BDT 490.00
Lafarge Surma Cement Ltd Price-Volume Graph
700
450,000
Volume
Price
400,000
600
350,000
500
300,000
400
250,000
Financial Revenue NPAT
EPS
Year (Dec) BDT' mn BDT' mn BDT' mn
2006
153
(580) (9.99)
2007
2,400
(1,096) (18.88)
2008E
6,383
770 13.26
2009E
9,534
1,586 27.32
2010E
10,804
2,024 34.85
a
Lafarge Surma Cement Limited’s (LSC) integrated cement manufacturing
plant has an annual capacity of 1.5 million tonnes of grey cement and
1.15 million tonnes of clinker. The Company extracts and processes the
basic raw materials like limestone & shale from its own quarry in Meghalaya,
India. A 17km cross-border conveyor belt links the quarry with the cement
plant for transportation of raw materials. A separate 30 MW gas engine
power generation plant has been setup to supply uninterrupted power to
the cement plant. The company is now operating at full capacity after a
court injunction in India resulted in a temporary halt to the production of
clinker in 2007. Legal proceedings are however ongoing over a dispute
over quarrying on forest land.
a
The annual per capita consumption of cement in Bangladesh is around
55.75 kg, with an installed capacity of 15 million tonnes per year and a
cement demand of 8 million tonnes per year. Local producers account for
as much as 60% of current cement production in the country while foreign
manufacturers account for 40% of market share. Consumption of cement
in Bangladesh is expected to increase further in the coming years following
a newly elected government that is likely to oversee a roll out of government
infrastructure projects along with an upturn in private sector led construction
activity. We expect a volume growth rate of around 8% per year for the
sector over the next few years
a
The company benefits from higher gross margins on account of having its
own supply source for clinker and is presently operating at full capacity.
The company’s sales revenue is expected to rise during 2008-2010 at a
CAGR of 30.1% with total grey cement sales volume growth at a CAGR
of 30.25% and surplus clinker sales volume growth at a CAGR of 19.52%
in the same period. EBITDA margins are expected to be maintained at
41.18% to 37.79%. for the years 2008 and 2009 respectively.
a
Expected earnings growth of 170% and 106% for the year 2008 and
2009 correspond to a P/E 36.95x and 17.94x for 2008E and 2009E.
respectively.
150,000
100,000
100
50,000
-
01-Jan-06
28-Feb-06
27-Apr-06
25-Jun-06
20-Aug-06
16-Oct-06
19-Dec-06
18-Feb-07
12-Apr-07
11-Jun-07
01-Aug-07
25-Sep-07
22-Nov-07
22-Jan-08
13-Mar-08
08-May-08
02-Jul-08
25-Aug-08
22-Oct-08
21-Dec-08
LAFARGE SURMA CEMENT BD (LAFSURCEML)
58.07
Ordinary Shares (mn)
15.40%
Free Float
639.00 / 419.75
12 mth High/Low (BDT)
28,454
Market Capitalization(BDT mn)
58,640
Average Daily Volume (Shares)
Price Performance
1 mth
6 mth
12 mth
DSI
13.19%
-10.77%
-8.94%
LAFSURCEML
11.40%
-1.91%
6.71%
Farzana Hoque
farzana@lbsbd.com
LankaBangla Securities Ltd
DSE Annex building (1st Floor)
9/E, Motijheel C/A, Dhaka-1000
Bangladesh.
880 29561868, 880 27174256
880 27174315, 880 29570496
Fax: 880 29555384
Email: lbsldhk@accesstel.net
Tel:
John Keells Stock Brokers (Pvt) Ltd
Company No. PV 89
130, Glennie Street, Col. 2 Sri Lanka.
Tel:
Fax:
941 244 6694/5,
941 234 2066/7,
941 2342 068
Email: jkstock@keells.com
February 2009
6.60
8.74
7.04
5.04
3.70
Lafarge Surma Cement (LSC), incorporated in January 2003 is the first
multinational cement manufacturer in the country with a fully integrated
cement plant set up at a cost of US$ 225mn at Sunamgong in the North
East of the country. The company is promoted by Lafarge of France and
Cementos Molins the concrete & construction aggregates manufacturer in
Spain. The company commenced commercial production in October of
2006 and has a 10% market share of the domestic cement market excluding
its supply of clinker to other local manufacturers.
