16th September 2003

Bamburi’s Seven – Year Itch

Cement Maker’s Comeback is a Tale of Valiant Survival

The giant kilns at Bamburi Cement plant in Mombasa are blasting in full voice.

Burning at temperatures as high as 1,500 degrees Celsius, the furnaces could be easily mistaken for a re-incarnation of poet, Dante’s Inferno – a minor Armageddon that has made Bamburi Cement one of the most profitable companies in East Africa.

But any time now, there could be a power dip or even worse an outage lasting hours. A one minute power dip, Didier Tressarrieu, Bamburi’s managing director, says, is bad news to the company’s bottom line.

“It could be very

Even with back-up

Tressarieu estimates that his kilns are not running because of a power dip, Bamburi loses 300 tonnes worth of cement that could have been churned out. For a company that sold 1.2 million tones of cement worth Sh. 10 billion in 2002, the lost production time per hour is worth Sh. 2.5 million in lost sales. This would be easier to swallow for an industrial giant of Bamburi’s size if the power dip was just an occasional event.

In the last three years since Kenya was first enveloped in a round-the –cock power failure, after the country’s power generation capacity was hampered by drought, power outages have been a nightmare for big consumers of power like Bamburi. Even after the situation returned to normal, power outages are now considered to be a regular interface in the country’s manufacturing lines. Though power failures in 2000 were largely blamed for the recession the country is going through, the economic decline has been decade- long affair that has been painfully borne by Kenya’s manufacturing industry.

There are many other afflictions ranging from corruption, high power costs and poor public infrastructure that have increased the cost doing business in Kenya.

However despite all these roadblocks, companies like Bamburi Cement have managed to thrive in a major comeback that sheds light on the quest by Kenya businesses to excel in the face of a deteriorating economic environment.

For Bamburi, a strategy geared at helping the company ride through the crest of the business cycle during an “economic bubble” in the mid 1990s has now become its template for survival in the next decade.

The results so far are encouraging. In the last seven years since the company’s expansion strategy began, Bamburi’s revenues have doubled to Sh. 10 billion and profits are even higher than they ever were in the last decade.

Investors at the Nairobi stock exchange (NSE), where Bamburi is listed are also noticing with its share price trading at Sh. 10 – a 424 per cent price appreciation from its lowest price of Sh. 21 in the last one year.

According to Robert Mathu, CEO, Drummond & Partners Stockbrokers, a huge demand now exists for Bamburi’s shares because investors are optimistic of the enormous growth potential that exists in Kenya’s cement industry.
This optimism is largely drawn by the amount of money that is expected to be poured in public works as the country embarks on economic reconstruction after President Mwai Kibaki’s electoral victory that kicked out the KANUgovernment that had held power for four decades.

“There is growing optimism of increased growth for Bamburi Cement especially as the Government embarks on the housing and road construction initiatives,” says Patrick Gichigo, an analyst with Peter Thuo & Partners, a stock brokerage firm based in Nairobi.

On the economic front, the reduction in bank lending rates and the stability of the economic environment could see a revival of both commercial and residential construction markets.

Even with the potential ahead, analysts laud the performance of Bamburi in the last seven years. This is mainly due to some of the decisions the company has taken during the period.

The future of the company is bright because it is a well managed frim,” says Mathu.

“The good news is that cement consumption has started showing signs of recovery and electricity tariffs have dropped,” says Tressarieu.

In 1996 when Bamburi embarked on a plant expansion programme, it was believed that Kenya was in the middle of an economic take-off, even with the frosty relationship that President arap Moi’s Government had with the WorldBank and the International Monetary Fund that saw aid frozen several times. Afterall, the NSE 20 share Index was just cooling off from a a dizzying rise in value that peaked at 5,049 in 1994 and even in 1996, the value of the index was way above the 3,000 level.

However, with Bamburi’s competitors taking the cue, the plant expansion by East African Portland Cement (EAPC) and Athi River Mining (ARM) doubled the industry capacity and the economic take-off faltered. The next five years was a study in survival for the three companies as they battled with capacity under utilization.

