Following the recent strength (+26% in the last month) in share prices across the European building materials’ sector, JP Morgan remain slightly cautious stepping into the 3Q11E reporting season. The house expect a moderation in demand growth for most companies on the back of slowing growth in Europe. However, continued growth in emerging markets is expected to support the sector’s performance during the quarter, albeit at compressed margins as pricing still has not caught up with increased costs.
Following a reduction in JP Morgan estimates on the back of weaker demand from Europe in 2012E earlier this month, it expect trends in 3Q developed markets to moderate after the robust growth in the first half. The US could see a marginally better performance due to resilience in economic datapoints during the quarter. Saint-Gobain, CRH and Heidelberg are expected to benefit from these trends.
Improvements in emerging market volumes, particularly Eastern Europe and Latin America are expected to continue. YoY demand growth in India could potentially moderate in the quarter due to monsoons. These emerging market trends should be positive for Heidelberg, Lafarge and, to a lesser extent, Holcim, JP Morgan notes.
Despite fuel costs flattening out in the quarter, it expect heavy-side margins to remain compressed on a YoY basis, with price increases not yet compensating for higher costs. Margins are unlikely to see considerable expansion before 1Q/2Q 2012E.
Saint-Gobain remains JP Morgan’s top-pick for the sector and it reiterates its Overweight ratings on Heidelberg and Holcim. It remains Neutral on CRH, Lafarge and Buzzi. Italcementi is the only Underweight rated stock under coverage due to its substantial exposure to the very difficult Italian and Egyptian markets.