Equity Valuation Report on LafargeHolcim Bangladesh Limited Initiation Coverage

Transcription

1 Equity Valuation Report on LafargeHolcim Bangladesh Limited Initiation Coverage (This document has been prepared by the Research Team of EBL Securities Limited for information only for its clients. No part of this report should be copied or used in any other report or publication or anything of that sort without any prior permission taken from the authorized publisher of this report)

2 LafargeHolcim Bangladesh Limited. DSE: LHBL BLOOMBERG: LAFCEM:BD Target Price: 58.7 (1 Year Holding Period); Current Price: 56.9 Rating: Market Weight Valuation date: 29 th March 2018 Analyst: Md. Nazmus Sakib Company Fundamentals Sector Cement Market Cap (BDT mn) 66,082.2 Market weight 1.7% Paid-up Capital (BDT mn) 11,613.7 No. of Share Outstanding (in mn) 1,161.4 Free-float Shares (Inst.+For.+Public) 35.3% 3 Months Avg. Daily Turnover (BDT mn) Months Avg. Daily Volume (mn) Months Return -14.5% 52-week price range (BDT) Expected Return (1 Year Holding Period) 5.8% Est Exp Exp. Financial Information (BDT mn): Net Sales 10,729 9,865 16,902 18,591 Gross Profit 3,770 2,659 4,970 6,652 EBITDA 3,466 1,555 4,486 6,076 Operating Profit 2,884 1,056 3,619 5,279 Profit After Tax 2, ,554 3,935 Total Assets 20,980 20,620 25,702 28,764 Total Debt Total Equity 15,372 15,009 16,402 19,176 Retained Earnings 3,488 3,125 4,517 7,292 Cash and FDR 3,697 3,722 1,326 4,118 Dividend (C/B)% 10/0 10/0 10/0 10/0 Margin: Gross Profit 35.1% 27.0% 29.4% 35.8% EBITDA 32.3% 15.8% 26.5% 32.7% Operating Profit 26.9% 10.7% 21.4% 28.4% Pretax Profit 27.5% 10.8% 20.1% 28.2% Net Profit 20.8% 8.1% 15.1% 21.2% Growth (YoY): Sales -2.2% -8.1% 71.3% 10.0% Gross Profit -3.8% -29.5% 86.9% 33.8% Operating Profit -0.2% -63.4% 242.6% 45.9% Net Profit -2.8% -64.2% 220.2% 54.1% Profitability: ROA 10.7% 3.8% 11.0% 14.5% ROE 15.0% 5.3% 16.3% 22.1% Payout Ratio 52.2% 145.6% 45.5% 29.5% PEG ratio Leverage: Debt-Equity 3.4% 5.4% 12.0% 9.2% Interest Coverage Valuation: EPS (BDT) NAVPS (BDT) P/E (x) P/NAV (x) P/Sales (x) EV/EBITDA *2017 Financials is are estimated based on their EPS declaration which stood at BDT 0.69 Sector Cement Rating Validity Up to Dec, 2018 Potential Upside 3.21% Exp. Dividend Yield (for Mar-Dec 18) 2.64% LafargeHolcim Bangladesh Limited (LHBL), previously known as Lafarge Surma Cement Limited (LSCL) produces clinker and cement in its plant located in Chhatak, Sunamganj which is the only fully integrated dry process cement plant in Bangladesh. It sources its primary raw material, limestone from its own quarry in Meghalaya, India which is brought to the plant using 17 Kilometer long conveyor belt. Currently it has 3 subsidiaries - Lafarge Umiam Mining Private Limited (100% Holding), Lum Mawshun Minerals Private Limited (74% Holding), and Holcim Bangladesh Limited (100% Holding). LHBL has completed the buyout of HBL with the remittance of BDT 5, million in consideration to 100% shares of HBL. Upon the completion of acquisition, HBL has become wholly owned subsidiary of Lafarge Holcim Bangladesh Limited. HBL has 3 cement manufacturing plants which will increase the production capacity of cement from 1.5 million MT to 3.7 million MT. LHBL has secured 3 rd position in terms of market share after the successful completion of acquisition of HBL by LSCL. LHBL will enter into higher growth trajectory and is estimated to register revenue growth of 71.3% in the year Upward pressure in the clinker price in the recent times (up by 10%) will exert positive impact on LHBL s business and negative impact on HBL s Business. LHBL will be able to relieve itself from downward pressure on the price of both clinker and cement and margin will improve from recent downturn. On the contrary, since Holcim Bangladesh Limited partially imports clinker, the rising cost will squeeze its profit margin. LHBL s wholly owned subsidiary, Lafarge Umiam Mining Private Limited (LUMPL) has received approval from the Government of Meghalaya to produce and transfer 5 million MT up from 2 million MT in a year. To capitalize the approval, LHBL needs to double the transfer capability of the conveyor belt which currently stands at 800 ton per hour. Currently, installation of new conveyor belt over the existing one is progressing phase by phase. The increase in the clinker production is estimated to occur in the year Tax-holiday period had expired for LUMPL in 2015 and since then the company s income is subject to 22.8% effective tax rate. The negative impact on the company s EPS is calculated at BDT 0.22 in the year 2016 which turned out to be a major blow towards the company s earnings. Advancement of the local players have made the market very competitive. LafargeHolcim is bound to make compromises in its pricing to keep its market share intact. We conducted a valuation on LHBL based on Discounted Cash Flow method and relative valuation. Currently, LHBL is traded at BDT 56.9 (as on 29 th March, 2018). In our valuation, the target price for LHBL based on DCF and Relative Valuation is determined at BDT 58.7 per share for 1 year holding period Price-Volume Movement of LHBL 0 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 VOLUME CLOSE PRICE 20,000,000 15,000,000 10,000,000 5,000,000 0

