Stock Name: LMCEMNT
Company Name: LAFARGE MALAYAN CEMENT BHD
Lafarge Malayan Cement Bhd
(June 27, RM7.37)
Maintain fully valued at RM7.58 with revised target price of RM6.50 (from RM6): LMC's operating costs will continue to rise with persistent high coal prices (2011/12F: US$113 [RM344.65] to US$117 per tonne), utility rate hikes (+8%), rising raw material costs (+10%), and higher transport costs (+5%). But the impact should be mitigated by: (i) average selling price (ASP) hikes (strong pricing power due to oligopoly market); and (ii) stronger demand growth (2011/12F: 6% to 7% against 2010: flat) with increased construction activity (low-cost carrier terminal, second Penang Bridge, double tracking railway, LRT extension, MRT) and property starts (robust 2010 sales).
Rebates have surpassed RM40 per tonne against 2010's RM25 to RM30 per tonne, despite improving demand (1Q11: +6% year-on-year). Competition could worsen with: (i) enforcement of Competition Act 2010 from Jan 1, 2012, which bans cartels (LMC can leverage on parent's experience overseas); and (ii) new supply post-2013, that is 1.5 million tonnes each by Hong Leong Industries (acquired Hume Cement Sdn Bhd), Cement Industries of Malaysia Bhd, and possibly YTL Cement Bhd (LMC is unlikely to expand given its 30% spare capacity that is currently exported).
We slash FY11/12F earnings by 13% to 17% after factoring in: (i) higher rebates (2011/12F: RM30 to 40 per tonne); and (ii) tax rate (25% against 15% previously) with the exhaustion of LMC's reinvestment allowance (given minimal capital expenditure). Amid a changing sector landscape and higher demand from Economic Transformation Programme spending, LMC's historical trading band no longer applies. We now value LMC at 15 times FY12 price-earnings ratio, a 10% discount to the construction sector average of 17 times, to derive a RM6.50 target price (from RM6). Although valuation exceeds replacement cost (US$212 against US$155 per tonne), LMC's share price should be partly supported by 4.3% dividend yield (against FBM KLCI average of 3.2%). ' HwangDBS Vickers Research, June 27
This article appeared in The Edge Financial Daily, June 28, 2011.
Company Name: LAFARGE MALAYAN CEMENT BHD
| Research House: HWANGDBS | Price Call: SELL | Target Price: 6.50 |
Lafarge Malayan Cement Bhd
(June 27, RM7.37)
Maintain fully valued at RM7.58 with revised target price of RM6.50 (from RM6): LMC's operating costs will continue to rise with persistent high coal prices (2011/12F: US$113 [RM344.65] to US$117 per tonne), utility rate hikes (+8%), rising raw material costs (+10%), and higher transport costs (+5%). But the impact should be mitigated by: (i) average selling price (ASP) hikes (strong pricing power due to oligopoly market); and (ii) stronger demand growth (2011/12F: 6% to 7% against 2010: flat) with increased construction activity (low-cost carrier terminal, second Penang Bridge, double tracking railway, LRT extension, MRT) and property starts (robust 2010 sales).
Rebates have surpassed RM40 per tonne against 2010's RM25 to RM30 per tonne, despite improving demand (1Q11: +6% year-on-year). Competition could worsen with: (i) enforcement of Competition Act 2010 from Jan 1, 2012, which bans cartels (LMC can leverage on parent's experience overseas); and (ii) new supply post-2013, that is 1.5 million tonnes each by Hong Leong Industries (acquired Hume Cement Sdn Bhd), Cement Industries of Malaysia Bhd, and possibly YTL Cement Bhd (LMC is unlikely to expand given its 30% spare capacity that is currently exported).
We slash FY11/12F earnings by 13% to 17% after factoring in: (i) higher rebates (2011/12F: RM30 to 40 per tonne); and (ii) tax rate (25% against 15% previously) with the exhaustion of LMC's reinvestment allowance (given minimal capital expenditure). Amid a changing sector landscape and higher demand from Economic Transformation Programme spending, LMC's historical trading band no longer applies. We now value LMC at 15 times FY12 price-earnings ratio, a 10% discount to the construction sector average of 17 times, to derive a RM6.50 target price (from RM6). Although valuation exceeds replacement cost (US$212 against US$155 per tonne), LMC's share price should be partly supported by 4.3% dividend yield (against FBM KLCI average of 3.2%). ' HwangDBS Vickers Research, June 27
This article appeared in The Edge Financial Daily, June 28, 2011.
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