One of the main reasons and attractions of investing in Africa is that most of the infrastructure we take for granted in our world, still needs to be built there.
For this week’s cover letter, we focus on the Benue Cement Company Plc (BCC), a very illustrative example of the forces that are at play in many of the vibrant African markets and economies.
As a cement producer it is a key chapter in the development story of one of Africa’s most populous countries which is also a driving force in the Silk Lions fund:Nigeria.
BCC was initially incorporated in 1975 and in 2006, following the privatisation of the company by the Benue State government, it became a part of one of Nigeria’s main business empires, the Dangote Group.
BCC produces and markets cement and is situated in the lower north east region of Nigeria.Despite last year’s global financial crisis, BCC returned an impressive year on year revenue growth rate of 177% during the first 9 months of 2009. At current levels, BCC’s stock price has appreciated by more than 300% since March 2009!
Although BCC is currently only operating at 50% capacity, due to a severe shortage in the supply of kiln fuel, we will likely see a revenue growth rate of at least 120% for its 2009 full year results. The main reason for the phenomenal improvement in revenue is the fact that the company recently commissioned two new kilns which increased its capacity from 0.5million tonnes to 2.8million tonnes.It is now the 2nd largest cement manufacturer in the country. Although BCC is trading at a forward PE of 16x, we believe the company still looks fairly attractive as we expect the capacity utilisation to increase as the energy supply to the plant becomes more stable. It is often the case in our markets that stock prices are trailing fast growingearnings multiples.
The Federal government’s drive to develop infrastructure in Nigeria has put upward pressure on the demand for cement. The government is currently providing local producers with incentives such as reduced import duties on imported bulk cement to help the industry tackle the problem of supply shortages.BBC’s location in Benue makes it the dominant player in the North Central region and its indicated plan to expand its capacity to 3 million tonnes, which will clearly make it an even larger force to reckon with!
So far this year, the Nigerian Stock exchange has risen by more than 19%. At current levels, it is trading at only 37% of its highs, achieved in May 2008. We continue to believe that these valuations remain too low and see considerable upside for this market.
With regards to the Middle East, there seems to be some progress in the Dubai World Saga. We will focus on this in more detail in next week’s update.
Our weekly updates in which we aim to put into perspective the developments and trends in the African, Arab and Eurasian markets and economies, can be accessed via our website.
We look forward to keeping you updated!
The Silk Invest Team
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