Stock Watch: ARM Cement Limited

ARM Cement Ltd (NSE: ARM) announced their audited financial results for the Full Year (FY) ended 31^st December 2014 on 25^th March 2015.

Recommendation: HOLD

Revenue Declined by a Marginal 3.08%; EBITDA Margin Improves by 8% to KES 3.7 Billion

ARM cement announced their results with a 3.08% drop in group’s turnover from KES 14.18 Billion (FY13) to KES 13.74 Billion in FY14. The turnover remained barely at equilibrium as no significant increased capacity came on line from the regional subsidiaries. Going by the fact that Tanga clinker plant was only completed in December 2014, there was no increase in production, save for the Kenyan plants which slightly increased production due to the increased demand arising from key government projects. The EBITDA margins improved by 8% to KES 3.7 Billion, driven by increased productivity and process efficiencies at all the plants.

Profit Margins Chalk up; Pre-tax Profit margin at 14.68% and PAT margins at 10.87%

PBT grew at a slower rate of 0.90% (FY13- 11.72%) to KES 2.02 Billion while after-tax profits shored up by 10.72% to KES 1.49 Billion (FY13-8.28%) driven by a decrease in the tax charges for the year. This translated to a 9.85% growth in Earnings per Share to KES 3.01 compared to KES 2.74 (FY13). The stock is currently trading at very high P/E and P/B multiples of 27.91x and 4.42x compared to their industry peers (P/E industry average – 14.65x and PB industry average – 2.05x). This creates a lot of headroom for price correction going by the company fundamentals. The company recommended a DPS of KES 0.60 deciphering into a dividend yield of 0.71% (Divided payout- 19.93%) which will be payable on or about 20^th August 2015 to members on the register at the close of business on 30^th July 2015.

Outlook; Improved Margins to be Supported by Own Clinker Production: Clinker production in Tanga, Tanzania commenced in December 2014 with high expectations that the plant will substitute expensive clinker imports with their own manufactured clinker. We anticipate that this will be a key driver for the turnover levels and general company profitability. Key infrastructure projects in the region will also contribute in propping up growth in the revenues. The cement manufacturer operates a diversified business model underpinned by the manufacturing of mavuno fertilizers which gives it a competitive advantage against the industry peers. The company doubled the manufacturing capacity for mavuno fertilizers in the preceding year and currently has a strong order book for sales in 2015 which will boost their turnover going forward. The share has been trading between KES 84-KES 86, YTD, a clear indication that investors have been clinching to their positions since the year began.