2010 RBS

Equity | Construction & Materials | Europe
6 August 2010
Produced by: The Royal Bank of Scotland N.V.
Building Materials
Neutral Developed market risks increase
The combination of public spending roll-off through stimulus withdrawal in the US and austerity measures in Europe against a backdrop of weakening recovery in private sector demand, is increasing the risks to recovery in developed market construction demand, with new build acticity and cement demand most at risk.
Key recommendations & forecasts
Stock Rating Hold Buy Sell Target price 39.60 SFr79.0 36.90 P/E FY10F 13.8 14.3 13.1 FY11F 10.0 12.5 10.1 EV/EBITDA FY10F 8.2 8.0 8.0 FY11F 7.2 7.1 7.4 Net debt / EBITDA FY10F 3.4 2.4 3.9 FY11F 2.9 1.8 3.4
Sector performance
(1M) Absolute Absolute (%) Rel market (%) 17.4 7.3 -2.9 (3M) -16.6 -6.1 -9.4 (12M) 18.3 7.7 -5.5
HeidelbergCement Holcim Lafarge
Priced as at 5 August 2010 close Source: Company data, RBS forecasts
FTSE Eurotop 300 Index: 1071.02 Eur Construct & Materials: 257.11 Source: Bloomberg
Recovering demand for cement in developed markets looks increasingly challenged As the adrenalin kick from public spending boosts and stimulus measures appears poised to reverse in the US and Europe in 2011 and 2012, we are increasingly concerned that the private sector recovery in new build construction and cement will, at best, deliver only a modicum of growth. Cost-cutting continues and should provide some earnings support, but volume pressure, increasing pricing pressure and, in our view, overly optimistic assumptions for the demand recovery, notably in the US, leave cement stocks at increasing risk of downward earning revisions. We reduce our earnings forecasts across the European cement stocks we cover We reduce our FY10 and FY11 forecasts for the pre-intangible amortisation earnings of the three European cement stocks in our coverage: by 11% and 13%, respectively, for HeidelbergCement, 13% and 7% for Lafarge and 9% and 11% for Holcim. We base these reductions on a combination of our reduced volume recovery expectations, more limited pricing offset to underlying cost inflation, the impact of reduced volume recovery and weaker pricing on operational gearing, and our increased debt forecasts driven by reduced underlying profitability and foreign exchange headwinds. We lower our target prices for all three stocks and downgrade HeidelbergCement We downgrade our rating on HeidelbergCement from Buy to Hold and reduce our target price from 58.0 to 39.6. We maintain our Sell rating on Lafarge and reduce our target price from 44.0 to 36.9. We maintain our Buy rating on Holcim but reduce our target price from SFr83.0 to SFr79.0.
Analysts
John Messenger
United Kingdom +44 20 7678 0551 john.messenger@rbs.com
We examine stock valuation, industry capacity benchmarking and macro dynamics In this note we also: 1) benchmark the cement players by applying a consistent approach to calculate enterprise value and valuation metrics; 2) detail the US cement recovery prospects and the assumptions being made by the PCA; 3) look at the cement stocks' debt metrics adjusted for emerging market operations, where significant minority interests impact access to cash flows and consolidated debt positions; 4) benchmark the players' capacity positions to clarify influenced, consolidated and equity-owned capacity positions; and 5) look at the nature of past US and UK construction cycles.
William Jones
+44 20 7678 0959 william.jones@rbs.com
250 Bishopsgate, London, EC2M 4AA, United Kingdom http://research.rbsm.com
Important disclosures can be found in the Disclosures Appendix.
Contents
Developed market risks increasing Public spending declines as stimulus initiatives expire, combined with weak privatesector demand recovery, suggest growing risks to prospects of a marked recovery in new build construction in developed markets, with cement stocks at risk of earnings downgrades. Target prices and earnings revisions Holcim remains our preferred cement play, which we rate Buy with a target price of SFr79. We move HeidelbergCement back to Hold and lower our target price to 39.6. Lafarge remains our least preferred stock Sell with a reduced target price of 36.9. Benchmarking valuations and debt metrics Here we benchmark cement player valuations, with a particular focus on capturing all enterprise value claims to ensure enterprise-value-based comparisons are as comparable as possible. We also detail cement player debt metrics. US cement how dramatic will recovery be? Our forecasts for cement demand recovery until FY14 are some 60% below those of the Portland Cement Association. We examine why and argue that our forecasts are realistic based on construction demand expectations and past cycles. Cement consolidated and deconsolidated Cement plays expansion into emerging markets, in search of growth, has created complex structures with material minorities. We examine the implications for their income statements, cash flows and balance sheets. Benchmarking cement capacity The cement players different growth strategies and geographic footprints have resulted in very different consolidation techniques and very different levels of cement asset ownership. Here we explore the differences. Macro outlook in summary On the macro outlook, emerging market growth remains underpinned, in our view. However, developed markets in the US and Europe are at risk of downgrades to expectations as to the speed and scale of construction demand recovery. US housing in focus US housing remains critical to both global recovery and building material demand growth in the US. Here we look at US housing cycles, why our forecasts are so far below consensus and where we expect housing starts to move through the remainder of 2010. US housing inventory in focus We view the scale of excess inventory as the fundamental challenge faced by the US new housebuilding industry, which drives our below-consensus expectations for housing starts recovery. Construction cycles how long? We believe investors must consider the later, longer and more pedestrian recovery cycle that we think the construction sector will see in developed economies. Here we analyse several cycles in the UK and the US. US construction cycles Data in relation to US construction is more difficult to assess given changing definitions and the publication of nominal US dollar-related spending. However, we believe certain aspects of the US construction cycle can be analysed relatively accurately. 3 3
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Building Materials | Table of Contents | 6 August 2010
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India in focus We remain fundamentally positive on India as a long-term attractive growth market for the cement industry. Here we look at the latest data on India in terms of the wider economic indicators, as well as the latest cement industry data. Appendix 1 In the following world maps, we highlight the countries in which each cement player carries out operations, with orange highlighting areas of operation and grey where each player is absent. Appendix 2 Here we detail country-by-country forecasts for construction output and cement demand as forecast by Euroconstruct in June 2010. We also detail previous forecasts (from June and December 2009), to show forecast evolution. Company profiles HeidelbergCement Holcim Lafargec
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Building Materials | Table of Contents | 6 August 2010
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Developed market risks increasing