3 ,00 0 1,20 0 1,40 0 1,60 0 1,80 0 Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 The Industry Construction and real estate activities are the two major drivers of cement consumption Increasing growth of construction sector alongside steady growth of urbanization have driven the demand for cement in Bangladesh Owing to the urbanization, improved living standard and increasing purchasing power, the construction sector of Bangladesh is passing a growth phase. Construction and real estate activities are the two major drivers of cement consumption Construction Sector of Bangladesh Size of Construction Sector (BDT billion) Share of GDP at Constant Prices 6.80% 6.90% 7.00% 7.20% 7.30% Growth Rate of Construction Sector 8.40% 8.00% 8.10% 8.60% 8.90% Real Estate Sector of Bangladesh Size of real estate, renting and business service sector (BDT billion) Share of GDP at Constant Prices 7.20% 7.10% 7.00% 6.80% 6.60% Growth Rate of Real Estate Sector 3.90% 4.00% 4.30% 4.40% 4.50% Source: Bangladesh Bureau of Statistics The country s increasing urbanization has stimulated growth for the building materials and has generated considerable needs for cement The country s increasing urbanization has stimulated the URBAN P OP ULATION ( % OF TOTAL) growth for building materials and has generated considerable needs for cement. Urban population has grown at a great 28.2% 29.0% 29.7% 30.5% 31.2% 32.0% 32.8% 33.5% 34.3% 35.0% speed over the years. By the end of year 2016, the urban population stands at 35.0% of Source: World Bank Data total population and the number will get bigger in the upcoming years. With the growth in urbanization, more and more people will move into urban areas and hence, the demand for construction materials from real estate and individual homebuilders will increase. Currently Government development projects contribute the highest towards demand for cement The country that are concentrating on development projects are on high end of cement uses Per Capita Cement Consumption (in Kilogram) in 2017 Saudi Arabia China Malaysia Srilanka India Indonesia Bangladesh Pakistan World Average Source: EBLSL Research ,683 1,581 For the time being demand for cement will be mainly fuelled by the Government projects which is taking a big shape. The ongoing Government projects that hasn t been completed yet and upcoming Government infrastructural projects will drive the growth for cement consumption. Use of Cement is an indicator of the rate of development pace of a country. The countries that are concentrating on development projects are on high end of cement uses. Govt. Development Projects 45% Individual Home Builder 25% Real Estate Developer & Contractors 30% Source: Annual Report of listed companies and EBLSL Research On the basis of regional comparison, Bangladesh falls far below than that of neighboring countries considering per capita cement consumption Although the growth in the demand of cement has been increasing in Bangladesh, the use of cement is far below than that of many developing countries. Currently per capita cement consumption for Bangladesh stands at 137 kg whereas world average is 500 kg. Even the neighboring countries are outperforming Bangladesh in terms of use of the cement. India and Srilanka has per capita cement consumption of 230 kg and 310 kg respectively. So, there is a broader scope of growth for cement sector of Bangladesh.

4 , , , , , , % 10. 0% 5.0 % 0.0 % -5.0% -10.0% -15.0% -20.0% % Market % % % 8.0 0% 6.0 0% 4.0 0% 2.0 0% 0.0 0% Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, % Imported Clinker Price Movement -3.3% 1.1% -6.0% 5,383 5,204 5,260 4,946 4,249 4,200 4,621 *As on February, 2018 Source: Average Consumption Quantity and Consumption Price of Selected Companies (CONFIDCEM, HEIDELBCEM, PREMIERCEM, MICEMENT) 93.7 Dec, 2007 Source: % -1.1% 10.0% * Clinker Price/MT Change in Price/MT Oil Price (Brent Crude Oil) USD Per Barrel Dec, 2008 Dec, 2009 Dec, Dec, 2011 Dec, 2012 USD per barrel Dec, Dec, Dec, Dec, 2016 Average Dec, Mar, Global price for Clinker (Key Raw Material for Cement Production) has reversed upward following the increase in demand and oil price alongside appreciation of USD to BDT Bangladesh has no source of cement clinker which makes it one of the largest importers of clinker and limestone in the world by importing an estimated 10 million - 15 million MT from India, Thailand, Vietnam, Indonesia, the Philippines and China annually. Only two manufacturers produce clinker at their own plant. One is Chhatak Cement Factory Limited, a government owned company with a limited production capacity. Another one is LafargeHolcim Bangladesh Limited (LHBL), which is situated at Chhatak, Sunamganj and produces approximate 10% of total clinker required for Bangladesh. So profitability of the sector largely depends on uninterrupted import facility and favorable foreign exchange condition. In the last few years global market for clinker which constitutes around 65.0% of total raw-materials has seen a downward trend in the price as fuel prices have experienced sharp decline resulting in lower freight cost. However, the upward trend in global oil price has increased freight cost in the recent period. Furthermore, demand for clinker has increased manifold in Africa. As a result clinker price has shot up by 10%-12% compared to previous year. Furthermore, USD to BDT exchange rate has gone up recently which has caused upward pressure in the import cost. Currently USD/BDT stands at BDT as on 28 March, 2018 which was BDT a year earlier. Upward trend in clinker price will be a bottleneck for companies engaged in grinding which are import dependent. Whereas fully integrated cement plant like LHBL will be able to capitalize the scenario as they sell both clinker and cement in the 79.7 Source: local market. On the flipside, since LHBL s wholly owned subsidiary Holcim Bangladesh Limited partially imports raw materials, the increase in clinker price will cause its cost of production to increase USD to BDT Dec, 2012 Dec, 2013 Dec, 2014 Dec, 2015 Dec, 2016 Dec, 2017 Mar, 2018 USD to BDT Average Competition Among the top 10 cement market players in Bangladesh, 8 are local and 2 are multinational. There is only one integrated cement plant (Lafarge Holcim Bangladesh Limited) and rest of all are Grinding Projects. Multinational cement companies are facing intensive competition with local companies which are grabbing the top slot of the industry by operating in economies of scale and with deft marketing strategy. MNCs now hold only around 15% of the total market share. As a result of failure to penetrate market, two of the global cement group, UAE based Emirates Cement and Mexicobased cement manufacturer Cemex has divested their Bangladesh operations in % 10.10% 8.97% 8.11% Share by the end of % 6.03% 5.65% 4.96% 4.23% 3 Source: Industry Players' Estimates and EBLSL Research

