, NAIROBI, October 8 – Popular media has a way of permeating our thoughts, shaping our opinions and influencing our investment decisions. Take for instance the dotcom boom of the late 1990s. Investors the world over swooned over any share that had the slightest hint of internet in it.
Business media worshipped the ground on which Chief Executive of IT businesses walked on and the investment community, in mass hysteria, fell over themselves in pushing IT company valuations to stratospheric levels.
Well, we all know how that ended and as I write this another bubble is bursting in the credit markets. The beauty about markets especially those that are open and transparent is that you can’t fool people for ever. The passage of time peels away all the media generated veneer surrounding a company and exposes its true worth to all investors. We call this mechanism ‘market efficiency’ and is reflected in a company’s share price, which adjusts constantly as new information on the company emerges.
This process works both ways. Sometimes a company may be doing what it does best away from the glare of the media. Management teams are constantly searching for new markets or cost reduction strategies that enhance shareholder value. In a sense, these companies produce stellar returns for shareholders in an unpretentious manner. Such companies from time to time do not get the recognition they deserve.
One such company is Athi River Mining (ARM), which started from humble beginnings as a marble mining company. Over the years the business expanded into various industrial minerals used as raw materials in the manufacture of every day household items such as toothpaste, soap, mattresses and even paint. Athi River today has expanded its product range to include fertiliser and cement. It has manufacturing facilities in Tanzania, South Africa and Kenya exporting its various innocuous products into the sub Sahara Africa region as well as to the Middle East and Europe.
However, probably the most exciting business line today in Athi River is cement. The Kenyan cement market has witnessed accelerating demand year on year in recent times leading to consumption growth running at about 12 percent for 2008. I estimate total cement consumption for this year will reach 2.3million tonnes and to continue growing at 10 percent over the medium term. I fully expect the cement market would have ballooned to 4 million tonnnes by 2014. If you consider that today total manufacturing capacity in the industry is 3.1 million tonnes, clearly local producers will have to scramble to increase capacity to meet the demand.
To add coal to the fire, Kenyan producers already export into Uganda which is also witnessing burgeoning demand. To meet this demand ARM is expanding its capacity at Kaloleni and will commence production in October 2009. The company could very well find it will have to run its factory at maximum capacity from day one suggesting that further capacity increases will have to be under consideration by December next year.
Demand for cement is primarily driven by individual home builders and the strong economic growth we have experienced, coupled with improved access to credit has supported an explosion in construction activity. This trend should be maintained over the next few years particularly as economic momentum deepens. Admittedly this year economic growth suffered following the post election violence and signs of weak global economic growth are casting a dark shadow over the immediate future. However, if you can look through the current uncertainties and focus on the local economic drivers you should comfortably settle on adding ARM shares to your portfolio.
If you’d like to receive our latest research notes send an email to [email protected]