Steppe Cement $STCM – Kazakh Cement Company

I put a position on in this a couple of weeks ago @33p, its risen strongly since but is still a buy at 40p. Its a neat little company which hasn’t been widely covered (as far as I am aware). It has a healthy 6-8% yield. Pretty much all earnings are paid as a dividend. Its trading just above book value. My current position is a 3.5% portfolio weight, which feels a touch light. I am still adjusting to growth in the size of my portfolio and don’t want to be too heavy in illiquid stock, I may well add in time as this plays out.

The company is basically a cement plant just outside Nur-sultan (the capital). It’s incorporated in Malaysia as the guy who is the major shareholder (Wan Hamzah) is Malaysian, he also built the operation. He is currently 69 so its not impossible he could sell out, he has bought a few shares recently and holds 30.8% but isn’t compelled to make an offer under the UK takeover code – in Malaysia he needs to get to 33%.

One of the things I like about this company is it doesn’t seem to me that they have much desire to expand by takeovers / heavy investment. They just seem want to be a well-run cement company. I am fine with this – I keep seeing companies risking / losing money chasing growth. Generally, I tend to favour companies doing one thing well – better to be a shareholder in an acquired company than an acquisitive one (generally)… I tend to think aqcuisitions can favour management over shareholders as they get bigger company, more perks / salary etc… This is particularly true in natural resources. I seldom encounter (say) management of cheap gold miners with a 20 year life who say, we will mine this out, run it effectively and efficiently then go on to the next project. Instead they use the first mine to buy another/ or to explore, which may, or may not, work. All at the expense of the long suffering shareholder…..

This is based in Kazakhstan – its actually a quite well performing economy solid 4% growth (pre-covid). Debt / GDP c 19%. There is a bit of risk of governmental instability with a handover of power following protests. It actually seems, from what I read to be quite well run, as these sorts of places go, of course its corrupt and there is a ruling oligarchy but the score is improving and mid-table. Then again, renaming the capital after the departing leader is never a positive… It’s one step down from naming a day of the week or month after him…

To me, the growth opportunity is if natural resources go on a run – as I think they will due to historic under investment and development of the ‘green economy’ coupled with covid recovery spending and inflationary money printing – (give it time to circulate through the economy then get to metal prices). If they do then Kazakhstan will benefit – being a big exporter – not only will they build more, residential and commercial using lots of concrete but also things like mine development will use lots of concrete. Potential risk is the dependence of Kazakh economy on oil and gas. Details on exports are here.

There are quite a few refugees not too far away following the Azerbaijan / Armenia war. This may push up demand in the area, though its hard to say if Kazakhstan prices will be affected.

Part of the annual report which stood out was here (p9)

“From a balance sheet standpoint, the investment made in the new line and some major renovation and various improvements is reflected in a very conservative way in our books: Foreign exchange losses and a heavy accumulated depreciation point to a net asset value which hides the real economic life of the equipment. With proper maintenance and professional operational processes, the Company is in fact operating a 1.9 million tons capacity cement factory in perfect condition and at the most recent level of technology. Any new entrant would need to invest between USD 200 and 250 million to set up an equivalent facility. This is to compare with the carrying value of property, plant and equipment in our books which stands at USD 55.8 million. The net equity of the company is USD 62.9 million (USD 61.0 million in December 2018). As an ongoing concern, a meaningful economic value would be closer to USD250-300 million.”

This implies opportunity for revenue growth (if demand is there) from as they only produced 1.7m tonnes in 2019, to say nothing for the value in an asset trading below replacement cost – to get us there implies a rough doubling of the share price.

Putting it another way the free cash flow is 7-9p per share vs a share price of 40p. Very, very cheap.

Its not as if you are suffering in quality terms either, again from the annual report (p9)

We are proud to have nearly completed the full reimbursement of our long-term debt. The new dry process lines, and other ancillary machinery and equipment, paid up in USD at the time, are now fully owned by our shareholders. This gives your company another competitive advantage, more freedom, and a strong balance sheet which will help in any recessionary scenario or tougher competitive environment : factoring the cost of servicing debt in the production cost, we do have the lowest cash cost in the industry. It also gives the company a preferred status with banks to meet the seasonal working capital requirements with short term credit.

They also have the advantage that they are near the capital – which has grown from 800k people in 2016 to 1.1m in 2020. This gives a cost advantage due to less spent on shipping.

The 6-8% yield should be put in context with yields on govt bonds of 9%. Though don’t forget that the free cash flow here could allow for 20% dividend payments (8-9 p per share) without increasing debt. I am not sure if the straight line depreciation of machinery over 14 years equal’s the operational life of these assets – meaning renewal capex is due in a while, or if it’s just an accounting decision. I have seen other cement operations with 10-20 year depreciations also. I tend to believe that the actual life will be higher though capex will increase in later years – lowering the amount that could be paid out on a sustainable basis. Much of the plant is reasonably new having had a lot of capex c2005-8.

The big risk here is a fall in cement/ commodity prices. Always a small risk of corruption / asset seizure in these sorts of countries.

In terms of price targets I would hope this could get to about 60-80p in a year or two, depending on how natural resources / covid / interest rates go.

As ever, comments appreciated.

Next share I intend to look at is AAZ – Anglo Asian Mining. Following the Azerbaijan / Armenia war they have been given some of their mines back, substantially increasing potential production – but it hasn’t yet been reflected in their share price. I’ve already bought in (though showing a small loss atm).


15 thoughts on “Steppe Cement $STCM – Kazakh Cement Company”

  1. Hi, thanks for the write-up! Really interesting!

    Seems cheap at $42 per ton of cement.

    Any chance you have and could share an excel/file with multi-year financials?


  2. “Depreciation of property, plant and equipment decreased slightly from USD 7.1 million in 2018 to
    USD 6.9 million in 2019.”
    200-250/20 yrs usage = 10-12.5 million USD.

    ROE on replacement value is very low –> this is never worth that much, speculation on price spike could work though.

  3. The Spectator website has an article from the 13th February ‘Is Kazakhstan capable of transitioning to Democracy’ by a Francis Pike that should be of interest to anyone invested in Steppe or other companies based in Kazakhstan

  4. my only concern is that they are now at 90% production capacity and there is not much room for revenues boost. Am i right or?

    1. Not if prices rise. Cement works take a long time to build and it can’t be shipped too far economically. Not sure on how easy / hard it would be to boost capacity.

  5. Really nice write-up. Also noteworthy that cement prices in Kazakhstan are <$50 per ton, among the lowest in the world. Steppe's competitors are only barely profitable at the current prices, there's very little incentive to add capacity

  6. Global average cement prices are ~$100. If cement prices make it even part of the way there, the impact on FCF will be big given the operating leverage.

    1. Thanks, I think of Cement like most building supplies as a local product as it can’t be shipped all that far. Though there will be some link to global prices and the Kazakh price may rise I dont think it will ever get that high. Results to come soon on this – looking forward to them…

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