Lafarge Malayan Cement Bhd
(Dec 22, RM7.70)
Upgrade to BUY at RM7.68 with revised target price of RM8.50 (from RM7.90):
LMC’s share price has outperformed its cement and steel peers by 3% and 11% year-to-date (YTD) respectively and the stock now trades at 15.4 times 2012 earnings, which we expect to be a peak demand year for cement in view of major infrastructure projects in Greater KL starting in 2011.
On that scenario, 15.4 times 2012 valuation is not too demanding. Also, LMC’s share price upside will be supported by:
(i) scarcity of fundamentally-sound building material stocks in Bursa; and
(ii) LMC being a big-cap with above-peer trading liquidity.
The next largest listed cement player, YTL Cement, is 0.34 times in market cap size, and 0.1 times in trading liquidity.
We upgrade LMC to a “buy” with a 17 times 2012 price-earnings ratio target price of RM8.50 (+8%) after rolling over to 2012 valuation. The new 17 times PER is at one standard deviation above mean.
Domestic cement demand plateaued in 2010 but should see growth of 6% per annum in 2011/12, driven by the commencement of big-scale construction works in 2011, KLIA 2, LRT Package A, Greater KL MRT-Blue Line and government land developments at Sungai Buloh and KL International Financial District.
We expect cement demand in 2012 to surpass the Ninth Malaysia Plan peak in 2008 and come close to the industry’s historical peak in 1997.
At a sustainable 40% market share, we project LMC’s production to grow 5% to 8% per annum.
The coal price (+30% YTD), in line with other commodities, is on an upward trend.
Separately, the long overdue electricity tariff hike could also be implemented next year. Under a rising demand environment, we believe higher costs can be justifiably passed on, avoiding margin erosion for all cement players.
For our 2011/12 forecast period, we have incorporated higher coal prices (+8-33%) and electricity tariff (+5%), coupled with higher net selling prices (+2-5%). Fuel and electricity comprise 50% of LMC’s production cost.
We have lowered our 2011 EPS by 9% due to a higher effective tax rate assumption of 24% (15% previously) as LMC has exhausted its reinvestment allowance in 2010, earlier than expected.
Coming from a low 2010 base (affected by plant performance), we expect LMC to register a strong 17.5% two-year net profit compound average growth rate (CAGR) into 2012 driven by 10% revenue CAGR and earnings before interest, tax, depreciation and amortisation margin improvement by two percentage points over two years. — Maybank IB Research, Dec 22
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