Lafarge Malayan Cement Bhd (Jan 10, RM6.75)
Maintain add at RM6.90 with target price of RM7.10: For the 9MFY11, domestic demand for cement registered a commendable growth of 10% to 12%. Extrapolated, this surpassed our 2011 full-year demand growth expectation of 5% to 7%. Typically, demand in 4QFY11 is seasonally stronger as stockists stock up ahead of the Chinese New Year. This is supported by healthy construction activities, as we expect the construction sector to post 7% growth in 4QFY11. Assuming a 10% volume growth in 2011, domestic demand could potentially reach 15 million tonnes, surpassing the peak historical level of 14.5 million in 2008. Entering into 2012, we expect a stronger pace of construction growth of 7% from an estimated 5% in 2011 as ongoing projects like the Second Penang Bridge, KLIA 2 and the LRT extension pick up momentum. Despite the anticipated slew of infrastructure projects in the pipeline, we believe there will be sufficient capacity to accommodate the demand growth as we gather that industry utilisation is only at around 70%. As for Lafarge, the proportion of sales between local consumption and exports remains relatively unchanged at 70:30. This suggests that it could easily switch its sales mix if there is a spike in local demand.
Despite the strong volume growth, we gather the domestic effective selling price remains under pressure, as manufacturers continue to offer high rebates in efforts to garner a bigger share of the pie. We gather that the amount of rebates currently being handed out range between RM40 to RM60 per tonne from just RM30 per tonne six months ago. Although the rising amount of rebates is a concern to the industry, as it may be an impetus to a price war, we believe the likelihood of a drastic price war among manufacturers is slim. We expect domestic demand to sustain at the current level, if not stronger, on the back of the slew of construction projects under the Economic Transformation Programme (ETP), while little new production capacity is seen in the near term. After the last hike in gross selling price in May 2011, we do not expect any further hikes as production costs have plateaued over the past nine months. We believe the quantum of rebates is not likely to increase further but will remain at the current level, if it does not not narrow, as demand is anticipated to remain buoyant. Therefore, we make no change to our RM297 per tonne average selling price (ASP) assumption for FY12.
Energy constitutes about 30% of production cost for cement manufacturers. As such, high coal prices will remain a challenge for Lafarge. The cost of coal remains high at around US$120 per tonne. Despite the high cost, Lafarge has consistently managed to maintain its earnings before interest, tax, depreciation and amortisation (Ebitda) margin at above 20% through various initiatives, including improving plant efficiency. We have imputed US$105 (RM330.75) per tonne coal price assumption for FY12.
We make no changes to our earnings forecast. Based on our simulation, every RM5 increase in net selling price will result in an 8% increase in earnings and vice versa. With no huge capital expenditure in the pipeline, we believe Lafarge is on track to maintain its 80% to 90% dividend payout, which at the current price level offers a decent 5.5% yield.
Fundamentally sound, Lafarge is a good proxy to the construction and ETP theme given that it is domestic-driven and less exposed to the external environment. Against this background, we maintain our “add” recommendation on Lafarge and target price of RM7.10, which is based on an unchanged target price-earnings ratio of 14.5 times FY12 earnings per share. The stock is also supported by a generous dividend yield. Risks to our recommendation include: (i) delay in implementation; (ii) higher rebates which will result in lower ASP; and (iii) resurgence of the coal price. — Affin IB Research, Jan 10
This article appeared in The Edge Financial Daily, January 11, 2012.