For EAPC , which had financed its plant expansion with a rights issue and a Japanese yen-dominated loan, it was a lean period in which the company was mismanaged and had to contend with dramatic foreign exchange-driven losses. Problems cropped up after the Asian currencies were devaluated, leading to an unprecedented wave of import dumping that hurt Bamburi’s export to the Indian Ocean rim.

Notice, for instance, that after a period of steady revenue growth in the early 1990s, Bamburi’s sales fell in 1996 and 1997, before recovering in 1998. Though the impact on earnings were minimal, profits fell dramatically and failed to recover until 2002. The expansion programme was also taking up all the cash generated by the business and the firm was forced to borrow – both long-term and through overdrafts – at a time interest rates were in the 20 per cent range. This forced the level of debt to swell to nearly Sh. 1.6 billion I n1998. Servicing this debt has been a very expensive affair that has been eaten into Bamburi’s earnings.

Today, problems with import dumping and excess production capacity are still alive and still pose a credible threat to the industry’s earnings prospects. Bamburi, specifically, and the cement industry in general, is only utilizing half of its production capacity.

The company has faced these problems with two deals that have turned its fortunes. This was through the acquisition of Hima Cement in Uganda for Sh 909 million and taking over a Sh. 407 million loan due to the company. Then there was an investment in a convertible bond in Athi River Mining that was eventually converted into a 20 per cent equity stake.

These details have widened market for Bamburi Cement in a significant way. The acquisition of Hima also diversified the company’s revenue base, allowing it to take advantage of the high economic growth in Uganda at a time when Kenya was In bad shape.

In 2002, Uganda contributed nearly a third of the company’s sales and operating profits. In terms of numbers, this was nearly Sh 3 billion in additional revenues and Sh 670 million in profits that are now flowing directly into Bamburi. In 1999, Hima accounted for Sh. 1.4 billion of Bamburi’s revenues and Sh 454 million in operating profits respectively. The Hima deal also allowed the company to expand to Uganda more smoothly.

With Hima currently enjoying market leadership in Uganda with 55 per cent market share and the combined Bamburi Group currently commanding a 58 per cent share of the East African cement market, the deal has paid off. Even as the firm’s offshore market (which accounts for 11 per cent of sales) continues to be buffeted by import dumping, Bamburi’s sales to other parts of Africa account for four per cent of its sales.

Overall, the company’s sales and earnings have been growing at an annualized compound rate of 194 per cent and 36 per cent respectively.

This has allowed Bamburi to continue churning out healthy cashflows that have enabled the company to cut down its debt. After a frenetic period of heavy capital outlays costing in excess of Sh 5 billion, Bamburi has also started churning out free cashflows. In the last two years, the company consistently generated over Sh 1 billion annually in free cashflow. This money couldbe used to fund expansions in Uganda and other markets and pay down debt, with a good protion still left over for increased dividends.

In terms of economic profits, the company is in positive territory now. Big challenges, however, still remain for Bamburi. Competitors like EAPC have started waking up and are already pit-ting the company in a bloody price war that could result in an erosion of profits.

“We are still the cost leaders, but when you are in an under-capacity situation, you have to watch profits very carefully,” says Tressarieu.

Tressarieu is not happy about this. Then there is the issue of electricity tariffs. Despite the heavy capital investments in the plant in Mombasa , the company has not managed to cut the cost of production significantly due to the high cost of power.

Though this has come down significantly since the black out days of 2000, electricity consumption accounts for eight per cent of Bamburi’s sales, and 17 per cent of its costs of raw materials and consumables.

Despite the heavy investment made to improve plant efficiencies, the power dips caused by faulty power supply continues to be a major issue. Though the company is profitable, Tressarieu believes there is still more room for growth.

In Uganda, Hima cannot meet the demands of the market and the supply is being supplemented by Bamburi. Hima is currently expanding its capacity.

In Kenya, Bamburi has continued to generate most of its growth from residential market and to some extent its special products division. The company is now focusing on expanding the retail market through consumer education programmes.

New products have also been developed to boost consumption of cement. One such programme has involved lobbying the Government to start using cement in the construction of roads.

If the economy does recover, the company will enjoy robust growth from both the commercial property market and the reconstruction of public infrastructure