Share analysis: Lafarge Republic – Building materials

THE COMPANY: Lafarge Republic, Inc (LRI), formerly known as Republic Cement Corporation, was incorporated in 1966 and presently engages in the manufacturing, development and sale of cement, marble and other kinds and classes of building materials for industrial or commercial purposes. LRI is a member of the larger Lafarge Group, a global leader in building materials headquartered in France. The group operates in 64 countries, generating $21.5bn in sales in 2012. Lafarge has four cement manufacturing plants in the Philippines, located in Bulacan, Batangas and Rizal.

LRI's subsidiaries include Fortune Cement Corporation, Lafarge Iligan, Lafarge Mindanao, FR Cement Corporation and Lloyds Richfield Industrial Corporation. LRI manufactures mainly Portland, Pozzolan and Type IP cements. Cement is sold in 40-kg bags or in bulk, loaded in bulk carriers at 800 and 1000 kg-equivalent bags per load. Of the total revenues of LRI, cement accounts for approximately 96%, with aggregates at 4%.

There have been talks of a global merger between Holcim and Lafarge to create the world’s largest cement maker, with both companies to consider whether further divestments would be necessary in areas where there are overlaps or to satisfy regulatory requirements. As part of the completion of the global merger, Holcim Philippines is proposing to acquire three companies under LRI that are engaged in cement-making and related businesses, as well as a port terminal facility in Manila’s Harbour Centre, in line with the global merger of their parent companies.

PERFORMANCE: Net sales were up 4.68% in first-half 2014, mainly due to higher sales volume and higher average selling prices. However, the cost of goods sold and operating expenses grew at a faster rate of 5.78% and 7.17%, respectively. This resulted in a 9% decline in net income to P2.15bn ($48.4m). LRI’s outlook remains bullish given the expansion of its plant capacity and the surge in construction activities in the country.

GROWTH DRIVERS: In 2013 gross value added of the construction industry amounted to P377.74bn ($8.5bn), up 11.13% y-o-y. This double-digit growth was driven by the upsurge in both public and private spending, with the former responsible for large-scale infrastructure projects and the latter more concentrated on the housing, office and retail segments.

Construction activities in the country are expected to remain strong going forward, supported by a favourable macroeconomic picture. The Philippine Constructors Association predicted the industry would grow by around 25%, from P300bn-310bn ($6. 75bn-6.98bn) in 2013 to P380bn ($8.55bn) in 2014.

The private sector will continue to account for a large portion of growth, while construction activities will be driven by infrastructure and construction spending, PPP projects and real estate development. The real estate industry will be fuelled by growing remittances from overseas Filipino workers (OFW), as well as growth in the business process outsourcing industry, which boosts demand for housing, office and retail spaces.

LOOKING AHEAD: To address cement demand growth from massive infrastructure spending plans by both the government and the private sector, LRI is investing in a new grinding mill in its Norzagaray plant to boost production capacity. The new mill will have an 850, 000-tonne-per-annum capacity and is slated to start operations by the second quarter of 2015. The Teresa plant in Rizal is also getting a new mill, with a target commissioning date of January 2015. It will also add 850,000 tonnes of capacity. Thanks to the two mills, LRI’s production capacity will expand by 22% to 9.4m tonnes by mid-2015, up from the current 7.7m tonnes.

Political issues are the primary concern for LRI, as they have the potential to affect the timely rollout of projects. Concerns over asset price bubbles in the real estate sector are also at the forefront. Lastly, a sudden reversal or slow do wn in global economic growth could greatly impact the inflow of OFW remittances and the number of firms coming into the country to outsource some of their business functions – both of which could negatively affect demand for housing and office space.