Ciments Français: reducing estimates and price target

Ciments Français: reducing estimates and price target
Published: 01 August 2011

Jefferies International Limited (JIL) are lowering its price target from €73 to €72 and its EBITDA estimates for both 2011 and 2012 by 7%, mainly due to its more cautious assumptions for Egypt (31% 2010 EBITDA) where cement prices declined by 8% in the first six months of 2011 as capacity in the country was increased by almost 20%. Balancing the shorter-term concerns on Egypt with the longer-term potential, JIL is retaining a “Hold” rating on the shares.

Significance of weakness in Egypt.

Ciments Français announced its 2Q11 results on Friday afternoon (29 July). They were weaker than JIL expected with a recurring EBITDA of €240m, €30m lower than JIL forecast. The shortfall relative to JIL’s forecasts was concentrated in Egypt. It accounted for 63% of the reduction in the company’s 2Q11 recurring EBITDA and 84% of the decline in 1H11.

For this year, JIL is lowering its recurring EBITDA estimates by 7% from €809m to €752m and while for next year the indicator is expected to fall from €856m to €790m. JIL’s mid-cycle estimate declines by 4% from €909m to €871m. These reductions are mainly due to our more cautious forecasts for Ciments Français’ Egyptian business, where cement prices fell by 8% between 1 January and 30 June 2011. The revised forecast equates to an 2H11 EBITDA of €365.1m, €21.3m lower than in 1H11. This is below the company’s guidance inline with 1H11, although it cautions about the uncertainties in Egypt.

JIL’s 2011 EPS estimate, which is boosted by the 1Q11 substantial disposal gain in Turkey, declines from €8.31 to €7.86, and declines from €5.30 to €4.85 if the disposal gain is excluded. JIL’s 2012 EPS estimate declines from €5.94 to €5.49.

Together with its 2Q results, Ciments Français also announced a surprise €1.5 per share interim advance dividend payable on 17 August. JIL continues to expect it to pay €3 per share in total for 2011.

Our 12-month price target (€72) is based on JIl’s estimate of Ciments Français mid-cycle EBITDA of €871m multiplied by its estimate of its future long-term EV/EBITDA ratio of 5.0. This is 0.5 below the average level over the last 16 years, as the latter was boosted by higher multiples in recent years when profitability has been depressed. The main risk to JIL’s estimates and rating would be if cement prices were weaker than JIL has assumed and if trading is worse than JIL expect in Ciments Français’ major markets (France, Egypt, and the US).