Twiga Cement (TPCC on the Dar es Salaam Stock Exchange) on Friday, May 22, 2020, released its Annual Report and audited accounts for the year ended 2019. Revenues grew 6% and net profits rose 5% in 2019 from the year earlier. Dividends were steady at TZS 290 per share for the third year running.
Twiga is the dominant cement company in Tanzania. It is the 19th-biggest company overall in East Africa by market value and the fifth-biggest in Tanzania, according to the latest African Business rankings.
The company is a subsidiary of German multinational 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 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. Dar es Salaam port 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.
This strategic advantage means the city’s future growth prospects are bright. The UN projects Dar es Salaam’s current population of 6.7 million will double within 15 years. This will mean huge demand for housing and infrastructure construction, and intensive use of cement.
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.
Nigeria’s Dangote Cement tried this tactic when it 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 it, 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. 2019 saw further solid growth.
Twiga Annual Report 2019
This is 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’s distinctive yellow and black giraffe logo is instantly recognizable, and its product is sought out by name. It has the reputation of being strong and reliable.
Twiga is well managed. 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 Spaniard Alfonso Velez. He has been running cement companies in Africa with Heidelberg group since 2013, initially in Benin.
I’ve met with Alfonso twice in the past 18 months. He comes across as a no-nonsense, highly effective manager who really knows his stuff. And that has partly been borne out in Twiga’s good financial performance in the two most recent years.
Twiga says business is currently tracking well. The company recently conducted some maintenance capital expenditure to replace a key part in one of their kilns. There are plans for about US$15 million of capital expenditure in 2020 – most of it for growth.
That puts the likely growth trajectory for Twiga in the 7% range 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.)
Twiga has indicated its dividend policy will remain unchanged. Company policy is to reward 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 Stiegler’s Gorge Dam over the Rufiji River is one such project that 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 cannot afford it. The government is borrowing billions of dollars to pay for it. But Tanzania is not over-reliant on any single source of debt finance. In Kenya and in Zambia by contrast, the governments borrowed heavily from China.
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 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 Magufuli’s policies.
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.
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 is going to need a lot of cement to build it. That is good for Twiga, even if it is not all going to be Twiga cement.
That said, conservationists and environmentalists are up in arms about Stiegler’s Gorge. This is because it is in Selous Game Reserve, a UNESCO World Heritage site. But the game reserve is huge — larger than Switzerland. And the Dam will affect only one small part of it.
Right now too many Tanzanians 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. And without adequate electricity infrastructure, no country can develop.
Twiga has been the best performing stock on the Dar es Salaam Stock Exchange in the time I have owned it, with a total return of 83.6% including dividends, since the beginning of 2018.
But the shares are still anything but expensive, in my view.
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 is 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 are looking at a 13.8% yield. And Tanzania only levies a modest 10% dividend withholding tax on foreign investors, and just 5% on locals.
For more on Twiga, and similar investment opportunities around Africa, be sure to stop by my website Global Value Hunter.
Tim Staermose is Founder at Global Value Hunter.