200
0
P/BV
a
200,000
300
EPS EV/Sales
EV /
Growth
(x)
EBITDA (x)
(49.03) -43%
248.95
(1977.7)
(25.95) 89%
15.60
200.2
36.95
170%
5.54
13.5
17.94
106%
3.58
9.5
14.06
28%
3.05
8.1
P/E(x)
An LBSL / JKSB Research Publication
LAFARGE SURMA CEMENT LTD
Page 1 of 5
Bangladesh Equities
PROFILE
a
Lafarge Surma Cement Limited (LSC) is the first multinational cement
manufacturer in the country with a fully integrated cement plant where
cement and the basic raw material clinker are manufactured in the same
facilities at Chhatak, Sunamganj in the North East of Bangladesh. Major
shareholders of the company include Lafarge of France and Spanish
cement producer Cementos Molins. Lafarge Group with years of
experience in the production of construction materials is one of the leading
cement producers worldwide while Cementos Molins is renowned in
concrete, aggregates, mortar and pre-cast product production in Spain.
a
Lafarge Surma Cement Limited (LSC) is the only integrated clinker and
cement producer in Bangladesh incorporated in January 2003 as a public
limited company in Bangladesh, starting its commercial operations in 2006.
Its only cement brand “Supercrete” currently holds a market share of
10%.
a
The annual per capita consumption of cement in Bangladesh is around
55.75 kg, which ranks as one of the lowest in the world with its neighbor
India having a per capital cement consumption estimated at 150 kg. The
dominant type of cement used in the country is Ordinary Portland Cement
(OPC), with a 95% to 5% mix of clinker and gypsum. Clinker, is primarily
imported from countries like India, Thailand, Malaysia, Philippines, Indonesia
and China and is therefore susceptible to fluctuating global raw material
costs. The country lacks cement plants that are integrated with clinker
production and as a result is forced to import clinker for its entire cement
production. Lafarge Cement is currently the only integrated cement producer
in Bangladesh with a clinker production capacity of 1.15mn MT that is
sourced via a cross border conveyer belt originating from the Indian State
Meghalaya.
a
The country has an installed capacity of 15 million tonnes per year and a
cement demand of 8 million tonnes per year, with a wide gap in capacity
and demand fueling severe competition in the market. This has resulted in
an increase in consolidation in the sector among local producers. Local
producers account for as much as 60% of current cement production in
the country while foreign manufacturers like Lafarge, HCBL, Cemex and
Holcim accounting for 40% of the market.
a
Among the local manufacturers Shah Cement, Fresh Crown, Seven Circle,
Royal and Aramit are the main players, many of whom lost market share
initially but subsequently enhanced their supply chain management and
their marketing and distribution capability in order to remain competitive.
Shah Cement was the market leader in 2007 with a market share of 22%
a
A slowdown in the local construction sector seen over the last year as a
result of political uncertainty, the recent anti-corruption drives as well as a
downturn in large government infrastructure projects has led to widening
of the installed capacity to demand gap. Consumption of cement in
Bangladesh has however seen an increase in the last quarter and is expected
to increase further in coming years following a newly elected government
that is likely to oversee a roll out of government infrastructure projects
along with an upturn in private sector lead construction activity. We expect
a volume growth rate of around 8% per year for the sector over the next
few years.
Page 2 of 5
CEMENT INDUSTRY IN BANGLADESH
PLANT AND PRODUCTION
a
Lafarge Surma Cement Limiteds’ (LSC) integrated cement manufacturing
plant of US$ 255m has an annual installed capacity of 1.5 million tones
of Grey cement and 1.15 million tones of clinker at Chhatak under the
Sunamganj district. The Company extracts and processes the basic raw
materials like limestone & shale from its own quarry in Meghalaya. A
17km cross-border conveyor belt links the quarry with the cement plant
for transportation of raw materials. A separate 30 MW gas engine power
generation plant has been setup to supply uninterrupted power to the plant.
a
The Lafarge Surma Cement Limited (LSC) project encompasses quarrying,
crushing and marketing activities through its subsidiaries, Lum Mawshun
Minerals Private Limited (LMMPL) in Meghalaya and Lafarge Umiam
Mining Private Limited (LUMPL) in Bangladesh with a 74% and 100%
ownership by LSC respectively.
a
The Company started its production from October 2006 but failed to
operate at full capacity in 2007 due to disruptions in the supply of limestone.
