Revenue forecasting:
The pearson correlation between the KLSE Construction sector Index (KLSECON), KLSE Industrials Index (KLSEIND) and the LMCE stock index (LMCE PI) is higher than the Coal (Australian Thermal coal) price index and LMCE stock index. Thermal coal is one among the main fuel for the production of cement.
CORREL | KLSECON | KLSEIND | LMCE PI | COAL PI |
KLSECON | 100% | |||
KLSEIND | 77% | 100% | ||
LMCE PI | 84% | 85% | 100% | |
COAL PI | 50% | 76% | 69% | 100% |
Hence, it can be observed that the LMCE sales could trend in tandem with the KLSECON, KLSEIND and less to the coal price. The relatively low correlation with the thermal coal price of the LMCE stock could also mean that LMCE may be able to effectively transfer input costs. The cost of coal accounts to 40% of the production cost.
But, it was also found that, coal price did have an effect on the LMCE stock price, whereas the KLSECON and LMCE trend together, with the help of econometric studies such as Cointegration and Vector error correction model. Hence, LMCE should try and control the input costs such as those arising from thermal coal, electricity, oil price etc. in the coming years to better utilize the opportunities that may arise from the 10th Malaysia Plan.
The construction sector is forecasted to grow at around 6% to 7% between 2011 and 2012. And, at around 5% in 2013. In order to better understand the pattern of KLSECON to LMCE, we will graph the Sales returns’ of LMCE to KLSECON Index’ returns. The graph below shows the trend of the KLSECON and LMCE Sales returns:
The Sales of LMCE also showed a corresponding peak growth to the KLSECON in 2003 and 2006. During the dip in 2006 and 2008, the Sales still showed a positive growth. From 2009, the two indices trended together. Overall, the Sales of LMCE is observed to be correlated to the KLSECON changes. Hence, we will assume that the Sales will grow as per KLSECON forecast for 2011, 2012 and 2013.
We will construct a proforma statement, based on 2010, for the Year-end of 2011, 2012 and 2013 and calculate the EPS, BVPS and SalesPerShare. The positive outlook will use 7% Y-o-Y Sales growth for end of 2011, 8% for 2012 and 6% for 2013. The Sales growth was chosen to be just above the KLSECON forecasted growth figures. The input costs in terms of coal & electricity costs will be assumed to be flat. The expected economic slowdown in 2012 may cause a slip in coal prices as demand may go down, which could help LMCE to attain better sales growth as the domestic construction sector may get a boost from the proposed 10th Malaysia plan.
The negative scenario will assume a growth of 4% in 2011, -1% in 2012 (assuming that the coal prices increase) and -2% in 2013. I was not able to get the market cap growth of the sector which could have helped to put up a better forecast by enabling us to calculate the per % change of LMCE sales to market cap growth of the sector. Sales growth for 2011 has improved to 12% in June 2011 from June 2010 (half year ended) and hence, keeping the forecast at 4% instead of a negative outlook for 2011. Below given is the forecasted ratios:
Positive forecast:
Year | EPS (MYR) | BVPS (MYR) | Sales/Share (MYR) |
2011 @ 7% | 0.37 | 3.89 | 2.93 |
2012 @ 8% | 0.40 | 4.20 | 4.45 |
2013 @ 6% | 0.43 | 4.45 | 3.35 |
Negative forecast:
Year | EPS (MYR) | BVPS (MYR) | Sales/Share (MYR) |
2011 @ 4% | 0.36 | 3.78 | 2.85 |
2012 @ -1% | 0.34 | 3.60 | 2.71 |
2013 @ -2% | 0.34 | 3.56 | 2.68 |
The EPS is forecasted to vary from 0.36 MYR to 0.37 MYR in 2011 from the 2010 EPS of 0.35 MYR. The GICS construction materials (Malaysia) average earnings multiple is 18X. Since, LMCE was able to provide better earnings multiplier compared to the sector average in 2010, a multiple of 19-21-20 could be assumed for 2011, 2012 and 2013 relative to the industry. This would put the forecasted share price at RM 6.87 to RM 7.07 in 2011, RM 7.23 to RM 8.44 in 2012 and RM 6.82 to RM 8.52 in 2013. I was unable to get historical earnings multiple of the sector for a better analysis. The current stock price is RM 6. 87 (as of 15-Nov-2011).
LMCE Stock history:
Forecasted price | 19X | 21X | 20X |
2011 | 2012 | 2013 | |
High | 7.07 | 8.04 | 8.95 |
Low | 6.87 | 6.89 | 7.16 |
