Cement Industry - any mispriced stock?

As it is getting harder and harder to find undervalue stock, I am trying to look at “distress” stocks if I could find some good value stock.  I was attracted by the big fall in prices for some cement stocks – Lafarge, Tasek & Hume Industries because the share price has fallen almost 50% from its peak (except for Tasek, which is more than 90% tightly held by institutions and no liquidity at all). I started to do a quick review on the industry leader – Lafarge and the Edge has also published some write up after its Q1 FY 17 results was announced (surprisingly a loss!).

The following appears on The Edge Daily 24 May 17

If you look closer at the article above, you will find the expected PE for FY17, FY18 and FY19 are 83.9, 35.5 and 33.1 respectively.

Let’s look at the past 5 years performance:-

	2012	2013	2014	2015	2016
Revenue (Rm'000)	2,740,062	2,852,400	2,743,090	2,750,820	2,552,205
Net Profit (Rm'000)	349,490	367,118	256,007	252,562	77,729
EPS (sen)	41.1	43.2	30.1	29.7	9.1
Dividend per share (sen)	37.0	41.0	34.0	31.0	5.0
Pay out ratio	90%	95%	113%	104%	55%
Total Dividend paid (Rm'000)	314,387	348,375	288,896	263,405	42,485
Average Dividend Yield %	4.4%	4.2%	3.7%	3.3%	0.6%
Operating Cashflow	455,199	454,127	460,920	383,427	292,289
Capex	(50,092)	(53,650)	(102,775)	(216,728)	(247,691)
Free Cashflow	405,107	400,477	358,145	166,699	44,598
Net cash	352,295	450,362	460,858	29,705	141,282
The below price chart paints a clearer picture of Lafarge’s performance over the last 6 years:-

Frankly, everything looked rosy back in 2013.

1. Revenue and profit were growing and so was dividend in FY13. Reasonable dividend yield at around 4%
2. Free cashflow was strong in 2013 and net cash strengthened further.
3. It was expanding – look at Capex for 2014 – 2016 (total more than Rm500 mil)

So, the question now is – how do they arrive at a target price of Rm5.15 (but another research house is giving Rm3.80, PE  27.5 ) ? wow ..the PE ratios for FY 17 – FY19 are 83.9, 35.5 and 33.1 respectively. Dividend yield expected to be 1.7%. The target price worked out was based on replacement cost, to me, this is only useful if there is potential acquirer into the industry, I do not see how the replacement cost could be used as target price though this is one of the valuation methods. Since there is already over capacity, who will want to enter the industry?

Quick look into Hume Industries and Tasek, I found similar trend in financial performance. Yes, there is mispriced in cements stocks – over priced!!

Having said that, I am keeping an eye on this industry as it is cyclical in nature (similar and closely linked to property & construction), any indication of an upcycle could make it a good investment. The search for undervalue stock continues….