Public spending declines as stimulus initiatives expire, combined with weak private-sector demand recovery, suggest growing risks to prospects of a marked recovery in new build construction in developed markets, with cement stocks at risk of earnings downgrades.
On the macro picture

Public spending slowdown with more limited private sector recovery not an ideal recipe for new build demand recovery
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Construction materials demand has been benefiting from public spending stimulus initiatives, which have proved critical at a time of collapsing private sector construction demand. However, this public funding boost is set to reverse yoy in 2011 and 2012 as austerity measures bite in Europe and federal stimulus spending falls back in the US and US state budgets remain under intense pressure. A private sector recovery is a potential offset in developed markets, but with the markets GDP recovery expectations now being revised lower, we see little prospect of this boosting construction demand sufficiently to offset public spending cuts. US housing recovery expectations from the Portland Cement Association and other US forecasting bodies a key driver of sentiment, global economic recovery and US build materials demand remain too optimistic, in our view. We remain at least 25% below wider market expectations for US housing starts in 2011. US cement demand recovery expectations are also too high, in our view, reflecting: 1) the overly optimistic expectations on US housing recovery; and 2) dramatic increases in cement consumption relative to US dollar construction spending. US cement forecasts are therefore facing significant risk. The Portland Cement Association (PCA) data, frequently adopted by sell-side research, assumes cement demand recovery of 51mt from 2009 to 2014F. However, our analysis of the PCA forecasts highlights that only 31mt, or 60%, of this growth is attributable to construction spending growth, with the remaining 40% dependent on increased cement intensity, which we dont see as deliverable. Finally, on the macro level, construction cycles in the UK and the US suggest to us that a recovery in developed market construction demand will take years, not quarters.
On the stocks
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Balance sheets remain stretched, with Lafarge likely to lose its investment-grade rating, in our view. Behind the simple consolidated debt metrics, we analyse the impact of deconsolidating emerging market operations with significant minority shareholdings. In our view, this suggests continued balance-sheet strain for the cement plays. Finally, we have benchmarked and categorised cement capacity between the three cement stocks we cover, looking at what each player 1) influences, 2) consolidates, and 3) ultimately owns. Our analysis indicates that, compared to the other two stocks, Holcim 1) owns proportionately more of what it consolidates, 2) has the largest emerging market capacity position at all three benchmarking levels, and 3) appears to generally understate its capacity positions relative to peer definitions of annual cement capacity, suggesting it has proportionately more capacity to satisfy emerging market growth. We downgrade HeidelbergCement to Hold from Buy, reducing our target price 32%, to 39.6 from 58.0. We maintain our Sell rating on Lafarge, reducing our target price 16.1%, to 36.9 from 44.0. We maintain our Buy rating on Holcim, but reduce our target price 5%, to SFr79.0 from SFr83.0.
Holcim remains our preferred play
Building Materials | Executive Summary | 6 August 2010
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A slog, not a sprint

