Bamburi Cement’s strategy message must improve to support their share price

We are concerned with management’s lack of additional disclosure on Project Indigo (1.6 million tonnes per annum clinker plant) since May 2022, despite our extensive communication on its potential earnings upside. Based on local press reports, Bamburi was set to receive receive a project license for its shale mining location (Kitui County) in April 2023. It is one of the final licenses required before plant construction. In May 2022, the operational date guidance was set to be during the second half of 2024. We decided not to include this scenario in our model until we see management updates. There have also been notable changes at the Board of Directors and C-suite levels, which could delay construction.

Costs will stifle earnings outlook recovery, highlighting the importance of Project Indigo

Without Project Indigo, we cut our earnings forecast by 8.8% on average (2023 – 25 estimate) as costs will remain high (cUSD82/tonne average). We compute energy and imported clinker accounted for 54.8% (+0.2% versus FY20210 of FY2022 production costs). In April, there was a modest reduction in Kenyan power tariffs for industrials, and we do not expect material changes to the energy and imported clinker line items (c54.5% average of total cost base over 2023 – 27estimate).

In addition, the Finance Bill 2023 (whose implementation has been frozen by the Kenyan Courts) has additional 10% duty on imported clinker (20% in total, if approved) and higher fuel price risk (logistics costs were 14.7% of the FY2022 cost base), emphasizing the need for the implementation of Project Indigo. The construction lead-time (at least 18 months), and FX risk (and leverage) as it will be 75% debt funded (cUSD240 million on our estimates), will delay any potential near-term margin accretion.