Lafarge was satisfied with its FY12 net profit of RM349m, incurred from higher sales volumes, better local sales and lower maintenance costs. Its management expects various construction projects under the ETP and 10MP, plus on-going property developments, to keep cement demand on an uptrend while it gradually absorbs the additional capacity of new players. It will focus on product differentiation to retain its competitive edge and margin, which justifies our conservative price escalation assumption. That said, we keep our NEUTRAL call and FV at RM9.44 as our valuation parameter at 20x FY13 EPS is a premium to its regional peers’ 18.5x.
A commendable year. We attended Lafarge’s analyst briefing yesterday. Mr. Bradley Mulroney, its President & CEO, was pleased with its commendable financial performance, whilst its plants managed to record zero fatalities in FY12. He stressed that the group will continue to focus on fulfilling customers’ requirements and “reduce layers” in order to improve the flow of information to senior management, which can then react quickly and accurately to market changes. ED & CFO Mr. Chen Theng Aik attributed the 7% improvement in FY12’s revenue to a slight increase in sales volume and a better local vs export ratio, which thereby bumped up its selling price thus, its margin. Together with reduce downtime and lower maintenance costs, its net profit rose by 9.8% to RM349m.
Steady demand in 2013? Mr. Mulroney expects domestic demand for cement in 2013 to be driven by construction projects launched under the Economic Transformation Programme (ETP) and 10th Malaysia Plan (10MP) as well as on-going property developments. He confirmed that the domestic cement market’s volatility in 4Q12, as customers reacted to a new kid on the block, Hume Cement in October. Our suspicion that Lafarge offered better rebates after it raised its list price, especially to big clients, is likely to be true. That said, Mr. Mulroney thinks it is too early to confirm if market has since stabilize moving into 1Q13, but expects the constant growth in local cement usage may help to gradually absorb any additional capacity. Its management estimates local cement usage may have increased by 4%, and the use of its ready mix plus other concrete products grown by 5% last year.
A commendable year. We attended Lafarge’s analyst briefing yesterday. Mr. Bradley Mulroney, its President & CEO, was pleased with its commendable financial performance, whilst its plants managed to record zero fatalities in FY12. He stressed that the group will continue to focus on fulfilling customers’ requirements and “reduce layers” in order to improve the flow of information to senior management, which can then react quickly and accurately to market changes. ED & CFO Mr. Chen Theng Aik attributed the 7% improvement in FY12’s revenue to a slight increase in sales volume and a better local vs export ratio, which thereby bumped up its selling price thus, its margin. Together with reduce downtime and lower maintenance costs, its net profit rose by 9.8% to RM349m.
Steady demand in 2013? Mr. Mulroney expects domestic demand for cement in 2013 to be driven by construction projects launched under the Economic Transformation Programme (ETP) and 10th Malaysia Plan (10MP) as well as on-going property developments. He confirmed that the domestic cement market’s volatility in 4Q12, as customers reacted to a new kid on the block, Hume Cement in October. Our suspicion that Lafarge offered better rebates after it raised its list price, especially to big clients, is likely to be true. That said, Mr. Mulroney thinks it is too early to confirm if market has since stabilize moving into 1Q13, but expects the constant growth in local cement usage may help to gradually absorb any additional capacity. Its management estimates local cement usage may have increased by 4%, and the use of its ready mix plus other concrete products grown by 5% last year.
KEY HIGHLIGHTS
Product differentiation is vital. Undeniably, Lafarge’s world-class R&D facilities and technical support provides the ideal platform to deliver sustainable solutions in its cement and concrete products. Mr. Mulroney said the company will launch two more products this year, after the successful introduction of the Agilia and Hydromedia cements. With its edge in niche products, Lafarge secured exclusive concrete and cement supply agreements for the new low-cost carrier terminal (KLIA2). However, its contract with Malaysia Airports Authority will end as the new airport is scheduled to be ready for commissioning in June. He was, however, confident in securing new exclusive supply agreements - we suspect Lafarge is now targeting niche cement products supply for the tunneling portion of the MRT project. It also secured similar supply arrangements with Tanjung Bin and Janamanjung for their respective power plant expansions. Product differentiation not only enables Lafarge to gain an edge over its peers; those products also command higher selling prices. Staying focused on product differentiation would boost Lafarge’s profit margin, as the company is very sensitive to movements in the domestic selling price - every 1% increase translates to a 4.4% enhancement in net profit.
OSK’s assumption is reasonable. 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 our assumptions for FY1 by RM10 per tonne, pushing the price up to RM305 a tonne. We continue to think the intensifying competition from a 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 (in line with Lafarge management view) by the new player from 2HFY13 onwards. Management guided that its key material costs such as limestone royalties and gypsum have escalated over the years and its rates have risen faster than the reported CPI in the country. That said, we are factoring those factors in, for a higher coal price assumption of USD100/USD110 a tonne for FY13/FY14 (refer to Figure 1).
Maintain NEUTRAL. We reckon the company’s valuation is a bit rich compared to its fast-developing South East Asia (SEA) region rivals. However, Lafarge remains the best proxy to growing construction and property development in Peninsular Malaysia, as it is the largest cement producer in Malaysia and the only liquid cement stock on Bursa Malaysia following the recent privatisation of YTL Cement. Furthermore, 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). Accounting for the scarcity premium, we apply a 20x FY13 EPS valuation to the stock, which is at a premium to its regional peers’ FY13 PE of 18.5x, and derive its FV at RM9.44. Given that its current share price implies a limited potential of an upside to our new FV, coupled with uncertain competition from the new player, we are keeping to our NEUTRAL recommendation. 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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