Cement firm races ahead of market, gains more than 25 pc in November

Owners of ARM Cement (formerly Athi River Mining Ltd) have grown their wealth by Sh5 billion in November alone, following a restructuring of its debt by retiring expensive loans. Despite announcing an operating loss of Sh645 million for the nine months to September, the value of the cement manufacturer has appreciated by 29 per cent to stay ahead of the market that is at the lowest level since August 2012.

A relentless bear run has seen remarked selling this year, depressing the cumulative value of the blue chip firms as tracked by the NSE20-share index. The firm hopes to borrow about Sh10 billion in an ongoing privately-issued five-year bond that closes end of next week, whose proceeds would settle other shorter-term debts that are costlier.

“The market has turned around especially after we released the information memorandum on our bond issue,” managing director Pradeep Paunrana told Weekend Business.

At yesterday’s closing price of Sh46, investors had earned over Sh10 on every share held since the November 1, ensuring the firm as the star performer in the month. The company’s value was just shy of Sh23 billion, up from Sh17.8 billion at the last day of trading in October. Proceeds from the bond issue will not result in increased debt, he adds, but will be spent to repay commercial paper and other short term paper.

ARM Cement is heavily leveraged with more than Sh14.6 billion in current liabilities - essentially debts that are repayable within one year.
At that level of debt, the cement and fertiliser manufacturer could rank among the highest on the rank of the most indebted as a proportion of the balance sheet among the listed companies, besides Kenya Airways.
Among the latest borrowings include a Sh4.5 billion short-term loan the firm received from CFC Stanbic Bank late last year which was spent in expansion of its plants, especially in Tanga and Dar es Salaam in Tanzania.

ARM’s planned corporate bond will pay interest of between 12 per cent and 16.5 per cent, which is significantly lower that the prevailing commercial lending rates that are above 20 per cent.

Analysts feel that the restructuring of the debt for longer term debt instruments would help in enhancing the debt to cash-flow mismatch, and hence the better earnings outlook. Investors are now more comfortable with the revised debt structure meaning the firm will spend less cash on interest expenses and repayments while a longer-term loan means ARM’s new investments will be in full production when the credit facilities mature, according to one fund manager.

“ARM has a strong business model in cement and it is now the second largest producer in the region,” said the fund manager who asked anonymity due to the possibility of conflicting interests in the clients on whose behalf he has invested.

Cement is ARM’s flagship product in Kenya and Tanzania – both countries currently reporting a boom in construction fueled by fast-growing economic activity.