Alert on H1 2013 – Target price lowered on Holcim following persistent political tensions

We lower our target price on Holcim Liban (HL) to USD 14.62 from USD 15.10 previously. Holcim shares are yielding a very attractive 5%-7% in dividends but the political unrest sweeping the Arab World accompanied by Lebanon’s intensified security incidents continue to act as an obstacle against the desired performance, leading us to issue a HOLD recommendation.

Revenues at Holcim Liban registered a 1.1% y-o-y drop during the first half of 2013 to reach USD 88.8 million, led by a 1.7% decline in sales volume to 1.04 million tons. Production costs rose to 73.3% of sales from 72.8% a year earlier, dragging down HL’s gross profit by 2.7% to USD 23.7 million. Earnings followed suit, declining by 10.4% to USD 8.1 million, further distressed by higher finance costs and extraordinary expenses. Hence, the company’s net margin tightened to 9.2% as opposed to 10.1% in H1 2012. However, we expect an improvement to this margin in the future as the Waste Heat Recovery power generation began in May 2013 and is estimated to reduce production costs by around $2 million per year. We estimate 2013 earnings to be around 2012 level at USD 17.8 million, growing at a CAGR of 26.6% in the coming three years on improved efficiency.

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