5 Holcim Supercrete 90. 0% 80. 0% 70. 0% 60. 0% 50. 0% 40. 0% 30. 0% 20. 0% 10. 0% 0.0 % Scan Fresh Akij 18, , , , ,0 00 8,00 0 6,00 0 4,00 0 2, Crown Bashundhara Premier Shah Cement Confidence Cement 15. 0% 10. 0% 5.0 % 0.0 % -5.0% -10.0% -15.0% -20.0% Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 However, completion of acquisition of Holcim by Lafarge Surma has reshaped the industry dominance in Bangladesh as both the companies already operates own business here. After the completion of acquisition, LafargeHolcim has the 3 rd place in terms of market share. Inward remittance is picking up and is expected to keep the momentum which will enhance homebuilders ability to spend on construction correspondingly With fall in remittance from the gulf region, concern was raised. Demand for cement saw a downturn due to low remittance which is a major source of income for individual homebuilders. Inward remittance has fallen down sharply in the FY % 10.2% 11,650 12,843 14,461 14,228 15,317 14,931 12,769 14,195 Source: Bangladesh Bank Total Inward Remittance in USD mn 12.6% By the end of the total inward remittance stood at USD 12,769 million which was USD 14,931 million in the previous FY. The scenario is taking a shift as oil price has gone up and USD to BDT exchange rate has spiked. Inward remittance has posted 11.2% growth in (8 Months annualized) which will ultimately enhance the homebuilders ability to spend on construction. In 2017, around 1 million workers went abroad. So, remittance is likely to see a surge in the next years. -1.6% 7.7% -2.5% -14.5% 11.2% (8M Ann.) Total Inward Remittance in USD mn YoY Growth Cement Production and Capacity 81.82% 80.00% 74.00% 68.18% 64.00% 62.50% Production capacity Production Capacity Utilization Ratio Source: Industry Players' Estimate and EBLSL Research and The Daily Star (December 28, 2017) Cement industry is facing overcapacity and hence, intense competition has driven down the cement price until recently. Increasing production cost has uplifted the cement price by around 10% in 2018 Currently the industry is experiencing overcapacity of cement production. In a recently surveyed report by Cement Manufacturer s Association, it has been found that there is production capacity of 50 million tons, whereas the demand is hovering around 37 million tons. On an average the utilization rate of cement manufacturing companies is currently around %. There are currently 32 companies who are operating as cement producer. The installed capacity of the local manufacturers far outstrips domestic demand. Though there is over-capacity in the sector, the market demand is almost equal to the effective capacity during peak season. The hidden capacity is there but it s not actually hidden as there are around 12% wastage. Cement manufacturers call it waste because of production error. Due to overcapacity and intense competition, most of the cement producers were forced to drive down the price. After reaching to the bottom level cement price has finally taken a U-turn. It has gone up by around 10% in 2018 so far Retail Cement Price (50KG Bag) in Dhaka Price in 2018 Price in 2017 Price in 2016 Price in 2015 Source: Industry Participants and EBLSL Research 4

6 National Election to be held by the end of 2018 or in the beginning of 2019 is a critical time for cement industry The year may remain critical as national election is to be held by the end of 2018 or in the beginning of As construction sector is highly sensitive to political situation, overall dynamics of cement industry may get affected by the uncertainty that may loom over the national election period. The uncertainty over political condition during election period is a major concern for the cement industry. Rivalry among Existing Competitors Porter's Five Forces Analysis Bargaining Power of Suppliers No Threat: 0 Very Low: 1 Low: 2 Moderate: 3 High: 4 Very High: 5 Source: EBLSL Research Threat of New Entrants Threat of Substitutes Bargaining Power of Customers Competitive Positioning: Porter s Five Forces Analysis Threat of New entrants: Low The cement industry is highly energy intensive company. It requires huge capital expenditure to set up a cement manufacturing company. Furthermore, the cement industry of Bangladesh is at a state of overcapacity which makes it much harder for a new company to venture into the cement manufacturing business. Bargaining Power of Customers: Very High Since overcapacity exists in the industry, customers have varied choices. The bargaining power of customers in the industry is pretty high which reflects in the declining cement price in the country. Threat of Substitutes: Very Low The threat of substitutes is very low as there is almost no alternative for cement in construction activities; especially for a country like Bangladesh where high-rise building is mushrooming and construction activities are speeding up. Bargaining Power of Suppliers: Moderate Bargaining power of suppliers is moderate as cement grinding units can avail clinker through import and companies like LHBL can procure limestone from its own quarry. Rivalry among Existing Competitors: Very High Cement industry of Bangladesh is going through massive competition as most of the local cement manufacturing companies have gone for expansion leaving the industry in an overcapacity state. The cement manufacturing companies are pushing the product prices down to capture greater market share creating intensive competition in the industry. The Company: Lafarge Holcim Bangladesh Limited The business of LafargeHolcim Bangladesh signifies first ever and only cross border industrial venture in Bangladesh up to this date. Such compact supply chain makes it the only fully integrated dry process cement plant in Bangladesh. 5 LafargeHolcim Bangladesh Limited (LHBL), previously known as Lafarge Surma Cement Limited is a major player in the cement industry of Bangladesh spanning its presence in the industry for almost 20 years. Lafarge Holcim Bangladesh Limited is a joint venture of LafargeHolcim and Cementos Molins. Both the companies are very much renowned and have a diverse global presence. The plant of Lafarge Holcim Bangladesh Limited is located in Chhatak, Sunamganj which makes it suitable for procuring limestone from its own quarry in Meghalaya through a 17 Kilometer long conveyor belt. After successful acquisition of Holcim Bangladesh Limited, the merged business has 3 more plants from Holcim Bangladesh Limited: 2 plants situated in Meghnaghat, Narayanganj and 1 plant in Mongla. An agreement was made in November, 2000 involving Government of Bangladesh and India to initiate exchange of letters in order to support this unique cross border commercial venture. The business of LafargeHolcim Bangladesh Limited (LHBL) signifies first ever and only cross border industrial venture in Bangladesh up to this date. Such compact supply chain makes it the only fully integrated dry process cement plant in Bangladesh. All the other cement manufacturers in Bangladesh are engaged in grinding

