Cement Industry: Shortage is Key Growth Driver
9, 2007 we forecast a spike in investor interest in cement stocks. We also noted that Iskitimcement and Volskcement securities are considerably undervalued and since the release of our recommendations the market caps of the above concerns have really gained 77% and 49%, respectively.
According to our forecasts, the execution of large-scale state-financed programs to roll out the national infrastructure coupled with an ongoing boom in residential and commercial construction sectors is driving steady demand for construction materials. The proportion of prime costs in the market price of residential and commercial real estate assets still remains modest, which leaves room for an upsurge in construction material prices.
We revised our valuation model of cement producers as follows:
We upgraded our weighted average price of cement by 23% from $105 to $130 per ton in 2007 taking into account a sharp increase in cement prices in summer and a strong likelihood for the market to face a continuous shortage.
We lifted our projection for the industry average price of cement by 10% from $38.90 to $43, which implies 27% growth in 2007. Positive price conditions have prompted producers to boost output at all costs, which is pushing up production costs.
We also revised upward our forecast for the industry's rate of growth from 12% to 19%. Thus, according to our forecasts, Russian companies will manufacture 65 mln tons of cement in 2007.
| Company | Ticker | MCap, $ mln | Fair price, $ | Upgrade/ | Current price, $ | Upside |
| Downgrade of fair price |
| Ulyanovskcement |
ulce |
194 |
20.8 |
- |
14.5 |
43.4% |
| Ulyanovskcement, prefs |
ulcep |
194 |
12.5 |
- |
9.25 |
35.1% |
| Iskitimcement |
iskc |
369 |
5,378 |
15.7% |
3,905 |
37.7% |
| Novoroscement |
nvrc |
1,113 |
151.1 |
61.9% |
109 |
38.6% |
| Novoroscement, prefs |
nvrcp |
1,113 |
45.3 |
61.9% |
34.5 |
31.3% |
| Volskcement |
volc |
809 |
410.7 |
27.9% |
338.5 |
21.3% |
| Gornozavodskcement |
gzce |
367 |
562.9 |
26.5% |
492.5 |
14.3% |
| Voskresenskcement |
vscm |
1,374 |
1,845 |
- 18.0% |
2,625 |
-29.7% |
We highlight Ulyanovskcement, Iskitimcement and Novoroscement as the most attractive investment vehicles.
The major shareholder of Ulyanovskcement, Eurocement, is looking to sink sizeable investments into the company's production base, enabling it to upgrade and improve the efficiency of existing facilities. On top of this, given the current market conditions the valuation of production capacities of $82 per ton looks extremely underestimated.
Iskitimcement has been rolling out a strategy aimed at intensive operating expansion and the introduction of advanced production techniques which should allow the company to grow faster than the market.
Novoroscement holds considerable production potential which, coupled with an expected increase in demand for the company's products amid surging investments in the infrastructural complex of southern Russia is a guarantee of stable growth in revenues.
Volskcement and Gronozavodskcement looks slightly less attractive, but taking into account the price rally on the cement market and the expected appearance of a continuous shortage their shares also hold upside potential.
Following Uralcement's takeover, the investment appeal of Voskresenskcement stocks was substantially undermined – according to our estimates, the current price levels of the company's shares cannot be substantiated even by the extremely favorable conditions which currently prevail in the industry.
Clients of Finam Investment Company may receive full versions of analytical research reports translated into English by sending requests to the International Trading Department.
Vladimir Sergievskiy
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Sector:
Construction
Companies:
Gornozavodskcement,
Iskitimcement,
Novoroscement,
Volskcement,
Voskresenskcement
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