Cementing growth

Wael Gamal profiles the Suez Cement Company, which is once again attracting foreign interest

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In 2001 Ciments Français, the international arm of Italcementi, the world's fifth largest cement producer, purchased a 25 per cent stake in the Suez Cement Company (SCC) for LE51 per share. It then upped its stake to 34 per cent by purchasing Alexandria Cement's and SCC's Employee Shareholders' Association (ESA)'s shares at the same price.

Now Ciments Français is showing renewed interest in SCC. Though its offer to increase its holding to 65.92 per cent of the company's 42,191,139 shares (at LE80.05 per share) was rejected as too low by the government it could still increase its stake to nearly 40 per by acquiring free floating shares.

Certainly SCC looks like an attractive prospect. Established in 1977 as a joint stock company operating under investment Law No 43/ 1977, with authorised capital of LE1 billion and a paid-in capital of LE640 million distributed over 64 million shares, by 2000 it had established itself as Egypt's largest cement producer, a position it consolidated by acquiring 67 per cent of Torah Portland Cement Company. The group has a combined annual capacity of 7.85 million tonnes.

SCC's acquisition of Torah Cement made it the uncontested market leader, controlling 22.5 per cent of the market. Though the company is expected to outperform the industry's average utilisation rates its concentration on the local market could yet be a problem. It has traditionally viewed exports as a last resort should local prices become unstable. In the first half of 2003 it exported just 22,786 tonnes, i.e. 1.3 per cent of total production.

A recent report by HC Brokerage predicted a surge in SCC's 2004 revenues on the back of higher utilisation rates and healthier selling prices. SCC's revenues are expected to grow at a rate of 11.2 per cent between 2003 and 2008, on a stand- alone basis. On a consolidated level SCC's revenues are expected to grow at 11.8 per cent during the same period. The report also expects SCC to increase its profit margins on a stand-alone basis. In 2003 the profit margin was 35.1 per cent, up from 29.2 per cent in 2002, and is expected to rise to 47 per cent, the highest among large caps producers. It has consistently outperformed its peers, who recorded average margins of 34.6 per cent in 2003 and an estimated 45.5 per cent for 2004.

SCC also enjoys high cost efficiency, recording a total cost of LE121 per ton for bagged cement compared to an average of LE133 for its peer group, a reflection of the company's use of relatively advanced technology. And despite a contracting local construction market the cement sector has been buoyed by falling prices, a trend reinforced by the devaluation of the pound. Not that everything is rosy. Company exports, the bulk generated primarily through its subsidiary TPCC, are expected to drop in the near future, with consolidated revenues generated in foreign currency falling from 14.5 per cent in 2003 to a predicted 10.9 per cent by 2008, under-performing its competitors who averaged 21.2 per cent in 2003, a figure that is expected to reach 23.6 per cent by 2008. Low export representation is a result of SCC's primary focus on developing its local market share and leaves the company vulnerable to the vagaries of the domestic construction sector.

Increased inflation over the next few years could also burden the company with rising CAPEX maintenance costs and associated depreciation expenses.

If the new anti-trust law is ratified the cement sector's self-regulating agreement will become void and the door would be open to fierce competition. SCC's near total dependence on the local market places it in a vulnerable position should a price war break out. And foreign interest in other cement producers could well up the ante in the local market.

SCC will have to capitalise fully on the opportunities presenting themselves to the sector. It must make full use of the relative advantage of its geographic position in accessing African and Arab markets, the growth potential of which could mitigate against the effects of a strengthening pound on export prices. Despite the improvement in Egyptian cement exports that has occurred since 2002 there is still room for more exports given the capacities in the market.

Total capacity is expected to reach 39 million tonnes in 2008, with domestic demand growing from 26.5 million tonnes in 2004 to 31.4 million tonnes by 2008. In order to capitalise on its enhanced capacity SCC will have to concentrate far more on the export market.