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Lafarge stock boosted by divestments

Nov, 07 2011

Lafarge is targeting €500m of cost savings next year as the French building materials group tackles rising raw material and energy prices and looks to recapture its investment-grade credit rating.

The group said it had already made more than €2bn of divestments, compared to its pledge to sell €750m of assets as part of a plan to cut debt by €2bn earlier this year.

The announcement came as the world’s second largest cement company by revenue reported a 10 per cent drop in profits in the third quarter, because of higher costs and sluggish demand in mature markets such as Spain, Greece and the US. Net income in the three months to September 30 was €336m, on like-for-like sales up 6 per cent to €4.21bn.

The market reacted warmly to the savings plan with shares in Lafarge, which have lost more than 30 per cent of their value since the start of this year, up over 6 per cent to €31.29 in mid-morning trading in Paris.

“These measures, including price actions in response to a high-cost environment, are part of ongoing steps to strengthen profitability, reduce debt and maintain strong liquidity,” said Bruno Lafont, chairman and chief executive.

In recent years Lafarge has targeted around €200m of annual cost savings, but decided to more than double this amount given rising business costs.

John Messenger, construction materials analyst at RBS, said that the €500m programme reflects Lafarge’s concern over the global economic situation.

“Rising raw material, labour and energy costs will broadly equate to €500m in 2012, as such the €500m savings probably equates to Lafarge holding its absolute cost base. The macro outcome on volumes and prices will then dictate whether Lafarge delivers profit growth or decline,” he said.

Net debt was down 3 per cent to €14.26bn compared to the same period last year.

Lafarge became indebted following a €10.2bn acquisition of Orascom Cement, the Middle East’s largest cement maker, in 2007.

In March, its credit rating was downgraded by Standard & Poor’s, the rating agency, to junk for the first time.

Lafarge has focused on cutting its debt pile through making disposals, such as the sale of some of its US cement and concrete assets to Colombian cement maker Cementos Argos for $760m in May.

Its largest divestment to date was the disposal of its European and South American gypsum assets to Etex, the Belgian building materials group for €850m. It will retain a 20 per cent stake in the business.

Mr Lafont said further divestments were under discussion.

SOURCE:  www.ft.com

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