Holcim in focus at JP Morgan

Holcim in focus at JP Morgan
Published: 31 January 2006

JP Morgan is increasing its DCF-based 18 month price target for Holcim from SF94 to SF106 per share. As its revised price target is 12 per cent above the current share price, the analysts are retaining an Overweight rating on the shares.

“There are two main reason for the upgrade to our price target. The first is technical. In our DCF we had been assuming that for every SF1m of additional sales Holcim needed to invest SF1.7m.  However, this resulted in fixed assets increasing as a percentage of sales by too much in our view. In our increased price target we are assuming that the investment required is SF1.5m – notes JP Morgan.

“The second factor is yesterday’s announcement of the acquisition of a controlling shareholding in Gujarat Ambuja in India. Although the price paid initially looks high, we estimate that Holcim will now have around 24 per cent of the fast growing Indian cement market. It and Grasim, its major
competitor will together supply almost half of demand in India.

“The Indian cement market is larger than the US market and is growing by 8-9 per cent a year. Cement consumption per capita in India is around 125Mt, only one fifth of the level in China. Incorporating the acquisition of the controlling shareholding in Gujarat Ambuja into our Holcim estimates increases our 2006 EPS estimate by almost four per cent from SF8.08 to SF8.40.

“Controlling shareholding acquired in Gujarat Ambuja. Yesterday Holcim announced that it was acquiring a 14.8 per cent shareholding in Gujarat Ambuja for $477m. It acquired this shareholding from the controlling families and therefore paid them a control premium. Holcim will be able to appoint the majority of the board of directors. It  also announced that it was making an offer for up to a further 20 per cent, at a maximum cost of $560m.

In JP Morgans revised estimates and valuation of Holcim it assumed that it acquires this additional 20%. Assuming that the remaining 65.2% can be valued on the same basis as is being offered for the additional 20 per cent, and taking into account Gujarat’s $75m of net debt, Holcim is paying an EV of $2938m.
This equates to 15.5 times Gujarat’s 2005 calendar year EBITDA of $190m, and to  US$210 for each of its 14Mt of cement capacity and US$267 for each tonne of clinker capacity. This appears expensive when compared with the US$99 per tonne of cement capacity it paid in January 2005 for its controlling shareholding in Associated Cement – says JP Morgan.

“Total price paid for Indian purchases equates to 9 times 2006E EBITDA, or US$130 per tonne of capacity. Holcim estimates that if it combines the purchase cost of its shareholdings in Gujarat Ambuja, Associated Cement and the smaller Ambuja Cement Eastern, which was also acquired in January 2005, the total purchase cost equates to 9 times its estimate of the combined 2006E EBITDA and 8 times Holcim’s estimate of their 2007E EBITDA. Similarly its estimates that the combined purchase price equates to US$130 per tonne of planned capacity at the end of 2006 and US$115 per tonne on the end 2007
capacity.

“Gujarat Ambuja is planning to increase its capacity from 34.5Mt at the end of 2005, to 37.6Mt at the end of 2006 and then to 39.5Mt at the end of 2007. We expect further capacity expansions at all three Indian companies to supply the expected 8-9% per annum growth in demand, further reducing the EV per tonne purchase cost. We estimate that new capacity can be constructed in India for $80-90 per tonne” reports JP Morgan.