May 12, 2010

LMCEMNT - 10MP likely catalyst for Lafarge

Stock Name: LMCEMNT
Company Name: LAFARGE MALAYAN CEMENT BHD
Research House: MAYBANK

Lafarge Malayan Cement Bhd
(May 11, RM6.53)
Maintain buy at RM6.68 with target price of RM7.40
: Lafarge's share price fell 3% from its 12-month high in end-April. We have tweaked our 2010 forecasts downward by 3% on lower export contribution. Nevertheless, we remain buyers of Lafarge due to: (i) capital management being a recurring theme, with its strong free cash flow of 67 sen per share over 2010-11 (versus dividend per share of 38 sen per share); (ii) 10th Malaysia Plan (10MP) could be an event catalyst for a high beta stock like Lafarge.

Reiterate buy, with an unchanged target price of RM7.40 on 14 times 2011 earnings.

Lafarge's 1Q10 was affected by lower export average selling prices (ASPs). Results are set to be released on May 26. Earnings should be sequentially weaker due to seasonal factors - slower construction activities during Chinese New Year, lumpy maintenance charges. Year-on-year (y-o-y), though sales volume stayed flattish, we expect earnings to be weaker given: (i) heightened discounting activities (rebates have doubled y-o-y to RM28/mt); (ii) lower export contribution (20% of total production volume) due to lower ASP of US$35-38/tonne (-11% y-o-y) and the stronger ringgit (+7% y-o-y). Note that Lafarge is a net loser from a stronger ringgit as coal import accounts for 60% of export sales receipt.

Effective May 1, cement makers raised the gross ASP to RM300/tonne (+9%), justifiably passing on rising imported coal cost (+23% year to date).

Effective ASP (after rebates of RM25/tonne) is now around RM275/tonne (versus RM247 in 1Q10). While Lafarge's cheap coal inventory could run out in June 2010, we expect effective ASP to continue rising in 2H10 with government-led construction demand and cancel out cost inflation.

After adjusting for lower export ASP of US$38/tonne (-11%), we tweaked our 2010 forecasts downward by 3%. Lafarge is a high beta stock in search of a catalyst. If investors re-rate the construction sector further on higher government spending in the 10MP versus 9MP, and with the awarding of major infrastructure projects, Lafarge's share price could outperform traditional construction stocks. The cement sector's oligopolistic market structure is clearly superior to the competitive construction sector, in our view. - Maybank IB, May 11
This article appeared in The Edge Financial Daily, May 12, 2010.

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