Company Name: LAFARGE MALAYAN CEMENT BHD
Research House: CIMB
Lafarge Malayan Cement Bhd
(Aug 26, RM7.09)
Maintain underperform at RM6.95 with revised target price of RM5.90 (from RM6): Lafarge's 2Q2010 results were largely in line with expectations. Annualised 1H net profit made up 71% of our full-year forecast and 62% of consensus. We expect 2H to be stronger as there should be an uptick in cement demand and 2H is usually a stronger period for Lafarge than 1H. The second interim dividend per share (DPS) of eight sen was also largely in line with expectations, taking year-to-date DPS to 16 sen (1H2009: 15 sen). Although the results are broadly in line, we have made some minor adjustments to our borrowing cost assumptions, resulting in 2% to 5% earnings cuts for FY2010-12. This trims our target price from RM6 to RM5.90 as we continue to use a blend of 15 times PER and 1.1 P/BV. While we acknowledge that stronger demand could come through in 2H, we continue to rate Lafarge an 'underperform' as we see limited short-term catalysts for the stock given the subdued demand and competitive pricing in the cement industry. For a play on pump-priming, we prefer direct exposure to the contractors.
Demand for cement remained soft in 2Q, leading to relatively flat 1H2010 domestic cement demand. Clinker utilisation rates were still running at about 85% to 90% as output from the spare capacity could be exported at lower prices. However, the 4% weakening of the US dollar during the quarter dragged down export earnings which account for about 30% of sales. Nevertheless, a 10% increase in domestic prices on May 1 allowed the company to pass on rising costs and report higher earnings before interest, tax, depreciation and amortisation (Ebitda) margins of 21.9% in 2Q2010 (1Q2010:17.7%). This helped push its bottom line growth to 57% quarter-on-quarter.
Domestic cement demand remains muted at the beginning of 3Q. However, Lafarge remains optimistic that demand will continue to improve in 2H2010 given the implementation of ongoing and new infrastructure projects. The company still expects growth in cement demand this year, albeit less than 5%. We are cautious about this as we expect demand to stay soft in 2H given the absence of major construction projects. The lull could also create price competition, which could pose a threat to cement players' market share and earnings.
Although Lafarge's results were largely in line with our expectations, we may have underestimated our borrowing cost assumptions. We have, therefore, made some minor adjustments to our assumptions and now project average interest costs of 4.8% (2.4% previously), leading to FY2010-12 earnings cuts of 2%-5%. ' CIMB Research, Aug 26
This article appeared in The Edge Financial Daily, August 27 2010.