7 only. Wholly owned subsidiary company of LafargeHolcim Bangladeh Limited, Lafarge Umiam Mining Private Limited (LUMPL) is registered in India and operates the quarry in Meghalaya. Lafarge also supplies the excess clinker (a semi-finished product for manufacturing cement) to Holcim Bangladesh Limited which partially meets the clinker requirement for HBL (around 57%). LHBL sells cement under brand name: Supercrete. Incorporation: 11 November, 1997 Listing in DSE and CSE: 20 January, 2003 Business Areas: Cement Manufacturing Acquisition of Holcim Bangladesh Limited As part of global merger between Lafarge Group and Holcim Group which occurred in July 10, 2015, both the groups business in Bangladesh has adopted acquisition process. Lafarge Surma Cement Limited has purchased 100% shares of Holcim Bangladesh Limited and the entity is named LafargeHolcim Bangladesh Limited now. The initial share purchase agreement asserted that Holcim Bangladesh Limited s 100% share would be bought at USD 117 million which was subject to Bangladesh Bank s permission. Later Bangladesh Bank approved the purchase of 100% share at USD 62 million as per their justification. Finally the acquisition was done at USD 62 mn and the remittance of the consideration was completed on 10 January, With the completion of acquisition, LafargeHolcim Bangladesh Limited has a combined business that will have diverse regional coverage and synergy benefits. Moreover, HBL s unutilized capacity (around 45%) provides the combined business opportunity for growth. Graphics Source: LafargeHolcim Bangladesh Limited EGM Report 2017 Subsidiaries Lafarge Umiam Mining Private Limited (LUMPL), Lum Mawshun Minerals Private Limited (LMMPL) and Holcim Bangladesh Limited (HBL) are the three subsidiaries of LafargeHolcim Bangladesh Limited. LHBL holds 100% share of LUMPL, 74% share of LMMPL, and 100 share of HBL. LUMPL and LMMPL were established in connection with supporting the parent company, LHBL. Lafarge Umiam Mining Private Limited Lafarge Umiam Mining Private Limited (LUMPL) was incorporated in Meghalaya, India. LUMPL is a wholly owned subsidiary of LHBL which facilitates the parent company with uninterrupted supply of raw materials, crushed limestone from the quarry in Meghalaya to the cement plant in Chhatak, Shunamganj. LMMPL has obtained approval from Government of Meghalaya and completed the transfer of all lands acquired for the project to LUMPL Lum Mawshun Minerals Private Limited Lum Mawshun Minerals Private Limited (LMMPL) was set up as subsidiary of LHBL to obtain land rights and mining leases for the mining project in Meghalaya, India. Recently, the company has obtained approval from Government of Meghalaya and completed the transfer of all lands acquired for the project to LUMPL. According to the annual report, 2016 of LHBL, the company is looking for new avenues for business. The company doesn t generate any profit since it s only engaged in executing legal support to conduct the mining operation. 6

8 Holcim Bangladesh Limited (100% owned Subsidiary, effective from 2018) Holcim Bangladesh Limited (HBL) was established in 2000 as an operating company of Holcim Group. After the establishment, HBL acquired two more grinding plants, United Cement Industries and Saiham Cement Industries to expand their business. Currently the company has three plants in total 2 plants situated in Meghnaghat, Narayanganj and 1 plant in Mongla 1. The company now has total production capacity of 2.2 million MT. Corporate Governance Shareholding Pattern 35.36% 58.87% 2.75% 3.02% Surma Holding B.V Sinha Fashions Limited Islam Cement Limited Other Shareholders Source: Annual Report, 2016, LHBL Shareholding Structure 58.87% shares of Lafarge Surma Cement Limited is owned by Surma Holding B.V. which is a Netherlands based company. Lafarge S.A. of France (a subsidiary of LafargeHolcim), Cemolins Internacional S.L.U. of Spain each owns 50% share of Surma Hoding B.V. LafargeHolcim is one of the leading global building materials and solutions companies. It made its presence in more than 80 countries, both developing and mature markets. It employs around 90,000 employees. The company has operations worldwide which includes several regions such as: North America, Latin America, Europe, Asia Pacific, Middle East, and Africa. LafargeHolcim has the highest presence in Asia Pacific. Source: Lafarge Holcim Group Website Visualization: EBLSL Research Cementos Molins presence spans for over 90 years having operation at four continents. Its portfolio includes different businesses such as cement, concrete, aggregates, pre-building materials and special solutions in cement mortar. 1.15% 14.82% Shareholding Structure 19.35% 64.68% Sponsor/Director Institute Foreign Public As on February 28, % of the Board of Directors has prior experience in the cement industry Among other shareholders, Sinha Fashions Limited owns 3.02% shares and Islam Cement Limited owns 2.75% shares. Other 35.36% share is owned by institution, public, and foreign shareholders. Sponsor/ Govt. Institute Foreign Public Director As on February 28, % 0.00% 14.82% 1.15% 19.35% As on January 31, % 0.00% 14.56% 1.17% 19.59% As on December 29, % 0.00% 14.26% 1.38% 19.68% As on December 31, % 0.00% 12.67% 0.00% 22.69% Source: DSE Website Corporate Management The team of directors of Lafarge Holcim Bangladesh possess some dynamic individuals who has vast experience in the relevant field % of the Board of Directors has prior experience in the cement industry. Chairman of the company, Mr. Daniel N. Bach joined the company in February, Besides, he is holding the responsibility of area manager South East Asia and China (Huaxin) of the LafargeHolcim Group. He joined LafargeHolcim group as a project manager in The management body consists of experienced individuals with diverse knowledge base and expertise. The average experience of the individuals of the management body is 18 years. 1 Holcim Bangladesh Website: 7

