless, Lafarge plans to mitigate the concentration risk by building a new factory in the Souss region. Valued at US$521/tonne, Larfarge Maroc is the most expensive cement play in the market and is fully valued. HOLD.
2009 5,441.0 2010F 5,800.9 2011F 6,726.8
BLOOMBERG: LAC:MC Current price (MAD) Current price (US$) Target price (MAD) Upside/Downside 12 month High/Low (MAD) Liquidity Market Cap (MADm) Market Cap (US$m) Shares (m) Free Float (%) Ave monthly value traded (US$m) Ave monthly volume traded (m) Share Price Performance 6 months (%) Relative Change (%)* Relative Change (%)** 12 months (%) Relative Change (%)* Relative Change (%)**
HOLD 2,051 236 2,182 6.40% 2195-2180 35,829.2 4,114.9 17.5 12.6 77.7 0.3 (2.2) (0.9) (10.3) 39.5 26.3 19.0
STRENGTHS PPn growing by 0.4m per year Strong demand from Emerging middle class Deep financial markets with well developed mortgage products OPPORTUNITIES Aggressive housing programme massive urban expansion with two new cities being built Expansion into Western Sahara
2009 106.1 118.7 66.1 346.4 56.1%

WEAKNESSES
2010F 113.1 126.4 70.5 396.1 56.1%
2011F 131.2 145.1 81.7 452.9 56.1%
One of the highest cement per capita consumption statistics Weakness in the Hotels sector which is overinvested Most expensive valuation in sector THREATS Contagion of tensions in Maghreb
FINANCIAL SUMMARY (MADm) Revenue
EBITDA 3,051.6 3,253.5 3,772.7 During the year 2009, the Attributable Profit 1,853.5 scope of Lafarge Ciments has widened 1,976.1 following 2,291.5 RATIOS the creation of a new entity "Calcinor Lafarge Morocco RoAE 46.9% 45.6% which is a partnership45.0% between Lafarge RoAA 22.6% 22.7% 25.1% and Cementos Calcinor, whose main VALUATION RATIOS activity is the production of lime. PBV(x) 5.2 4.5 The Lafarge Group holds 49% 5.9 of PER(x) 19.3 18.1 15.6 Calcinor Morocco through which it exercises significant influence. EV/EBITDA 12.1 11.4 9.9 The strength of the domestic market 646 combined with EV/Tonne (US$) 652 521 an yield domestic 4.0% sales Dividend improvement in prices helped 3.4% 3.2% increase by 11% in 2009. Current operating income benefited from good volumes and price trends combined with tight cost control.
58
Morocco, a strong domestic market, despite some deceleration in the fourth
Table 32: Top 5 Shareholders' list Lafarge Maroc* CDG BID CIMR Lafarge Cementos Others Total 50/50 JV between Lafarge and SNI (State) 69.4 8.0 5.5 3.9 0.6 12.6 100.0
Overview of the company Lafarge Maroc is the longest established cement group in Morocco with a current production capacity in excess of 6.5m MT, through which it controls over 42% of the local market. Lafarge Maroc is active in four principle sectors which are cement, concrete, aggregates and most recently, lime and the group has three cement plants in Casablanca, Mknes, and Ttouan. Outlook for the group The success of the Moroccan construction industry has principally been a result of government partnering with the private sector to achieve its strategic developmental objectives, particularly for the lower income and middle class segments of the population. Having attained a national capacity of over 15m MT in 2010 following continued capacity expansion by the three largest players and the entry of new players, in H1 2010, the country has now crossed the threshold and is in a state of over-capacity. Specific regions, most notably the economic powerhouse that is Casablanca, are now oversupplied and sales volumes are expected to wane. Lafarge has strategically decided to mitigate the anticipated tightening by building a new factory in the Souss region, about 300km to the south east of Casablanca. This shift in market positioning is justified by the saturation of the Grand Casablanca market, the deceleration in the growth rate of the Tangier Ttouan region, and the strong growth potential of the Souss region. It is noteworthy to mention that total cement consumption is above 1.3m MT in this region, and more so Souss Massa Draa is the second contributor to GDP right after Casablanca. 55% of the projects undertaken in 2009 were related to the building and public work sector in this region and plans are underway for the development of the first fishing park in the Kingdom which will be extended over 150 ha with an investment amounting to MAD 6.6bn (US$ 758m) over 5 years. Valuation and Recommendation Lafarge is currently the most expensive cement company in Morocco, valued at US$ 521/tonne, significantly ahead of its peers Ciments du Maroc and Holcim, which are trading at discounts of 40% and 43% to Lafarge on an EV/tonne basis. While the cement sector will keep pumping for some time yet, we believe that the latter two offer more upside for investors seeking exposure to Morocco.
Table 33: Morocco Relative Metrics CM 2010 PER (x) 11.7 2011 PER (x) 9.9 2010 PBV (x) 3.4 2011 PBV (x) 3.0 2010 EV/EBITDA (x) 10.9 2011 EV/EBITDA (x) 9.1 2010 Div yield (%) 5.8% 2011 Div yield (%) 6.9% Gearing (%) 0.0% 2010 EV/Tonne (US$) 371.7 Capacity 5.9
Holcim 15.9 15.1 4.8 4.2 10.9 10.5 3.4% 3.6% 118.7% 335.4 4.5
Lafarge 18.1 15.6 5.2 4.5 11.4 9.9 3.4% 4.0% 17.9% 521.1 6.5
59
Notes
LAFARGE CIMENTS MAROC - 4 CGR and Forecasts 31 DEC (MADm) Income Statement Revenue EBITDA PBT PAT Dividend Weighted shares (m) EPS (MAD) DPS (MAD) NAV (MAD) Balance Sheet Fixed Assets Current Assets Total Assets Shareholders' equity Interest Bearing Debt Current Liabilities Total Liabilities and equity Enterprise Value (US$m) EV/EBITDA (x) Capacity (MT) Enterprise Value/tonne (US$) Net debt/equity ratio 5,233 2,257 7,490 5,573 837 5,573 6,417 1,429 7,846 5,605 1,083 5,605 7,058 1,495 8,553 6,052 1,242 6,052 2009 4,240 12.1 6.5 652 17.9% 7,411 1,415 8,827 6,919 1,324 6,919 2010F 4,266 11.4 6.6 646 19.0% 7,782 1,615 9,397 7,912 1,536 7,912 2011F 4,273 9.9 8.2 521 17.4% 2012F 4,281 8.4 8.2 522 16.0% 3,203 1,484 1,163 855 507 17 49 29 3,732 3,732 1,032 1,034 611 17 59 35 4,356 2,166 1,905 1,908 873 17 109 50 319 4,914 2,510 2,292 1,684 1,048 17 96 60 321 5,441 3,052 2,734 1,859 1,155 17 106 66 346 5,801 3,253 2,915 1,982 1,231 17 113 70 396 6,727 3,773 3,381 2,298 1,428 17 131 82 453 14.17% 19.76% 23.84% 21.43% 22.87% 0.00% 21.36% 22.87% 2005 2006 2007 2008 2009 2010F 2011F 4 Yr CGR
60
Notes
Capital Securities Botswana Ground Floor, Plot 64511 Showgrounds Gaborone Botswana Tel: + 267 318 8886 Fax: +267 318 8887 Cell:+267 713 1421 / +267 7162 4390 Member of the Botswana Stock Exchange
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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Edwards Securities (Pvt.) Ltd. (Imara) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara Group of companies including their respective associated companies (together Group Companies), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i)have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii)have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii)to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. Imara Capital 2011
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Imara African Cement Report - Feb 2011

