Steppe Cement: A Value Trap in Disguise? Evaluating Deteriorating Capital Allocation and ROCE Trends

The cement industry, often seen as a bastion of stable cash flows, has long attracted income-focused investors. Yet, for Steppe Cement (LON:STCM), the picture is far less rosy. A stark decline in return on capital employed (ROCE), stagnant capital deployment, and weak earnings trends raise critical questions about whether the stock is a value trap-a seemingly cheap asset masking fundamental decay.

A Deteriorating ROCE: From Strength to Struggle

Steppe Cement's ROCE has plummeted from 19% five years ago to a mere 4.6% in the trailing twelve months to December 2024, lagging behind the Basic Materials industry average of 6.7%. This collapse reflects a failure to generate returns on invested capital, a red flag for both growth and income investors. While the company's capital employed has remained roughly stable over the same period, the lack of meaningful reinvestment or efficiency gains underscores poor capital allocation discipline.

The erosion of ROCE is compounded by cost pressures. Electricity costs, for instance, surged 42% in 2024 compared to 2023, squeezing margins despite a 28% year-on-year revenue increase in the first nine months of 2025 according to Q3 2025 earnings. Even as sales volumes rose 15.7% to 1.55 million tonnes, net income remained elusive, with the company posting a $0.5 million loss in H1 2025 and an operating profit of just $10,000 for the same period. Currency devaluation further muddies the picture: while Kazakh tenge prices rose 10%, the 13% devaluation against the dollar eroded revenue in USD terms.

Capital Allocation: Shareholder Returns vs. Operational Reality

Steppe Cement has attempted to offset weak operational performance with shareholder-friendly measures. In 2025, the company proposed a capital repayment of 1.5 pence per share, totaling $4.35 million, via a capital reduction-a tax-efficient method to return surplus cash. This approach avoids the logistical and tax complexities of dividends or buybacks, which the board has historically deemed inefficient. While such returns may appeal to income investors, they mask the underlying issue: the company's ability to generate returns from its core operations is deteriorating.

The company's capital deployment strategy also lacks clarity. A multiyear investment in Line 6 aims to boost production capacity to 2.2 million metric tons by 2026, but management has not outlined projected ROCE improvements from this expansion. With clinker production expected to rise by 5% in 2025 and cement output reaching 1.85 million metric tons, the focus appears to be on maintaining market share (14–15% in Kazakhstan) rather than driving profitability. This suggests a defensive strategy, prioritizing volume over margin, which is unlikely to reverse the ROCE decline.

Is Steppe Cement a Value Trap?

A value trap typically lures investors with low valuations but fails to deliver returns due to structural or operational weaknesses. Steppe Cement's market valuation of £40.52 million and enterprise value of £38.71 million may appear attractive, but they obscure the company's weak fundamentals. Free cash flow of £9.61 million and a healthy FCF margin of 14.38% are positives, yet these metrics are insufficient to offset the ROCE shortfall.

For income investors, the 0.16% shareholder yield is negligible, and the reliance on capital repayments rather than dividends introduces uncertainty. Growth investors, meanwhile, face a company that has not meaningfully increased capital employed to drive returns. The Line 6 investment, while ambitious, lacks clear financial upside projections, and the Kazakh tenge's volatility adds currency risk.

Conclusion: A Cautionary Tale

Steppe Cement's story is one of resilience in the face of adversity-rising costs, currency headwinds, and a competitive market. However, the company's deteriorating ROCE, stagnant capital deployment, and reliance on tax-efficient but non-operational shareholder returns paint a troubling picture. While the stock may appear cheap on paper, the underlying business struggles to generate returns that justify its valuation. For both income and growth investors, Steppe Cement risks becoming a textbook value trap, where low prices mask deeper, unresolved challenges.