2Q10 results from Cemex, Lafarge and Heidelberg have not altered our view that the construction cycles in the developed markets of Europe and North America will show a pedestrian and potholed recovery at best. Volumes in 2Q10 showed some recovery yoy, or at least a slowing in the rate of decline, which was driven by two key factors. The first of these was a genuine move towards a trough in activity following the sequential building material volume declines since mid-2006/early 2007. The second was a catch-up effect from volumes lost through the very poor weather in both Europe and North America in 1Q10. By way of example, in 2Q10 Cemex reported cement volume growth of 8% yoy in the US but a decline of 6% in Europe; these translated into 1H10 volume declines of -1% yoy in the US and -13% in Europe. We welcome the 2Q10 recovery in the US but remain concerned that the hangover for the tax credit-driven stimulus to new housing and the continuing pressure on state budgets may limit the scale of a continued recovery in the remainder of 2010. In Europe, we believe forecasts remain even more at risk given the continued 1H10 volume pressure and risks around austerity-driven spending curtailment.
The trough now looks nearer but a smooth recovery path is unlikely
The stimulus spending in developed markets or at least the maintenance of construction-related public spending has delivered a welcome boost to building materials demand. It has also provided a vital offset to the collapse in private spending on residential and later-cycle nonresidential activity and, in the US, the pullback in state-funded construction spending.
We believe cement and aggregates volume recovery will be highly dependent on the degree to which private sector construction recovery can bridge the shortfall as public spending is reduced
Looking forward, we believe cement and aggregates volume recovery will be highly dependent on the degree to which private sector construction recovery can bridge the shortfall as public spending is reduced either through public spending cuts as part of austerity measures, most notably in Europe, or as ARRA (American Recovery and Reinvestment Act of 2009) fiscal stimulus spending falls away in 2011 and spring 2012 in the US.
Emerging markets appear to be the only beacon of growth

Emerging markets, notably in Asia and Latin America but also certain African markets, appear to offer the best prospects for continued cement and aggregates demand growth. However, a recovery in Eastern Europe is likely to prove more challenging given over-build and financing constraints, with Poland looking to be the most positive market, aided by EU infrastructure funds and a more developed economy.
The premise for US volume recovery looks fundamentally at risk

Although the US construction market is part of a wider portfolio of geographic exposures for Lafarge and Holcim and accounts for only 25% of HeidelbergCements FY10F sales, it is, in our view, a critical ingredient both for sentiment and for operationally geared profit recovery on the back of demand recovery. PCA which produces the most widely respected forecasts for US cement demand and is frequently adopted within sell-side forecasts is currently forecasting a 5.0% recovery in 2010, 13.3% in 2011, 18.7% in 2012, 12.6% in 2013 and 8.3% in 2014. However, we have taken a very different view on the scale of US housing recovery and US cement demand recovery.
We continue to forecast that US cement volumes will be either flat to 1% down in 2010
We continue to forecast that US cement volumes will be either flat to 1% down in 2010 and then grow 6.5% in 2011, 6.0% in 2012, 6.5% in 2013 and 6.8% in 2014. The differentials in growth rates are so marked that we have analysed further the PCA forecasts as follows:
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PCA is forecasting cement demand growing 51mt from 70.5mt in 2009 to 121.5mt in 2014. 40% of this forecast recovery is based on the impact of cement intensity increasing for every US dollar spent and/or the timing of cement spend relative to construction recovery. If we strip out intensity and timing effects from the PCA forecasts (as we are sceptical these will be delivered), this suggests demand recovery of 30.6mt over this period.
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If we additionally factor our much more muted residential recovery forecasts into the PCA forecast framework, this reduces the cement demand recovery forecast by a further 12.4mt to 18.2mt, with an annual volume recovery in the range of 4.8% to 6.3%.
While we dont have PCAs databank of information, we believe the scale of cement demand recovery inherent in its forecasts looks increasingly at risk given:
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The data points on US new housing recovery, which are broadly following the pattern we have been expecting; The general weakening in US business and consumer survey data; and The risks around securing longer-term federal funding for infrastructure, with a replacement for the last six-year programme likely to fall victim to mid-term election timing.
We therefore expect significant downward adjustments to market expectations of US construction and cement demand recovery and the scale of rebound in US divisional profits, which will, in our view, dampen both sentiment and profit recovery expectations for the European listed cement stocks we cover.
Our forecasts still equate to a Reagan recovery

Note also that our cement volume recovery forecasts 6.5% in 2011, 6.0% in 2012, 6.5% in 2013 and 6.8% in 2014 would equate to a scale of recovery from the cycle trough not seen since the Reagan recovery, which was boosted by tax incentives and falling interest rates, the latter being an additional obstacle to the current recovery cycle.
We believe pricing remains the critical uncertainty

