Lafarge Malayan Cement - A bigger and better 2010

2Q09 results: Nothing spectacular. 2Q09 results should improve yoy as weaker demand in 1H09 (vs 1H08) is more than offset by better domestic average selling prices (ASPs). However, the results could ease qoq as export income may have weakened (as noted in the 1Q09 results disclosure) and 1Q09’s demand contraction of 8% should spill over into 2Q09.

Resurgence in demand for 2010. The recent pick-up in new property launches and project implementation in the construction sector, aided by the new administration’s drive to expedite mega projects, are expected to boost domestic cement demand from as early as 4Q09. Although we still expect 2009 demand to contract 6% due to 1H09’s drastic 8% contraction, we are increasingly optimistic on 2010 prospects. We understand that a tender has been called for cement supply to the 2nd Penang Bridge which is expected to consume about 200,000 tonnes of cement. We expect more of such tenders in 2010 as the government has to spend the remaining RM80b out of the RM230b allocation under the 9MP by next year. In addition, there is still RM23.8b of additional development expenditure from the two stimulus packages announced in Nov 08 and Mar 09 respectively. As such, we are raising our domestic demand growth assumption to 5% (previously 1%).


EBITDA margin sustainable at 20%. Lafarge was unable to fully benefit from the reversal of coal prices from US$195/tonne to US$ 64/tonne in 1H09, as it had locked in US$8m worth of coal supplies (as disclosed in 1Q09 results). However, going into 3Q09, the higher-cost raw material inventories would have been depleted, which should translate into cost savings and better margins in 2H09. Coal prices are currently about US$73/tonne, up 21% from 1Q09’s low.

We raise our 2010 and 2011 EPS forecasts by 7% to 44.9sen and 47.6sen respectively after raising our domestic assumption growth from 1% to 5%.

Our fair price assumes a target 8.5x EV/EBITDA (historical average) vs Lafarge’s historical low of 6x, in line with valuations during the construction upcycle (refer to chart overleaf). Potentially, the upside could temporarily surpass valuations based on historical trends. We see trading opportunities for the stock, should its share price decline to RM5.80 based on target 7.8x EV/EBITDA using the 5-year historical average.