9 Internal Control System The company s internal control system consists of policies and procedures that directs the board of directors and the management committee to be definite and effective in achieving company s objectives. The audit committee of the company consists of 3 executive directors, 2 independent directors, and 1 from the management body (Head of Legal and Company Secretary). Social Responsibility The company focuses on its host communities by providing social, environmental, and economic value to the society Lafarge Surma Cement Limited engages in several activities that uphold the organization s stance on maintaining the social responsibilities. The company focuses on its host communities by providing social, environmental, and economic value to the society. Both in Chhatak, Sunamganj, Bangladesh and in Nongtrai and Shella Villages, Meghalaya, India, LHBL has made arrangement to create positive impact in the society by making contribution in the areas of healthcare, education, employment, skill development, and infrastructure development. With the aim to make some positive impact in the environment, the company has introduced Geocycle, waste management service. The service was introduced in the year 2016 in a small scale. Official announcement was made in December, Geocycle is a project to manage industry waste to provide a cleaner environment. Currently the company manages 900 tonnes of industrial waste in its Chaatak plant and the plant is supposed to be more efficient owing to Geocycle. The company has started providing the service to other industries who also seek efficient ways to dispose wastes. According to the annual report (2016), the company has been able to gradually increase the volume of waste co-processing by on-boarding some leading oil and gas, pharmaceutical, agro chemical, food and consumer goods companies in their customer portfolio. Corporate Governance Assessment Corporate Governance Assessment Score Weight Calculation 1. Audit and Risk Oversight 8/10 40% 3.2 a. No adverse opinion by the auditor in the past years b. The board of director has 12 individuals c. Previous statutory auditor of the company retired as per regulation d. Discloses the fee for auditors 2. Board Structure and Responsibilities 7/10 40% 2.8 a. 25% are independent directors b. 0% of the board consists of family members c. Maintains a formal nominating, compensation, and audit committee d. Absence rate of directors in the board meeting was 18.05% in the last year e. Absence rate of directors in the AGM held on August 31, 2016 was 66.67% f. No significant related party transaction other than clinker sales to Holcim Bangladesh Limited 3. Compensation and Remuneration 7/10 20% 1.4 a. Non-executive directors participate to performance related remuneration b. Does not disclose details on executives remuneration Total Corporate Governance Score 7.4 Significance of the rating: 1-2: High Threat to Shareholders 3-4: Significant Threat to Shareholders 5-6: Moderate Threat to Shareholders 7-8: Low Threat to Shareholders 9-10: Insignificant Threat to Shareholders 8

10 The Corporate Governance Assessment indicates that the company s corporate governance stature spurs low threat to shareholder. The company has always remained vigilant in maintaining strong corporate governance. Supply-chain: Fully integrated cement plant has paved the way for LHBL to enjoy higher margin than most other cement manufacturing companies in Bangladesh LafargeHolcim Bangladesh has its two subsidiaries to cater to the needs of LHBL in procuring raw materials for its cement manufacturing unit in Chhatak, Sunamganj. Lafarge Umiam Mining Private Limited (LUMPL), a wholly owned subsidiary is engaged in mining limestone from the quarry in Meghalaya. Another subsidiary (74% holding), Lum Mawshun Minerals Private Limited (LMMPL) was formed to execute the acquisition of mining and land rights for facilitating the mining operation of limestone and shale by Lafarge Umiam Mining Pvt Ltd. Since LSCL is the only fully integrated cement plant of Bangladesh, it enjoys the privilege of generating higher margin than all the other companies listed under the cement sector The whole process involves mining limestone from the quarry of Meghalaya by LUMPL. Afterwards, the crushed limestone is brought to the plant in Chatak, Shunamganj using a 17 Kilometer long conveyor belt. Clinker is produced in the plant using temperature of 1,450 degree celsius and correspondingly Cement is produced using required clinker, gypsum, and limestone. The excess clinker is sold to the local grinders. 100% clinker is distributed through the river since it s the most cost effective route. Clinker Production and Distribution Limestone Quarry in Meghalaya Cement Plant in Chhatak, Sunamganj Cement Production Limestone Transferred Through 17 KM long Conveyor Belt Cement and Clinker Distribution Source: LafargeHolcim Bangladesh Limited Website; Visualization: EBLSL Research All the other companies are generally grinders which are import dependent in procuring raw materials whereas, LHBL procures raw materials from its own quarries in Meghalaya. Hence, cost of raw materials is very low for LHBL compared to other cement manufacturing companies in Bangladesh. In year 2016, LHBL achieved gross profit margin of 35.1% and net profit margin of 20.8%. ARAMITCEM CONFIDCEM HEIDELBCEM LHBL MEGHNACEM MICEMENT PREMIERCEM Particulars Gross Profit Margin (GPM) 20.3% 17.5% 25.9% 35.1% 11.0% 17.1% 16.4% Operating Profit Margin (OPM) 11.3% 4.6% 18.4% 26.9% 7.1% 11.8% 9.9% Pre Tax Profit Margin -4.2% 15.2% 19.6% 27.5% 1.8% 9.1% 6.4% Net Profit Margin (NPM) -6.5% 13.7% 14.2% 20.8% 1.3% 7.0% 5.4% Source: Latest Annual Reports of Mentioned Companies 9

