Comparing Lafarge and YTL Cement

Building materials
Maintain neutral: In this report, we make a comparison between the two largest cement players in Malaysia, Lafarge and YTL Cement. Year-to-date (YTD), Lafarge’s share price has outperformed the FBM KLCI, while YTL Cement’s share price has underperformed. Based on our estimate, Lafarge is currently trading at 17.1 times our revised FY11 ending December EPS forecast of 46.4 sen, while YTL Cement is trading at just 11 times our CY11 fully-diluted EPS forecast of 43 sen. We think a six times multiple discount is excessive and we outline two reasons why the discount should narrow over time.

We do not doubt that Lafarge is poised to benefit more than YTL Cement from the anticipated pick-up in domestic cement consumption, given its leadership position in the domestic cement market and strategic location of its plants. But YTL Cement is actually not that far behind Lafarge in terms of domestic market share, or far off  Lafarge in terms of the location of its plants. As such, we see no reason why YTL Cement should trade at such a wide discount to Lafarge.

We have cut Lafarge’s FY10/FY11 earnings forecasts by 5.8% to 16.2% and raised Lafarge’s FY12 earnings forecasts by 5.4% after adjusting for the ratio of domestic versus export sales, domestic net selling price and effective tax rates.

We increase YTL Cement’s FY11/FY13 ending June earnings by 1.9% to 7.4% after adjusting for a higher domestic net selling price. Our FY11/FY13 domestic sales volume growth assumption for YTL Cement remains unchanged at about 1% per year.

The risks include: (i) delays in the roll-out of projects, resulting in lower cement consumption; (ii) steep rise in energy prices; and (iii) potential price war in the industry when new capacity (CIMA expansion and Hume Cement’s new plant in Perak) come onstream near end-2012.

Given investors’ better risk appetite for cement stocks in the near term, we raise our one-year target forward PER for the cement stocks under our coverage from 11 to 14 times to 13 to 16 times. Following the raise in one-year target forward PER, our indicative fair values for the cement stocks are raised by 7.8% to 19.2%. Nevertheless, our recommendations for the respective companies are maintained. Hence, our “neutral” call on the cement sub-sector is maintained as well. — RHB Research Institute, Oct 28