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Imara African Cement Report Africa, the last cement frontier

LPFO Low Pour Fuel Oil

African Cement Companies Fast Facts

African Cement Companies Fast Facts (cont.) c

The cement production process At a glance

African Cement Companies - Relative Graphs

Figure 2: Consumption vs GDP per capita

0 2,000 4,000 6,000

Source: Lafarge SA, IES, IMF

GDP Per capita (US$)

Source: Lafarge SA, IES, IMF

Figure 3: Ave Price/tonne

Figure 4: Global demand vs capacity

Average Price (Us$)

150 100 50 EAPC Lafarge Maroc Dangote

Source: Dangote Cement

Figure 5: EBITDA by company

Figure 6: 2011 EV/tonne by company

EBITDA margin (%)

50% 40% 30% 20% 10% 0%

Lafarge WAPCO Lafarge Zambia

Figure 7: Capacity by company

Figure 8: Common Size Income statements

100% 80% 60%

Twiga 2% Ashaka 1% Athi River Mine CCNN 1% 1% Lafarge Zim 1%

Global Executive Summary

Table 5: Relative Valuation Metrics for SSA Cement Companies

Table 6: Relative Valuation Metrics for North African Cement Companies

Qena Cement Egypt 83.1 1.90 601.81 2,263 350 138

Table 7: Discounted Free Cashflow Valuation Model

Figure 11: Exchange rate Naira vs US$

2009 0.42 0.52 5.87 8.92%

2010F 1.15 1.59 0.34 6.67 10.89%

2011F 1.26 1.88 0.38 7.56 25.09%

Figure 12: Nigerian EBITDA margins 70.0% 60.0%

Figure 13: 2011 Nigerian EV/tonne (US$) 700 600

2009 1.46 1.69 0.9 3.40 25.54%

2010F 1.49 2.08 0.9 3.97 30.36%

2011F 2.29 3.12 1.4 4.85 29.64%

Figure 14: Nigerian EBITDA margins 70.0% 60.0%

Figure 15: 2011 Nigerian EV/tonne (US$) 700 600

2009 5.9 8.1 4.4 12.1 59.53%

2010F 11.0 16.1 8.2 14.9 65.99%

2011F 20.8 21.2 15.6 20.1 67.70%

% 95.9% 3.2% 0.8% 100%

Figure 16: Nigeria installed capacity

2009 Ashaka CCNN

Figure 17: Dangote market share of African capacity

EQUITY RESEARCH NIGERIA FEBRUARY 2011 CEMENT

2009 1.68 1.59 0.10 14.56 18.15%

2010F 2.79 3.53 0.28 17.08 18.15%

2011F 5.12 7.10 0.51 21.69 18.15%

% 60.0% 10.0% 30.0% 100%

Figure 18: Nigerian EBITDA margins 70.0% 60.0%

Figure 19: Nigerian EV/tonne (US$) 700 600

2006 39,518 14,263 12,119 10,946 3,002 3.65 1.0 8.5

2007 38,665 11,877 12,536 10,678 3,002 3.56 1.2 10.9

2008 43,274 13,673 13,033 11,252 3,002 3.75 0.6 13.5

2009 45,590 9,853 9,238 5,056 3,002 1.68 0.1 14.6

2010F 51,061 20,879 16,456 12,342 3,002 2.96 1.1 18.1

32,425 16,329 48,754 25,547 7,234 15,973 48,754

33,416 17,180 50,596 32,806 2,536 15,254 50,596