High beta play, with limited downside
Comfortable entry level. Share price fell 3% from its 12-month high in end-Apr ‘10. We have tweaked our 2010 forecasts downward by 3% on lower export contribution. Nevertheless, we remain buyers of Lafarge:
(i) capital management is a recurring theme, with its strong FCF of 67sen/sh over 2010-11 (vs. DPS of 38sen/sh); (ii) 10th Malaysia Plan (10MP) could be an event catalyst for a high beta stock like Lafarge. Reiterate Buy, with an unchanged TP of RM7.40 on 14x 2011 earnings.
1Q10 affected by lower export ASPs. Results are set to be released on 26th May. Earnings should be sequentially weaker due to seasonal factors – slower construction activities during CNY, lumpy maintenance charges. YoY, though sales volume stayed flattish, we expect earnings to be weaker given: (i) heightened discounting activities (rebates have doubled YoY to RM28/mt); (ii) lower export contribution (20% of total production volume) due to lower ASP of USD35-38/mt (-11% YoY) and the stronger Ringgit (+7% YoY). Note that Lafarge is a net loser from a stronger Ringgit as coal import accounts for 60% of export sales receipt.
No coal price fear; ASP now rising. Effective 1st May, cement-makers raised the gross ASP to RM300/mt (+9%), justifiably passing on rising imported coal cost (+23% YTD). Effective ASP (after rebates of RM25/mt) is now around RM275/mt (vs. RM247/mt in 1Q10). While Lafarge’s cheap coal inventory could run out in Jun ‘10, we expect effective ASP to continue rising in 2H10 with government-led construction demand and cancel out cost inflation.
10MP could be an event catalyst. After adjusting for lower export ASP of USD38/mt (-11%), we tweaked our 2010 forecasts downward by 3%. Lafarge is a high beta stock in search of a catalyst. If investors re-rate the construction sector further on higher government spending in the 10MP vs. 9MP, and with the awarding of major infrastructure projects, Lafarge’s share price could outperform traditional construction stocks. The cement sector’s oligopolistic market structure is clearly superior to the competitive construction sector, in our view.
by Maybank IB