Analysts at JP Morgan are retaining an ‘overweight’ rating on Lafarge, with a DCF-based price target of €86, 21% above the current share price. Our valuation assumes a continuation of the current profit improvement programs, which in JPM’s view need to be more aggressive. Amongst the three major global cement companies, Lafarge is the only one not to have increased its 2004 profit forecast in recent months. JPM’s forecasts also assume only a 0.5 percentage point increase this year in the operating margin of Lafarge’s cement division, only half the rate of improvement that it is targeting and less than half the rate of improvement that it expects at Holcim. Therefore in JPM’s view the profit improvement programme in Lafarge’s cement division needs to be more aggressive, particularly the speed at which it is delivered.
At the recent analysts day, Lafarge quantified the potential improvement to margins from two other areas. First, it estimates that a 10 per cent price increase in high-growth countries would boost the cement division’s margins by two percentage points. Prices in these countries, which accounted for 48 per cent of Lafarge’s clinker production in 2003, currently average less than €40 per tonne, less than two-thirds of the group average. However, Lafarge has only limited control on prices, which are mainly driven by market forces. Second, Lafarge is targeting a further one percentage point improvement in margins from better sales and marketing. It plans to identify and target its better customers, ensuring that it maximises pricing. It also plans to introduce new products and brands.
