Our and the market’s expectations of Lafarge’s FY12 net profit of RM349m were spot-on. Although the heavy rainfall in the past months dented demand and sales, the company’s bottomline improved, thanks to higher cement prices and lower tax. Nonetheless, we suspect that the additional supply from a new player may limit the price rise in the short term. That said, in raising our coal price assumption, our FY13/14 projections are cut by 14.3%/8.7% respectively. Hence our FV is now RM9.44 despite a higher target 20x PE vs 19x. Downgrade to NEUTRAL on the stock’s limited upside potential.
Within expectations. Lafarge posted a net profit of RM349m in FY12, representing 97.6%/99.2% of our/consensus estimate respectivelys. The 9% q-o-q improvement in its bottomline can be attributed to higher cement prices, coupled with a 2.9% q-o-q reduction in the effective tax rate. The board has declared a fourth interim dividend of 13 sen, bringing the company’s FY12 cumulative dividend to 37 sen a share, 3 sen higher than our estimates.
Poor weather conditions? The heavy rainfall in 4QFY12 may have disrupted construction activities and dampened cement demand, resulting in Lafarge’s turnover dropping by a marginal 2.6% q-o-q. The Malaysian Meteorological Department confirmed that rainfall distribution was generally above average in most of Peninsular Malaysia during the quarter, especially in December. Petaling Jaya and Subang also experienced record monthly rainfall from Nov to Dec 2012. This dampened cement demand, considering that both areas are important catchment areas for infrastructure and property development.
Cement price ambition. While the results were generally in line, our follow-up calls to hardware traders and contractors affirmed that cement prices were generally steady in 2012. Last July, Lafarge announced price hikes for its cement, raising the price of a 50kg bag from RM16.75 to RM17.75 while the bulk cement price was raised by RM20 to RM340 a tonne. However, we gather from our sources that cement companies offered bigger rebates, especially to big clients, as the entry of Hume Cement in Oct 2012 intensified competition, particularly in the central region. We expect competition from the new player to ease post-General Election as construction activities gain momentum and drive up demand for cement.
KEY HIGHLIGHTS
Fine-tuning assumptions. In conjunction with the streamlining of OSK’s team coverage, this analyst took a relook at Lafarge’s financial model. In the meantime, we hold on to our view that the cement price hike, which was supposed to take effect from Aug 2012, may only translate into a mild increase of RM5 per tonne in FY13 to RM295. However, we raise FY14 assumption by RM10 to RM305 a tonne. We suspect the intensifying competition from the new kid on the block, Hume Cement – representing an additional 9% of clinker capacity in Peninsular Malaysia – is likely to cap the price hike, at least until the conclusion of the upcoming General Election. After that, construction projects may gain momentum and drive the demand for and use of cement, as well as progressively absorb any additional supply by the new player from 2HFY13 onwards. We also lift our coal price assumption to USD100/USD110 a tonne for FY13/FY14 to match our in-house commodity price assumptions (refer to Figure 1).
Earnings revisions. Lafarge only exports its excess tonnage to keep its plant at optimum utilisation as well as lower its average overhead cost. As such, it is the least sensitive to changes in export prices but very sensitive to any movements in the domestic selling price. This aside, energy is the single largest cost element that may swing its profitability – every 1% hike in the coal price/electricity tariff may trim its profit by -0.9%/-0.8% (refer Figure 2). As we are keeping to our conservative assumption of the cement price but with higher coal costs, our revision results in earnings cuts of 14.3%/8.7% for FY13/FY14. Given that the group is in a net cash position and has limited capex requirement in the foreseeable future, we do see some room for capital management, although the quantum may not be significant. Meanwhile, we have assumed a payout ratio of 90%, translating to an attractive dividend yield of 14.3%/8.7% for FY13/FY14.
VALUATION AND RECOMMENDATION
The reason for a rich valuation. A quick comparison of valuations of cement companies within the fast-developing South East Asia (SEA) region found Lafarge a bit rich, especially given that the group’s current share price implies a higher PE than the regional average despite having an ROE that is approximately half of most of its regional peers in Indonesia and Thailand. However, the group is more generous in terms of dividend payouts compared to its regional peers and its prospective yield also appears to be slightly ahead of its local rival Tasek Corporation (Tasek). However, we note that Tasek is sitting on a relatively larger cash pile which gives it better prospects if it wants to introduce any capital management exercise. In terms of a book-based valuation, Lafarge appears to be cheap compared to its regional peers but is at a premium to Tasek. All said, Lafarge is the country’s leading cement manufacturer.
Downgrade to NEUTRAL. We reckon Lafarge remains the best proxy to growing construction and property development in Peninsular Malaysia given that it is the largest cement producer in Malaysia and the only liquid cement stock on Bursa Malaysia, following the recent privatisation of YTL Cement. Accounting for the scarcity premium, we apply a new 20x FY13 EPS valuation to Lafarge, which is at a premium to its regional peers’ FY13 PE of 18.5x (refer Figure 3), deriving a new fair value of RM9.44. Given that the current share price implies a limited upside potential to our new fair value, coupled with uncertain competition from the new player, we downgrade our recommend to NEUTRAL. We advise investors to accumulate only when the visibility of the supply-demand dynamic for the local cement industry improves, or when it is trading at a lower price.
Downgrade to NEUTRAL. We reckon Lafarge remains the best proxy to growing construction and property development in Peninsular Malaysia given that it is the largest cement producer in Malaysia and the only liquid cement stock on Bursa Malaysia, following the recent privatisation of YTL Cement. Accounting for the scarcity premium, we apply a new 20x FY13 EPS valuation to Lafarge, which is at a premium to its regional peers’ FY13 PE of 18.5x (refer Figure 3), deriving a new fair value of RM9.44. Given that the current share price implies a limited upside potential to our new fair value, coupled with uncertain competition from the new player, we downgrade our recommend to NEUTRAL. We advise investors to accumulate only when the visibility of the supply-demand dynamic for the local cement industry improves, or when it is trading at a lower price.
Source: OSK
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