Why my biggest stock investment
is an African cement company

Back in 2018, I personally invested in Twiga Cement (TPCC on the Dar es Salaam Stock Exchange) in Tanzania. The company is a subsidiary of Heidelberg Cement, which owns 69.3%. The other 30.7% trades on the DSE and is owned by thousands of small shareholders and investment funds.

Twiga is the dominant cement company in Tanzania. It’s the 19th-biggest company overall in East Africa by market value, and fifth-biggest in Tanzania.

It has a huge competitive advantage over the other cement industry players in Tanzania, because its production facilities are on the outskirts of Dar es Salaam. Cement is heavy and expensive to transport, so the nearby supplier usually always wins.

Dar es Salaam is far and away the dominant city in Tanzania. It is the commercial capital and sits on the Indian Ocean coast just south of the Equator. The current population of about 6.7 million is projected to double within 15 years.

Dar es Salaam has a huge port, which is the largest in East Africa. It services not only Tanzania, but also the landlocked countries bordering Tanzania in the interior. These include Zambia, Rwanda, Malawi, Burundi, and the eastern part of the Democratic Republic of Congo.

The only way it makes sense for a competitor to try and break into Twiga’s market is to sell cement at a discount to Twiga’s prices.

Africa’s richest man, Aliko Dangote, founder of Nigeria’s Dangote Cement tried this tactic when he entered the Tanzanian cement market back in 2016. But Dangote’s plant is 400 kilometers away from Dar es Salaam at Mtwara. And when Twiga lowered its prices temporarily to undercut him, Dangote could not sustain that price with the added transportation cost. So Twiga drove Dangote out of its Dar es Salaam stronghold.

You can see it clearly in Twiga’s financial results. In 2016 and 2017 the company sold more cement each year by volume, but its revenue temporarily declined due to the cut in prices.

As soon as it had repelled the competitive threat from Dangote, Twiga put prices back up. And in 2018 business was back to normal with growing volumes and growing revenues. It’s a good illustration of how powerful the “moat” around Twiga’s business is.

The other source of competitive advantage Twiga has is its brand. “Twiga” means giraffe in Swahili, and is Tanzania’s national animal. Twiga’s distinctive yellow and brown giraffe logo is instantly recognizable, and its product is sought out by name. It has the reputation of being strong and reliable.

For some more general background on Twiga Cement, and its current operations, here’s a link to a useful press article.

Twiga is run very professionally. European senior management rotates in and out on three- or four-year contracts. But the vast majority of employees are local. The company has a policy of hiring and training locals whenever it can.

The current CEO of Twiga Cement is an affable Spaniard by the name of Alfonso Velez. He has been running cement companies in Africa with Heidelberg since 2013.

I’ve met with Alfonso twice in the past 18 months. He comes across as a no-nonsense, highly effective manager that really knows his stuff. And that has partly been borne out in Twiga’s good financial performance in the two most recent years.

My most recent exchange of emails with Alfonso Velez was only last week. He says business is tracking well. They had some maintenance capital expenditure of late to replace a key part in one of their kilns, which I had seen covered in the trade press.

I asked him about expansion. He said there are plans for about US$15 million of capital expenditure in 2020 – most of it being for growth.

That puts the likely growth trajectory for Twiga smack bang in the 7%-12% range that I am assuming over the medium- to long-term, which is not too different from the overall nominal growth rate of the Tanzanian economy.  (Any temporary COVID-19-related slowdown aside.)

Alfonso indicated the dividend policy would remain, “unchanged, as we always want to reward our shareholders with a predictable dividend despite the unpredictability of the current global environment.”

The other growth driver for cement in Tanzania, aside from general construction and urbanization are a series of large infrastructure projects.

The article I linked to above talks about the Stiegler’s Gorge Dam over the Rufiji River, which is one such project that has recently got underway. The other is the Standard Gauge Railway (SGR) that Tanzania is constructing to link Dar es salaam with the interior of the country and its neighbours.

These projects are not without controversy. In the case of the SGR, detractors say the country can’t afford it. The government is borrowing money to pay for it. I think Tanzania has been sensible not to rely on one source of finance. In Kenya and in Zambia, to name but two neighbouring countries, the governments have borrowed far too much money from China alone.