11 Gross margin has experienced a massive pullback LHBL has lowered its cement product price to keep its market share intact as majority of the competitors has followed the same route The gradual decline in the global clinker price has induced LHBL to lower its clinker price which is one of the sources of its revenue. Furthermore, existing oversupply scenario of the industry has created an intensive competition among the major players of the cement industry of Bangladesh. Hence, LHBL has lowered its cement product price to keep its market share intact as majority of the competitors has followed the same route. As a result, gross profit margin of LHBL has dropped below the threshold. In the recent quarterly disclosure, it has garnered 24.3% gross profit margin in the 3 rd quarter of 2017 whereas its average gross profit margin for the last 5 years stands at 36.0%. Gross Margin Trend 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Source: Company Financial Statements and EBLSL Research Product price has lifted up after series of fall Downward pressure in the global clinker price, unutilized capacity of local grinding stations, state of overcapacity in the industry have led Lafarge Surma Cement Limited to pull its products price down in the last few years to sustain its market share. The scenario has shifted as production cost has picked up quite significantly. Price is estimated to go up by 10% in Price Movement Companies that enjoyed higher margin besides securing a handsome market share have shifted their highest concentration on tackling their eroding market share by reducing margin 6,700 6,728 6,369 5,198 5,232 5,198 6,242 4, % Growth of Sale Price of Cement/MT Sale Price of Cement/MT 5,989 4,165 5,850 4,000 6,435 4,400 Growth of Sale Price of Clinker/MT Sale Price of Clinker/MT 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% ; 2017 and 2018 Figures: Estimated Growth in the overall production capacity of cement has outweighed the growth of overall demand for cement in Bangladesh. Companies that enjoyed higher margin besides securing a handsome market share have shifted their highest concentration on tackling their eroding market share by reducing margin. LHBL has reduced both its cement and clinker price amid pressure spurred by the downgrade of global clinker price and local cement price. Both the products price experienced downward pressure from the year 2012 and kept falling over the years. Cement and Clinker price of LHBL has registered CAGR of -2.8% and -5.4% respectively for the period

12 % 100.0% 80. 0% 60. 0% 40. 0% 20. 0% 0.0 % Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 All the peer companies of LHBL had followed the same route to tackle increasing competition in the industry. In the case of grinders, the impact of heavy decline in the cement price has been cushioned by decline in the global clinker price. The business of LHBL has been hurt from the both ends as it is a fully integrated cement plant and sells both clinker and cement in the market. Going forward all the other cement manufacturers are expected to charge higher price which is quite apparent in the current market scenario. 7,300 Cement Price/MT 6,800 6,300 5,800 Lafarge Holcim Bangladesh Limited Heidelberg Cement Limited MI Cement Limited Source: Annual Report of Mentioned Companies and EBLSL Research Revenue Mix Sales Volume Metrices (Mn MT) % % % % % 60.00% 40.00% 20.00% 0.00% % % Cement Clinker Cement Growth Clinker Growth LHBL s avenue for collecting revenue is Cement and Clinker. Cement s contribution to total revenue accounts for around 80.0% while clinker s contribution to total revenue accounts for around 20.0%. Due to downward pressure in both the revenue earning products, the company has faced a serious fall in its revenue growth. Amount of cement and clinker sold Revenue Mix 19.4% 24.7% 19.3% 18.0% 17.3% 80.6% 75.3% 80.7% 82.0% 82.7% Source: Annual Reports of LSCL and EBLSL Research Sale of Cement Clinker (% of Total Sales) Sale of Gray Cement (% of Total Sales) Growth of Sale of Gray Cement Growth of Sale of Cement Clinker experienced CAGR of 3.73% and 2.89% for the period Due to downward pressure in the product price, the earnings from the products sold has not picked up to the same level as the quantity sold. The earnings from cement and clinker sales has registered CAGR of 0.86% and -2.65% during the period % 125.0% 100.0% 75.0% 50.0% 25.0% 0.0% -25.0% -50.0% Cement is sold under brand name, Supercrete. Supercrete is regarded as PLC (Portland Limestone Cement) which is one of a kind in Bangladesh. Since LHBL has access to limestone and has the authority to procure limestone from the quarry in Meghalaya, it enjoys the privilege to be the only company in Bangladesh to be able to produce PLC. LHBL addresses Supercrete as their premium product even though it is priced at par with PCC (Portland Composite Cement) produced by other companies. 11

13 120.0% 100.0% 80. 0% 60. 0% 40. 0% 20. 0% 0.0 % Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 Composition of Clinker Uses 34.4% 41.4% 32.3% 32.2% 32.0% Clinker Uses LHBL possesses higher clinker production capacity than what is required for its grinding unit. The excess clinker is sold to local grinders. The quantity sold contributes to the total revenue earned by the company. 65.6% 58.6% 67.7% 67.8% 68.0% % of Clinker Consumed % of Clinker Sold Amount of Cement Produced, MT 1,212,000 1,438,000 1,403,000 Amount of Clinker Converted, MT 902, , ,000 Cement to Clinker Ratio Cement to clinker ratio for LHBL stands at around Hence, out of total clinker produced, 65% is converted to produce cement and around 35% is sold to the local grinders. Due to acquisition the unconverted clinker will be sold to HBL and it will be regarded as intercompany transaction. Production Capacity Metrices % 90.0% Production Capacity, Clinker (Mn MT) Production Capacity, Cement (Mn MT) Utilization, Cement Production Utilization, Clinker Production 120.0% 115.0% 110.0% 105.0% 100.0% Raw Materials Major raw material required for LHBL to produce clinker and cement is limestone. The cost of limestone covers around 69% of the cost of total raw materials. Other raw materials include clay, gypsum, iron ore, sand, and slag. Most of the cement manufacturing companies are import dependent in procuring raw materials. The possibility of growth has been jammed by the capacity constraint The current capacity of LHBL stands at Cement: 1.5 million MT, Clinker: 1.4 million MT. The utilization rate of both clinker and cement stood at over 100% in the year 2014 and then dropped in the next years to register shortfall from its optimum capacity utilization. Because of higher demand in the year 2014, LHBL initiated contract manufacturing to produce cement more than its capacity allows it to do so. The contract manufacturing has been derailed in the recent times. The company has lost its growth momentum because of its capacity constraint and overall overcapacity scenario of the industry. The successful acquisition of Holcim Bangladesh Limited will positively impact in revitalizing the growth momentum of the company. Cost Structure of LHBL The major cost of production involves raw material costs, production and maintenance costs, and power and fuel costs. Raw material cost, production and maintenance cost, and power and fuel cost constitute around 32.2%, 20.0%, and 18.9% of total COGS. Power and fuel cost has gone up due to the price hike in both power and fuel. Geocycle Raw materials costs Toll manufacturing costs Power and fuel costs Production and maintenance costs Plant general and administrative costs Freight cost to customers Depot operating and transportation costs Site restoration costs Source: Annual Report 2016 In a new announcement on December 1, 2017, LafargeHolcim Bangladesh Limited has informed that they are launching its waste management service, Geocycle in the country. Geocycle will utilize alternative fuels to fire its 7.1% 4.9% 0.8% 1.2% 4.7% 5.7% 8.8% 2.2% 20.0% 11.2% Raw Materials Limestone Gypsum Sand Cost Structure of LHBL 11.8% 0.0% 18.9% 32.2% 1.2% Clay Iron Ore Slag 69.2%