Lafarge Umiam Mining Private Limited (LUMPL), a subsidiary of LSC
owning the quarry was charged of environmental degradation as the sites
of the quarries were allegedly on forestland and not wasteland as claimed.
This resulted in a disruption of mining activities following a court directive
in India. During this period, the company continued its Grey cement
production in a limited scale importing its requirement of clinker. However,
in September 2007, the closure order was lifted temporarily by the court
and the company started to produce cement from its own clinker since
December 2007. Production now continues unhindered although the legal
dispute is still ongoing. The company may end up having to pay
compensation as settlement of the issue.
a
Currently, the Company has an annual installed capacity 1.5 million tones
of grey cement and 1.15 million tones of clinker but it could utilize only
22% and 23% of its capacity of grey cement and clinker production in
2007, but is expected to have increased its capacity utilization to 55% in
grey cement production and 70% in clinker production in 2008. With
consumption of cement expected to increase in the coming years for large
infrastructure development plans by the newly elected government, in
addition to fresh private sector lead projects we expect the company to
utilize 100% capacity of clinker production and between 90%-100%
capacity in grey cement production in the coming years being the main
contributor to a sharp rise in expected earnings in 2009. The company has
not disclosed any plans to enhance capacity in the short to medium term.
While the necessity for capacity expansion is on the cards in 2010 we have
not factored any enhancement in capacity in our forecasts.
a
Lafarge Cement has the distinct advantage of being the only integrated
cement manufacturer in the country with competitors forced to import its
raw materials for production thus contributing to wider gross margins.
a
Lafarge Surma Cement Limited (LSC) produces its own clinker for its
cement production with the surplus clinker being sold to local cement
manufacturers in the country. Import dependency of major cement
manufacturers in Bangladesh for the supply of clinker is not only expensive
due to high freight cost, duties, handling/re-handling charges but sourcing
a consistent quality and uninterrupted supply of clinker is also a challenge.
The control over costs, quality and uninterrupted supply of clinker ensures
Page 3 of 5
COST STRUCTURE
a competitive advantage over other local and multi-national cement
manufacturers in the country. The company benefits from superior
advantages over its cost of clinker which is significantly lower than other
local manufacturers.
a
The gross margin for the year 2007 does not represent a true reflection of
its profitability as the company produced a limited scale of grey cement by
importing clinker from the international market due to the interruption in
supply of limestone from India as a result of litigation against the company.
With business operations expected to stabilize fully in the current and
subsequent years, the company is expected to retain healthy gross margins
a
Gross margins for 2008 are expected to amount to 39% declining to 37%
in 2009 as a result of a reduction in clinker and gery cement prices in line
with a decline in market prices. The decline in imported clinker prices
have forced a reduction in prices of clinker sold by La Frage Surma
Cement Ltd thus reducing margins. Margins would further moderate as a
result of an expected reduction in retail grey cement prices in line with a
reduction in prices witnessed in the market that has resulted from delcien
in raw material costs for the industry.
FINANCIAL PERFORMANCE
a
The Company’s sales revenue includes sales revenue from grey cement
and the sale of surplus clinker to local cement manufacturers. The sales
revenue is expected to rise during 2008-2010 at a CAGR of 30.1% with
total grey cement sales volume growth at a CAGR of 30.25% and surplus
clinker sales volume growth at a CAGR of 19.52% in the same period. An
increasing trend in capacity utilization with a stable cost structure is expected
to result in earnings growth of 106% and 28% for years 2009 and 2010.
a
EBITDA of BDT 3.06bn for the year 2009 is an expected increase of
37% over 2008, with EBITDA margins declining from 41.18% to 37.79%.
ROE is expected at 20.54% and 38.25% for the years 2008 and 2009
respectively. The company has an accumulated loss of BDT 2.71bn in
2007 and is expected to be reversed to a surplus by 2009.
VALUATIONS
Full capacity utilization is expected to result in a stable growth in earnings
over the next few years also enhanced by a decline in finance expense.
