Lafarge Malayan Cement (LMC) 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 Kuala Lumpur (KL) starting in 2011. Nonetheless, 2012 could mark the start of sustained demand for cement driven by the LRT, MRT, and government land development projects, according to analysts at Maybank IB Research.
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. Therefore Maybank have upgraded LMC to a “buy” with a 17 times 2012 price-earnings ratio target price of RM8.50 (+8%) after rolling over to 2012 valuation.
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. Maybank 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.