18th February 2003

All Eyes Turn to Bamburi Cement
By Tom Mogusu

A DECISION by cement manufacturer Bamburi Cement Company to invest in new technology, and the growth of markets within the Great Lakes region is expected to boost the firm’s earning.

The firm will release its final results for 2002 tomorrow. After a good showing in the first half of 2002, analysts expect the full year to be better.

Last year, Bamburi’s pre-tax profits rose by 64 percent to Sh653 million for the first half of 2002, and the Kenyan cement market grew by 8 percent. The firm’s Ugandan division, which trades as Hima, has also been doing well.

“A lot of stocks have been driven by sentiments but not Bamburi. We expect consistency in profitability for the closing year,” David Kinyua, investments manager at Stanbic Investment Management Services, said.

He said the firm is expected to benefit as the economy rides out of the recession circle that has affected the building and construction industry for sometime. An additional boost is expected from Hima Cement, which Bamburi acquired in 1999. Hima has significantly improved Bamburi’s market presence in Uganda and the Great Lakes region. The expansion is now expected to start being reflected through increased profits.

And having completed its heavy investment phase, the company has also reduced its costs and improved its cash flow.

Bamburi Managing Director, Didier Tresarrieu, told the financial standard that the 50 percent tax reduction in the generation of electricity, introduced by the current Finance Bill, has failed to excite local cement manufacturers. The tax incentive, which was factored by the former government in the 2002/2003 Budget, has failed to reduce the operational costs of local industries.

Tresarrieu said the local cement industry has been affected heavily by the high cost of power despite the government’s incentive. He said energy costs amount to about 32 percent of the firm’s total production cost of cement. “This makes it difficult for cement produced locally to compete effectively with that from Comesa countries, which enjoy better tax regimes.”

The firm wants the government to scrap tax on electricity generation and recover the same from the corporate tax, arguing that there will be no tax loss “because consumers will purchase the same power”.

Cement production requires three forms of energy: electricity, fuel-oil and coal. Bamburi, which is the leading cement producer in the country with over 60 percent market share, paid Sh630 million for electricity last year and another Sh603 million for coal.

All Eyes Turn to Bamburi Cement as Earnings Season Approaches

different in various areas with companies operating in Mombasa paying US7.43 cents per kilowatt hour and those in Nairobi paying US6.6 cents. These figures compare very poorly with what obtains in South Africa, where the rate is US2.4 cents, Uganda US4.5 cents and the one in Egypt being much less. The same should apply to coal, which attracts an excise duty of 15 percent upon importation, mainly from South Africa.

Tresarrieu says as a starting pointing addressing the high power costs in Kenya, the Government needs to reform the power generation company, KenGen and transmission entity, Kenya Power and Lightning Company, to make them more efficient.

“KPLC, for instance, loses a lot of power during transmission, while KenGen charges power expansively because of the heavy taxation on imported equipment,” he said.
He proposed that the Government give a tax waiver on all power generation equipment used by local companies to enable Kenyan goods compete alongside those of other countries.

Tresarrieu also suggested that the Government re-negotiate the sale of power by Independent Power Producers (IPPs) with a view to putting them in tandem with international pricing structures.

“The forex and fuel adjustment levies that the Government has guaranteed KPLC appear to defuse the motivation by the corporation to operate more efficiently,” he says.

“There should be no guarantees on costs that the power company would eventually recover until appropriate safeguards are put in place.”