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ARM Cement of Kenya Mulls Eurobond Sale to Fund Expansion

Nov. 7 (Bloomberg) -- ARM Cement Ltd., Kenya’s second-largest maker of the building material, is considering selling Eurobonds to help fund a planned $300 million expansion program, Managing Director Pradeep Paunrana said.

The sale of debt will follow the Kenyan government’s planned offering of as much as $2 billion of the securities by January, Paunrana said in a Nov. 5 interview in the capital, Nairobi. The company intends to double cement production within four years from 2.5 million metric tons in 2012, Deputy Managing Director Surendra Bhatia said in the interview.

Kenya’s sale of Eurobonds “will set the stage for other corporates to tap into the Eurobond markets,” Paunrana said. “That is one of the events we are looking at anxiously as we plan our own capital raising.”

Production in Kenya’s cement industry, the largest in East Africa, climbed 3.5 percent to 4.64 million metric tons last year, according to Kenya National Bureau of Statistics data. Growth is being driven by government spending on infrastructure projects like upgrading ports and constructing new roads, as well as home builders trying to meet an annual deficit of 440,000 units, according to Kestrel Capital East Africa Ltd.

Cement consumption per capita surged 60 percent to 85.7 kilograms (189 pounds) over the past five years, the Nairobi-based brokerage said in a August research note. Demand is expected to grow at 2.7 times gross domestic product growth over the next three years, compared with a 2.4-times-GDP increase in production, Kestrel analyst Linet Muriungi said in the report. Kestrel has an accumulate rating on the industry.

50-Year Outlook

Consumption per capita in Kenya compares with 300 kilograms in South Africa and 500 kilograms in Egypt, Paunrana said. Kenya’s total consumption is expected to more than double to as much as 10 million tons within seven years, he said.

“We see the market growing for the next 50 years in this country,” Paunrana said.

ARM Cement will next year begin construction of a clinker factory in Kenya at a cost of $250 million to boost its capacity to 5 million metric tons of cement, Bhatia said. Another $50 million will be spent on other projects, he said.

Clinker is the main ingredient used to make cement and as much as 45 percent of domestic consumption is met by imports, Paunrana said. The company expects to complete construction of a 1.2 million-ton plant in Tanga, Tanzania, within five months that will boost supplies of the material, he said.

The total cost of that project, as well as a grinding plant that has been in operation since last year in Dar es salaam, the commercial capital, is $150 million, Paunrana said.

Minerals, Chemicals

ARM also produces industrial minerals, chemicals, fertilizers and other types of building products, Bhatia said.

Cement sales grew at an annual average rate of 28 percent over the past 10 years in Kenya, Paunrana said. In the nine months through September, ARM’s revenue grew 32 percent to 10.2 billion shillings ($120 million), boosting net income in the period to 1.06 billion shillings from 826.5 million shillings a year earlier, the company said on Nov. 5.

“We are looking at closing the year higher than that number,” he said. “We are in a good market, a growing market where cement consumption is increasing throughout the region.”

Africa Finance Corp., a Nigeria-based development-finance institution that gave ARM a $50 million convertible loan in September 2012, will mostly probably convert the remaining five years of its funding into 13 percent equity, said Paunrana, who owns about half of the company’s stock.

Rating Upgrade

In August, ARM’s price estimate at Kestrel Capital was increased to 77.50 shillings from the 43.4 shillings set in July 2011, while the recommendation was upgraded to accumulate from buy. Accumulate means investors are advised to buy more shares during price dips.

ARM’s shares climbed to a record today, closing 2.4 percent higher at 84.50 shillings. The stock has gained 89 percent this year, outperforming the FTSE NSE 25-Share Index, which has gained 38 percent. The company ranks as Kenya’s biggest cement producer by market value, after Bamburi Cement Co.

“The stock had started appreciating on Monday in anticipation of results so it is a mixture of the nine-months profit and since the news on the bonds is public it will also spike the stock a bit,” Muammar Ismaily, head of research at Nairobi-based Genghis Capital Ltd., said by phone today.

To contact the reporter on this story: Eric Ombok in Nairobi at eombok@bloomberg.net

To contact the editor responsible for this story: Shaji Mathew at shajimathew@bloomberg.net

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