Healthy earnings in 2008 and a 106% earnings growth expected in 2009
correspond to a P/E of 36.95x and 17.94x respectively at a market price
of BDT 490/-.
Income Statement
For the year ended 31st December
2006
BDT 'mn
2007
BDT 'mn
2008E
BDT 'mn
2009E
BDT 'mn
2010E
BDT 'mn
Revenue
Cost of Sales
Gross Profit
153
111
42
2,400
2,372
28
6,383
3,880
2,503
9,534
5,999
3,535
10,804
6,756
4,048
General and administrative expenses
Selling and distribution expenses
Operating (Loss)/Profit
(164)
(35)
(158)
(264)
(109)
(344)
(303)
(125)
2,074
(349)
(125)
3,062
(401)
(125)
3,522
Exchange gain/(loss) in foreign currency translation
Finance Expenses
Other (expense)/Income
Contribution to WPPF
Net Profit/(Loss) before tax
Income tax income / (expense)
Net Profit/(Loss) after tax
(363)
(165)
1
(685)
105
(580)
110
(1,138)
(5)
(1,378)
281
(1,096)
(50)
(917)
8
(53)
1,062
(292)
770
(4)
(773)
12
(108)
2,188
(602)
1,586
(5)
(625)
37
(138)
2,791
(768)
2,024
Page 4 of 5
a
2006
BDT 'mn
2007
BDT 'mn
2008E
BDT 'mn
2009E
BDT 'mn
2010E
BDT 'mn
15,224
172
106
15,502
15,494
178
394
16,066
15,090
178
394
15,662
14,708
178
394
15,280
14,345
178
394
14,916
Total Assets
990
74
669
18
1,751
17,253
851
56
728
30
1,665
17,730
764
448
511
218
1,940
17,602
650
284
763
385
2,082
17,361
600
519
702
618
2,439
17,356
Share Capital
Foreign currency translation
Accumulated loss
Shareholders' Equity
5,807
113
(1,612)
4,308
5,807
155
(2,708)
3,254
5,807
170
(1,938)
4,039
5,807
187
(352)
5,643
5,807
206
1,672
7,685
8,292
8,292
8,113
8,113
5,724
5,724
4,530
4,530
3,056
3,056
595
318
2,348
1,392
4,653
12,945
17,253
340
415
4,720
888
6,364
14,476
17,730
957
766
4,920
1,194
7,838
13,562
17,602
1,430
1,144
3,420
1,194
7,189
11,719
17,362
972
648
3,520
1,474
6,615
9,671
17,356
Current Assets
Inventories
Trade Receivables
Advances,deposits and prepayments
Cash and cash equivalents
Non-Current Liabilities
Long-term debt
Current Liabilities
Trade payables
Other payables
Bank overdrafts
Current portion of long term debt
Total Liabilities
Total Equity and Liabilities
Cash Fow Statement
As at 31st December
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Acquisition of property,plant and equipement
Intangible assets
Cash Flows from Financing Activities
Long term debt
Short term debt
Dividend Paid
Share capital & deposits for shares
Net Increase/(Decrease) in cash & cash equivalents
Cash & Cash Equivalents at Beginning of the Year
Cash & Cash Equivalents at End of the Year
2006
BDT 'mn
2007
BDT 'mn
2008E
BDT 'mn
2009E
BDT 'mn
2010E
BDT 'mn
(946)
(1,199)
2,203
3,012
1,487
(2,258)
(11)
(2,269)
(605)
(25)
(630)
(150)
(150)
(160)
(160)
(170)
(170)
268
1,882
2,150
(574)
2,415
1,840
(2,075)
210
(1,865)
(1,194)
(1,490)
(2,684)
(1,194)
110
(1,084)
(1,065)
1,082
17
12
17
29
188
29
217
167
217
384
233
384
617
This document is published by LankaBangla Securities Ltd and John Keells Stock Brokers (Pvt) Ltd for the exclusive use of their clients. All information has been compiled
from available documentation and LBSL's and JKSB’s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this
document, neither LBSL or JKSB nor its employees can accept responsibility for any decisions made by investors based on information herein.
Page 5 of 5
Balance Sheet
As at 31st December
Assets
Non-Current Assets
Property, plant and equipment
Intangible assets
Deffered income tax assets