14 45. 0% 40. 0% 35. 0% 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5.0 % 0.0 % 90. 0% 80. 0% 70. 0% 60. 0% 50. 0% 40. 0% 30. 0% 20. 0% 10. 0% 0.0 % 100 % 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 kilns (for clinker production) which will reduce CO2 emission and energy cost. Geocylce also endeavors to provide sustainable solution to waste that would otherwise be disposed of in landfill sites. 2 Geocycle will also contribute to revenue through waste management services provided to some renowned manufacturing companies. Business Performance of Subsidiaries Lafarge Umiam Mining Private Limited Contribution including supply of raw materials 38.6% 36.7% 30.0% 19.9% 18.5% Contribution % Cost Structure % of Sales 37.6% 42.7% 34.5% 38.1% 40.0% 16.7% 16.4% 7.5% 6.4% 7.7% 5.9% 6.5% 2.6% 5.5% 5.9% 19.5% 19.1% 15.6% 14.5% 13.6% LUMPL mainly supplies limestone to its parent company after mining it from the quarry in Meghalaya. LUMPL earns its revenue from supplying limestone to LHBL. In the consolidated business of LHBL, LUMPL contributed around 36.7% towards the profitability in the year The contribution of LUMPL towards profitability has gradually increased over the years. It was 19.9% in the year 2012 and increased to 36.7% in the year The contribution comes in the form of supplying raw materials along with adjustment for other associated cost of the subsidiary business. The volatility observed in the contribution is greatly associated with the cost structure of LUMPL. The cost as % of sales of LUMPL has increased in the year 2013 from 2012 and hence, the contribution to overall profitability of LHBL has decreased. The contribution then picked up because of the decreased cost in the overall business of LUMPL. The fall in the contribution in 2015 was also linked to the increase of total cost in the business of LUMPL compared to the previous year. In the cost structure, it is observable that cost of extracted limestone has decreased gradually in terms of percentage of sales. The reason behind the gradual decline is that the efficiency in mining limestone reached to the highest level in the year Apart from increased efficiency in the MMD (Mining Machinery Developments) crusher, addition of new fleet of mining equipment like dumpers and excavators helped LUMPL to increase its efficiency and ensure uninterrupted supply to the plant in Chaatak, Sunamganj. Since then, the cost of extracted limestone has decreased gradually over the years. Other Non Operating Expenses Financial Expenses Administrative Expenses Cost of Extracted Limestone Equipment reliability and MMD crusher efficiency has increased gradually year by year For LUMPL, a mining contractor was assigned to supply mining equipment since the inception of LUMPL and the contract was terminated from March, 2015 due to inefficiency of the equipment. LHBL started its in-house mining by bringing new equipment which ensured better efficiency and helped reduce the cost of extracted limestone. Equipment reliability has increased gradually year by year since new equipment was brought to the company s operational premise. MMD crusher efficiency has also experienced improvement and helped the company reduce the power consumption. Hence, overall cost reduction strategy of the company has driven the company towards maintaining steady profitability. Other costs like administrative expense and financial expense have also declined over the years. Equipment Reliability 95% 94% 70% MMD Crusher Efficiency MMD Crusher TPH Power Required Per Ton, kwh 2 LafargeHolcim Group (Global) Annual Report

