With a significant price decline for the company from a level of KES 221 in May 31st 2013 to a current sub-150 price (May 2015), Bamburi Cement has clearly had a hard run in recent years. Concerns over sluggish sales and earnings growth, along with increasing competition has clearly stirred the concern of investors. On one hand, one could take the view that Bamburi cannot produce sufficient earnings growth to recover. On the other, one could make the argument that the current price drop represents a great opportunity for investors to ‘’buy the dip’’, as it were, and enjoy good returns. In this article, I use the dividend discount model to illustrate a range of dividend and earnings growth, I calculate that Bamburi needs to reach a DPS (Dividend Per Share) and EPS (Earnings Per Share) annual growth rate of at least 8% and 15% respectively to justify getting in at the current price which would be the minimum needed to yield an annual return of 10.68% or greater.
Using the Dividend Discount Model, I use 2%, 4% and 8% growth rates in DPS and 10%, 12.5% and 15% in EPS to illustrate price targets under various scenarios. I also use a 10.68% rate (current 364 Treasury bill rate) to discount future projected earnings and dividends back to the present date.
2% & 10% Scenario
Dividend Per Share Forecast (2015-19)
2015E
2016E
2017E
2018E
2019E
Projected 2% DPS growth
9.74
9.94
10.13
10.34
10.54
10.68% discount rate
8.80
8.11
7.47
6.89
6.35
Earnings Per Share Forecast (2015-10)
2015E
2016E
2017E
2018E
2019E
Projected 10% EPS growth
11.55
12.71
13.98
15.37
16.91
10.68% discount rate
10.44
10.38
10.31
10.24
10.18
Assuming 10% Earnings and 2% Dividend Growth
Current P/E Ratio
15.18
Terminal P/E*Estimated 2019 EPS
154.55
Present Value of Dividends Per Share through to 2019
36.44
Target Price in Year 2019
190.99
Upside from current price of Kshs. 139
37.41%
5-Year Annualised Rate of Return
7.48%
4% & 12.5% Scenario
Dividend Per Share Forecast (2015-19)
2015E
2016E
2017E
2018E
2019E
Projected 4% DPS growth
9.93
10.33
10.74
11.17
11.62
10.68% discount rate
8.97
8.43
7.92
7.44
7.00
Earnings Per Share Forecast (2015-10)
2015E
2016E
2017E
2018E
2019E
Projected 12.5% EPS growth
11.81
13.29
14.95
16.82
18.92
10.68% discount rate
10.67
10.85
11.03
11.21
11.39
Assuming 12.5% Earnings and 4% Dividend Growth
Current P/E Ratio
15.18
Terminal P/E*Estimated 2019 EPS
172.92
Present Value of Dividends Per Share through to 2019
39.77
Target Price in Year 2019
212.69
Upside from current price of Kshs. 139
53.01%
5-Year Annualised Rate of Return
10.60%
8% & 15% Scenario
Dividend Per Share Forecast (2015-19)
2015E
2016E
2017E
2018E
2019E
Projected 8% DPS growth
10.31
11.14
12.03
12.99
14.03
10.68% discount rate
9.64
9.73
9.82
9.91
10.00
Earnings Per Share Forecast (2015-19)
2015E
2016E
2017E
2018E
2019E
Projected 15% EPS growth
12.08
13.89
15.97
18.36
21.12
10.68% discount rate
11.29
12.13
13.04
14.01
15.06
Assuming 15% Earnings and 8% Dividend Growth
Current P/E Ratio
15.18
Terminal P/E*Estimated 2019 EPS
193.03
Present Value of Dividends Per Share through to 2019
44.36
Target Price in Year 2019
237.41
Upside from current price of Kshs. 139
70.80%
5-Year Annualised Rate of Return
14.16%
Price Targets
Growth Rate
Price Target
Upside
Annual Rate of Return
2% &5%
224.53
37.41%
7.48%
4% &12.5%
248.65
53.01%
10.60%
8% &15%
277.11
70.80%
14.16%
From the above, we can see that to obtain a rate of return greater than our discount rate, we would need to achieve a minimum of 4% annual growth in DPS and 12% annual growth in EPS. According to the model, any growth rate below this will not yield a rate of return sufficient to justify buying the stock at the current price. Ultimately, I believe 2015 will be a critical year for Bamburi as far as earnings are concerned – while the stock is ‘’fairly’’ discounted, with a P/E ratio of 15.18X relative to the construction sector of 21.12X, there are many times where a P/E ratio is low simply because no one wants to buy the stock. Unless earnings at Bamburi improve significantly, this could prove to be one of those scenarios.
Conclusion
In conclusion, I believe that the question as to whether Bamburi is undervalued depends on what happens with DPS and EPS growth in 2015. In my opinion, unless Bamburi can show significant improvement, or at least indication that it can realistically hit the above growth targets in the future, then I would not be a Bamburi buyer.
