Lafarge Malayan Cement Bhd (Nov 2, RM6.90)
Maintain buy with revised target price of RM7.60 from RM7.85: As the largest cement producer in the country, Lafarge is undoubtedly a proxy to, and a major beneficiary of, the high-growth construction sector, which should see robust activity once projects under the Economic Transformation Programme (ETP) take off.
In addition, we expect its share price to be supported by its decent net dividend yield of 5%. Maintain “buy” with a marginally lower target price of RM7.60 (RM7.85 previously) on 17 times 2013 price earnings ratio (PER) as we roll forward valuations after trimming earnings forecasts by 11% per year.
Results for 3QFY11 are due to be released in the third week of this month. Earnings are likely to mirror 2QFY11 (net profit: RM77 million) on flattish sales volume, given the Hari Raya Aidilfitri festivities in 3QFY11. Margins are expected to match 2QFY11 as both net average selling prices (ASP) and coal cost were stable.
While electricity tariff was raised by 8% in June this year, the overall impact is minimal as electricity makes up 20% of production cost, hence, we estimate the net impact to be only a 2% increment in its electricity bill. At flattish sequential 3QFY11 net profit, we estimate 9MFY11 net profit to hit RM207 million (-4% year-on-year).
As it stands, coal prices are off about 16% from their high this year. Accounting for 40% of production cost, we estimate that every 1% decline in coal cost contributes to a 0.8% increase in earnings for Lafarge. With the prospect of slower global economic growth into 2012, coal prices could potentially slip further, which in turn would have a positive impact on LMC’s bottom line.
Price competition has picked up of late, and as a result we are imputing a lower market share of 38% (-2 percentage points) for Lafarge. This in turn results in a 4% downward revision of its sales volume.
Overall, however, we expect Lafarge to weather the situation well with its strong cash pile and with an annual free cash flow generation of more than RM400 million (against an annual dividend payout of RM290 million), we expect the company to be able to sustain a dividend per share of 34 sen to 36 sen over the next two years, which translates into prospective net dividend yields of more than 5%. — Maybank IB Research, Nov 2
This article appeared in The Edge Financial Daily, November 3, 2011.
Maintain buy with revised target price of RM7.60 from RM7.85: As the largest cement producer in the country, Lafarge is undoubtedly a proxy to, and a major beneficiary of, the high-growth construction sector, which should see robust activity once projects under the Economic Transformation Programme (ETP) take off.
In addition, we expect its share price to be supported by its decent net dividend yield of 5%. Maintain “buy” with a marginally lower target price of RM7.60 (RM7.85 previously) on 17 times 2013 price earnings ratio (PER) as we roll forward valuations after trimming earnings forecasts by 11% per year.
Results for 3QFY11 are due to be released in the third week of this month. Earnings are likely to mirror 2QFY11 (net profit: RM77 million) on flattish sales volume, given the Hari Raya Aidilfitri festivities in 3QFY11. Margins are expected to match 2QFY11 as both net average selling prices (ASP) and coal cost were stable.
While electricity tariff was raised by 8% in June this year, the overall impact is minimal as electricity makes up 20% of production cost, hence, we estimate the net impact to be only a 2% increment in its electricity bill. At flattish sequential 3QFY11 net profit, we estimate 9MFY11 net profit to hit RM207 million (-4% year-on-year).
As it stands, coal prices are off about 16% from their high this year. Accounting for 40% of production cost, we estimate that every 1% decline in coal cost contributes to a 0.8% increase in earnings for Lafarge. With the prospect of slower global economic growth into 2012, coal prices could potentially slip further, which in turn would have a positive impact on LMC’s bottom line.
Price competition has picked up of late, and as a result we are imputing a lower market share of 38% (-2 percentage points) for Lafarge. This in turn results in a 4% downward revision of its sales volume.
Overall, however, we expect Lafarge to weather the situation well with its strong cash pile and with an annual free cash flow generation of more than RM400 million (against an annual dividend payout of RM290 million), we expect the company to be able to sustain a dividend per share of 34 sen to 36 sen over the next two years, which translates into prospective net dividend yields of more than 5%. — Maybank IB Research, Nov 2
This article appeared in The Edge Financial Daily, November 3, 2011.