15 1,20 0 1, ,00 0 2,50 0 2,00 0 1,50 0 1, % 250.0% 200.0% 150.0% 100.0% 50. 0% 0.0 % -50.0% % 250.0% 200.0% 150.0% 100.0% 50. 0% 0.0 % -50.0% Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 Imposition of 32% increase on mineral cess has increased the non-operating expense of LUMPL in 2015 Non-operating expense has remained volatile and has been mainly affected by the changes in fuel and power cost. In the year 2015 non-operating expense has increased to 38.1% of total sales from 34.5% in the year Non-operating expense was mainly increased due to the imposition of 32% increase on mineral cess in 2015 by the Government of India coupled with increased fuel and power cost. Revenue Trend 201.2% 2,594 2,695 2,759 2,803 2, % 3.9% 2.4% 1.6% Revenue, BDT mn Growth Capital expenditure will be required to increase the mining capacity and utilize the permission to procure higher amount of limestone Revenue growth has remained static in the last 4 years as the company reached to its optimum mining capacity in the year Since then the growth in revenue has marginally increased year by year. The growth is attributed to the increased efficiency of the equipment. Capital expenditure will be required to increase the mining capacity and utilize the permission to procure higher amount of limestone. Tax holiday period of 10 years has expired for LUMPL in the year 2015 and the company s profit is subject to tax since then NPAT trend of LUMPL has displayed volatility in the last 5 years. It reached to the peak in the year 2014 and then fell drastically in the year 2015 before returning to the growth phase. The massive fall in the NPAT is attributed to tax imposition and increased non-operating expense. Tax holiday period of 10 years has expired for LUMPL in the year 2015 and the company s profit has turned into subject to tax since then. The effective tax rate of LUMPL now stands 22.8% since 2015 which was 0.0% in the prior years. NPAT Trend 244.0% 143.1% 25.2% % 309 1, % Profit After Tax, BDT mn Growth Financial Performance of LafargeHolcim Bangladesh Limited Current Ratio Quick Ratio Cash Ratio Liquidity Position: Liquidity position of LHBL has improved over the years. Current ratio, quick ratio, and cash ratio trends indicate that the company is performing strongly in terms of liquidity position. The main impact came from the increasing cash reserve of the company. Cash and cash equivalents stood at BDT 3,697 million in 2016 whereas it stood at BDT 154 million in The company s sales growth and NPAT growth was triggered strongly in the year 2012 by 74.5% and 184.7% and experienced volatility in the following years. Furthermore, company s long term debt was completely written off in the year The company paid dividend (cash) for the first time in 2014 and the payout ratio stood 41% to 52%. Such combination has helped the company maintain its strong cash reserve. The company s sound cash reserve gives indication that the company is well equipped to provide internal financing for supporting capital expenditure. Operating Efficiency: Operating efficiency has experienced a slight fall even though its inventory turnover ratio has improved over the years. The company s shortcoming was displayed in managing receivables. Receivable turnover ratio has fallen sharply over the years. Hence, operating cycle has increased gradually due to the impact of declining receivables turnover. Operating cycle stood at 83 (days) in the year 2016 which was 75 (days) in

16 12% 10% 8% 6% 4% 2% 0% 160.0% 140.0% 120.0% 100.0% 80. 0% 60. 0% 40. 0% 20. 0% 0.0 % (0.10) (0.20) Valuation Report on LafargeHolcim Bangladesh Limited. Date: 29 March, 2018 Inventory Turnover Ratio Receivable Turnover Ratio Company s cash conversion cycle saw improvement due to decreasing accounts payable turnover. Cash conversion cycle stood at -41 (days) in 2016 which was -28 (days) in Profitability: LHBL has been facing adverse situation in terms of profitability. Gross Profit Margin (GPM), Net Profit Margin (NPM), and Operating Profit Margin (OPM) have declined every year in the last three years. The intense competition in the industry and declining product price has created adverse impact on LHBL. In the year 2016 interest income was higher than financial expense and hence, pre-tax profit was higher than operating profit % Profitability 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% Gross Profit Margin (GPM) Operating Profit Margin (OPM) Pre Tax Profit Margin Net Profit Margin (NPM) EPS Trend: LHBL s EPS trend indicates that the company faces seasonality in its business like any other cement manufacturing business. Rainy season hampers sales as construction activities slow down during the period. First quarter (January-March) and fourth quarter (October-December) usually sees better business performance of LHBL due to increased construction activities in those quarters. Even though the company has increased its sales volume, it has experienced downfall in both top line and bottom line. Due to increasing operational cost and sluggish sales, the company s performance has worsened in the recent quarters EPS Trend 0.78 Dividend Trend % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (0.07) % 50.7% 52.2% 10% 10% 10% 10% Dividend (Cash %) Payout Ratio Source: Annual Reports of LHBL, DSE Website and EBLSL Research Dividend History: LHBL paid dividend for the first time in 2014 and has been very consistent since then. The company paid only cash dividend in the past and its payout ratio has increased gradually. It remained around 40%-50%. It is estimated that they will keep the same cash dividend in the following years and will gradually increase once the net income absorbs solid growth. 15

17 Price Movement: Share Price and News Flow of LHBL July 2015 Global Merger Completed 03 November 2016 LHBL entered into discussion to explore opportunities for combining LSC's business with Holcim Cement Bangladesh Limited 15 December 2016 Board of Directors approved acquisition of 100% shares of HCBL at USD 117 mn 18 September 2017 Bangladesh Bank allowed purchase of 100% shares of HBL at USD million instead of USD 117 million April 2014 Lafarge and Holcim announced a global merger project to create LafargeHolcim 30 November 2016 LUMPL got approval to produce and transport 5 million tons up from 2 million tons 24 December 2017 LSCL has announced to buy HBL at USD million 20-Feb Jul Dec May Oct Mar Aug Jan Jun Nov-17 Rebased Performance March May March Source: DSE website and EBLSL Research - LHBL Rebased DSEX Rebased Investment Insights Investment Positives Fully integrated cement plant: Since LHBL is the only fully integrated cement plant in Bangladesh, it enjoys higher margin than any other cement manufacturing companies in Bangladesh. LHBL has completed the buyout of HBL with the remittance of BDT 5, million in consideration to 100% shares of HBL. Upon the completion of acquisition, HBL has become wholly owned subsidiary of Lafarge Holcim Bangladesh Limited. HBL has 3 cement manufacturing plants which will increase the production capacity of cement from 1.5 million MT to 3.7 million MT. Growth potential due to the acquisition of Holcim Bangladesh Limited: LHBL will move into higher growth trajectory after the successful completion of acquisition of HBL. Revenue is expected to grow at 71.3% in the year Potential increase in the market share: After acquisition of Holcim Bangladesh Limited, the cement production capacity of the company will increase to 3.7 million MT from earlier 1.5 MT per year along with its 1.4 million MT Clinker capacity. Due to the said acquisition, the market share of the company has increased to ~9%, 3 rd highest in the market. 16