Tanzania is friendly with China. It borrows from China. Chinese companies help build infrastructure in Tanzania. But, China is not a single dominant force. Tanzania also borrows for its development from multilateral institutions such as the World Bank, and various aid development partners. Borrowing for infrastructure spending via the domestic bond market, in Tanzanian shillings, has also been a cornerstone of President John Magafuli’s policies. I think that is sensible, provided there is money available.

In the case of the Stiegler’s Gorge Dam, which has an initial projected cost of US$3.6 billion, the government has appointed contractors from Egypt, not China. But many Chinese firms are still involved. That’s probably a good thing, as they are known for being fast and efficient in infrastructure construction and have the capacity to supply very cost-competitive equipment.

The Egyptians have extensive experience in hydroelectric power, with the Aswan Dam over the Nile. It was by far the biggest infrastructure project in Egypt in modern times, though maybe not as big as the pyramids.

At Stiegler’s Gorge, the hydroelectric structure will be 130 metres high and 700 metres wide, covering an area of approximately 1,350 square kilometres with the capacity to hold back 34 billion cubic metres of water.

It’s going to need a lot of cement to build it. That’s good for Twiga, even if it’s not all going to be Twiga cement.

That said, conservationists and environmentalists are up in arms about Stiegler’s Gorge.

This is because it’s in Selous Game Reserve, a UNESCO World Heritage site. But the game reserve is the size of Switzerland (Tanzania is a big place). And the Dam will affect only one small part of it.

Right now too many people in Tanzania do not have access to cheap, clean grid power. And the country’s leadership is keen to point out that losing approximately 3% of the Selous Game Reserve to a dam is a small sacrifice to provide a better future for tens of millions of Tanzanians. Hydropower, once up and running, is also one of the cleanest sources of electricity there is.

I’m not taking sides, but I would point out that without infrastructure, no country can develop. And for now at least, from what I have seen with my own eyes, the environmental impact does not seem severe. What happens over time, as construction activities escalate, and when the dam is completed, remains to be seen.

Last year, I was in Selous Game Reserve, and stayed at Lake Manze, which is fed by the Rufiji River. We were not far from where they are building the dam.

There was massive road construction going on, to prepare for the entry of more heavy equipment and construction supplies for the dam.

But happily, the local population of African Wild Dogs seemed unfazed. Selous Game Reserve has one of the largest remaining populations of this endangered species anywhere in the world.

There was a pack sleeping under a bush not more than 10 meters from the road under construction…

If you’ve ever wanted to visit this part of the world, I can thoroughly recommend it. It’s far less touristy than the popular “northern” safari circuit.

I’ll write more about this next week, over in the “Lifestyle Section,” of Global Value Hunter. Be sure to check it out, as I’ll reveal a great insider’s tip to avoid paying through the nose for your Tanzanian safari.

Maybe you could even make some money in Twiga shares to pay for it.

Twiga has been the best performing stock on the Dar es Salaam Stock Exchange in the time I have been investing there, with a total return of 83.6% including dividends, since the beginning of 2018.

But the shares are still anything but expensive.

I would expect Twiga’s earnings per share (EPS) for 2020 to come in around TZS 300, barring any major surprises. So, the forward price earnings (P/E) ratio is about 7x. That’s a modest multiple to pay for the dominant industry player, with a strong competitive advantage, in a high-growth market.

Twiga has a generous dividend payout, too. The only way Heidelberg (the parent company) gets paid, is to declare dividends. Twiga paid TZS 290 per share in dividends for 2018, and has again declared a dividend of TZS 290 for 2019, payable on June 30, 2020.

The stock is currently offered ex-dividend at TZS 2,100. If it pays out the same dividend again next year, which I expect, you’re looking at a 13.8% yield. And Tanzania only levies a modest 10% dividend withholding tax on foreign investors.

Until next time,

Good Investing!

Tim Staermose

Copyright © 2020 ST Funds Management Limited | ABN 65 154 454 092 | AFSL No 416778