Sustained demand for cement


By Affin Research

Target price: RM8.50

Reduced (maintained)

WHILST the average selling price for Ordinary Portland Cement was under pressure in the first half of 2013 (1H13), falling below the 1H12 average price level (due to Hume’s entry in the fourth quarter in 2012 (4Q12)), we gather that ASP has shown signs of stability.

This has been anticipated as we expect the demand level for cement will continue to hold up well into the medium to long-term, supported by the various on-going and planned infrastructure projects.

In our earnings model, we have factored in an average selling price of RM307 per tonne in 2013, a RM4 per tonne increase from FY12’s ASP.

To ensure that the company is able to ride on the buoyant domestic demand as well as retain its market position, Lafarge Malaysia Bhd (LMB) is embarking on a capacity expansion programme. Management guided that they would add grinding capacity at its Rawang and Guning Kanthan plants.

The proposed capacity expansion will increase LMB’s cement capacity by 1.2 million tonne per annum, from its existing installed cement capacity of about 13 million tonne per annum.

The capital expenditure (capex) required for the expansion has not been finalised.

As such, we have yet to make any changes to our capex assumption of RM55mil for financial years (FY) 2013 to 2015, which merely takes into consideration the working capital.

We are not concerned on funding as LMB has minimal borrowings and is currently in a net cash position.

Construction is expected to start by the 4Q13 and the new capacity is expected to come on stream by 1H15.

Once the new capacity comes on stream, LMB will release its Langkawi plant’s capacity to further tap into the export markets – Sri Lanka, Indonesia and Bangladesh amongst others.

Currently, LMB exports an average of 30% of its production volume.

Although margin is more attractive in the domestic market, LMB will continue to sustain its export market to maintain its existing regional relationship and distribution network, in the longer term.

One of the concerns, in our opinion, is the rising cost of fuel as well as the potential hike in electricity tariff going forward.

The total cost of energy (apart from coal) accounts for about 20% of LMB ‘s total cost of production.

Given the current pressure on ASP, we think it is not easy for LMB to fully pass through the higher cost of fuel to customers.

However, the impact will be negated by lower cost of coal. Year to date (YTD), the average cost of coal has fallen by 13% year-on-year (yoy) to US$86 (RM281) per tonne compared to the same period last year.

Our current assumption for coal is US$90 (RM294) per tonne in FY13 and FY14.

At current price level, LMB is trading at 20x calendar year 2013 (CY14) price earnings ratio (PER), which is above its three-year average PER of 18x.

We believe the strong fundamentals are well reflected in its share price. We make no changes to our earnings forecast as well as our target price of RM8.50, which is based on 18x CY14 PER.

Backed by an annual free cash flow of around RM500mil, we believe that LMB is able to maintain a high payout ratio of 80% to 90%, despite the planned expansion exercise.

Our 38 sen dividend forecast for FY13 (80% payout ratio) offers a decent yield of 4%. In 1H13. LMB has already proposed a total interim dividend per share (DPS) of 16 sen.

Astro Malaysia Holdings Bhd

By Maybank IB Research

Target price: RM3.53

Buy (unchanged)

ASTRO Malaysia Holdings Bhd (Astro)’s second quarter of financial year 2014 (2QFY14) net profit (NP) was within expectations but earnings before interest, tax, depreciation and amortisation (Ebitda) was above expectations due to fewer-than-expected B.yond set-top boxes (STBs) swapped out.

We raise our FY114F (forecast) NP forecast by 8% but trim FY15F by 5% as we now assume that the remaining B.yond STBs will be swapped out by mid-FY15 rather than by end FY14. We continue to like Astro for its stable business model and steady Ebitda growth. 2QFY14 NP of RM98.9mil (+5% year-on-year (YoY), -13% quarter-on-quarter (QoQ)) brought the first half of financial year 2014 (1HFY14) NP to RM213mil (-2% YoY), 49% of our full-year estimate.

1HFY14 revenue of RM2.3bil was also in line at 47% of our FY14 estimate.

That said, 1HFY14 Ebitda of RM785.5mil was slightly above our expectation at 51% of our full year estimate, as Astro swapped out 441,000 B.yond STBs in 1HFY14, 67% of our expectation of 665,000.

This resulted in lower installation costs at the Ebitda level.

Higher depreciation and interest costs in 1HFY1/14, however, brought CP to be in line. 2QFY14 DPS of two sen brought 1HFY14 DPS to four sen, 98% DPR vs our expectation of only 75%.

Second quarter Ebitda rose 13% YoY due to higher take-up of high average revenue per user (ARPU) products – high definition (HD) (+40% YoY) and SuperPack (+82% YoY), but NP was up just 5% YoY due to higher depreciation.

Second quarter Ebitda expanded 6% due to higher take-up of high ARPU products – HD (+9% QoQ) and SuperPack (+5% QoQ), but NP fell 13% QoQ due to higher finance costs. Negatively, 2QFY14 Pay-TV net additions fell 26% YoY to 43,000 as household debt curbs crimped budgets.

For 1HFY14, Pay-TV net additions were 83,000 (-16% YoY).

Astro still expects to add more Pay-TV subscribers in FY1/14 (FY1/13: 209,000).

We maintain our Pay-TV net additions assumption of 225,000 for FY14 but revise our assumptions for B.yond STB swap-outs.

We now assume that Astro will swap out the remaining 877,000 B.yond STBs by mid-FY15 rather than by end-FY14.

We also expect depreciation and finance costs to normalise as the year progresses. Consequently, our FY14 NP estimate is raised by 8% but FY15 estimate trimmed by 5%. Rolling forward our discounted cash flow (DCF) valuation to end-FY15, our target price is marginally lifted to RM3.53.

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