Lafarge’s valuation trimmed on likely slowing demand

Lafarge’s valuation trimmed on likely slowing demand
Published: 01 July 2008

Aseambankers Equity Research has adjusted its price target for Lafarge Malayan Cement Bhd given a cloudy outlook on demand despite higher selling prices of cement.
 
The target price was revised down to RM4.50 from RM4.80 to reflect the clouded outlook for overall demand amid competitive pricing, it said in a research note yesterday.
 
The new target price pegged Lafarge’s valuation at CY09 price to earnings of 12 times, down from 13 times previously.
 
Aseambankers said it has lowered the valuation as overall demand for cement remained uncertain over the near term given the softening property market and the scaling back of some government infrastructure projects.
 
It noted, however, that selling prices of cement may rise further after having increased more than 15% since the ceiling prices were lifted.
 
The increase in diesel and electricity costs would raise overall costs by 14% in FY08 and 22% in FY09, hence another round of cement price adjustment was imminent, it said.
 
“The quantum is uncertain for now, but we understand that an additional cost of RM11 to RM12 per tonne will be incured from RM5 per tonne in diesel plus RM6 to RM7 per tonne in electricity from the second half of FY08,” it said.
 
Aseambankers estimated that imported cement from Thailand cost RM273/t – RM233 ex-plant plus RM50 or RM60 for delivery, handling and storage.
 
“This would be RM13/t above the current average domestic prices, which is just sufficient for Lafarge to offset the RM11-RM12/t rise in cost from higher diesel and electricity tariff,” it said. The current selling prices of cement are about RM250 to RM260/t before rebates.
 
The research house said while the export market could take up the slack in the domestic demand, profit margins were lower.