Addressing the key market debates
We address investors' key concerns on LafargeHolcim, which continue to be emerging market performance, integration challenges and high multiples. We believe these concerns are overdone and the stock remains our top pick. OW.
In this report we try to address 3 key investor concerns on the shares and explain why we believe that at this stage the negative impact is overdone, which is why LafargeHolcim continues to be our preferred pick in the sector.
We also update our forecasts slightly to reflect lower demand growth in 2016 and cut our price target to €73 as a result.
Concern #1: the 65% attributable EBITDA exposure LHN has in
emerging markets (EM). We believe earnings have already troughed in
2015. Since 2012 the significant capacity accretion seen in EM regions globally
has been hitting the price-cost balance materially and, while demand growth is
still below long-term averages, limited new capacity to be added until 2018
should reverse the balance and allow for margin expansion starting in 2016.
Thus, based on a recovery in supply / demand balance, we believe earnings in
EM regions will not be as negative as the shares seem to be pricing in today.
Concern #2: Current valuation multiples are high. While we agree 2016e
comps look rich, they diminish rapidly as cost cutting delivers and debt
reduces fast, so by 2017 our estimated EV/EBITDA is already at 8x vs. historical
averages of ~8.3x. Regarding P/E, if we eliminate the SFr550mn new
depreciation charge on the purchase price allocation impact, the 2016e P/E
would be 14.4, below the historical average of 16.5x.
Concern #3: Integration challenges. While we agree that integration could
face challenges, we believe a large amount of the announced cost cutting
should be delivered. We estimate c.45% of the cement capacity installed is in
markets where both were operating before. In these, savings in headquarters,
central systems and transportation should be delivered easily and fast. Overall,
we estimate 69% of the total cost savings target will be delivered but believe
none is reflected in the current share price.
Where could we be wrong? We believe the main risk to our view at this
stage is a material additional fall in cement demand in EM vs. the modest
improvement we assume in 2016, with India, Mexico, Egypt and Africa regions
the key countries for delivery at this stage.