Many in the market are focusing on a prospective inflection point in demand. However, we believe that pricing dynamics are of greater significance and concern as regards prospects for the cement and aggregate plays. 2Q10 trends from Cemex, which provides useful sequential quarterly pricing data by region, drive home this concern, with cement and ready-mix concrete pricing generally declining qoq, as highlighted in the charts below. Chart 1 : Cemex cement price indices (local currency) (4Q04-2Q10) (4Q08 = 100)
115 110 105 100 95 90 85 80 75 70 4Q04 1Q05 2Q05 3Q05 Mexico United Kingdom Africa and Middle East * 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 USA Europe Asia and Australia * 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 Spain South / Central America and Caribbean * 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
*Volume weighted average price Source: Cemex
In cement, Cemex pricing data indicates that:

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US cement prices declined 3% from 4Q09 to 1Q10 and by a further 2% from 1Q10 to 2Q10; they were thus 8% lower in 1H10 vs 1H09. In Europe, cement prices were broadly flat in 1Q10 vs 4Q09, but in 2Q10 they fell 4% vs 1Q10, leaving pricing 5% lower in 1H10 vs 1H09.
In aggregates, Cemex pricing data indicates that:

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US pricing was up 1% in 1Q10 vs 4Q09 but held flat in 2Q10 vs 1Q10.
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European pricing saw a significant increase in 1Q10 vs 4Q09 (at +3% in Spain, -3% in the UK but +10% in the rest of Europe). However, in 2Q10 prices were 6% lower vs 1Q10, leaving 1H10 pricing ahead of 1H09 by just 2% across Europe as a whole.
Chart 2 : Cemex ready-mix concrete price indices (local currency) (4Q04-2Q10) (4Q08 = 100)
110 105 100 95 90 85 80 75 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Mexico United Kingdom Africa and Middle East * USA Europe Asia and Australia * Spain South / Central America and Caribbean *
*Volume weighted average price Source: Cemex
In downstream, ready-mix concrete pricing movements have also shown weakness.

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US ready-mix concrete prices were down 2% in 1Q10 vs 4Q09 and showed a further slip of 2% in 2Q10 vs 1Q10, with pricing in 1H10 14% lower than in 1H09. In Europe, ready-mix concrete prices were flat (the UK and Spain) to up 6% (for the rest of Europe) in 1Q10 vs 4Q09, but 4% down in 2Q10 vs 1Q10 across Europe, leaving 1H10 pricing 2% lower vs 1H09.
Pricing pressure is now the critical dynamic

We continue to argue that pricing discipline will only be truly tested when market players face all of the following:
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Excess capacity; Demand from customers for better pricing terms to reduce build costs (and thereby induce incremental demand growth); and Demand from investors for operationally geared recovery.
Given the relatively modest marginal cost of production at current activity levels and the need for volume growth, it is not in our view surprising that pricing weakness is now being exhibited after relatively disciplined pricing behaviour as demand collapsed.
Downstream pricing will gear impact via vertically integrated operations

We believe ready-mix pricing is a better reflection of the market's ability to absorb price changes
While much attention is focused on cement prices, a significant proportion of cement volumes is tied to downstream ready-mix and concrete products operations, where transfer pricing policies can have a material impact on reported cement pricing movements. Therefore, we believe readymix pricing is a better reflection of the markets ability to absorb price changes. As a broad rule of thumb, we also flag that a 3% positive movement on cement pricing can be negated by a 1% negative movement on ready-mix concrete pricing, assuming all other input costs are stable.
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Target prices and earnings revisions

Holcim remains our preferred cement play, which we rate Buy with a target price of SFr79. We move HeidelbergCement back to Hold and lower our target price to 39.6. Lafarge remains our least preferred stock Sell with a reduced target price of 36.9.
Lafarge Sell maintained, target price lowered to 36.9 from 44.0

Lafarge remains our least preferred stock
We maintain our Sell rating on Lafarge and lower the target price from 44.0 to 36.9. This reflects: 1) downward revisions to our earnings forecasts, 2) the companys increase in net debt given the 338m wallboard fine it paid on 23 July 2010, its reduced profitability, and foreign exchange headwinds, and 3) the increased risk, in our view, of more challenging trading in the remainder of 2010 and 2011 and risks around the groups investment grade credit rating. The notable area of weaker trading is the Middle East, especially Egypt, where price increases in 2Q10 reduced cement demand dramatically and where a new 5% sales levy will, in our view, prove difficult to pass through into cement selling prices. For normalised diluted earnings preintangible amortisation, we lower our forecasts from 3.60 to 3.13 for FY10 (-13.0%) and from 4.41 to 4.09 for FY11 (-7.3%); the less severe impact in FY11F reflects Lafarges announced 200m additional cost-cutting programme for that year. We discuss our target price in detail in the company section later in this report. It remains based on a weighted mix of P/E, sales multiple, DCF and normalised FY14F valuations. We have also incorporated a valuation for the groups asset replacement cost using Lafarges insurance cover disclosed in the FY09 report and accounts which, with adjustments to reflect foreign exchange impacts since the year-end, suggests an asset replacement cost valuation of 33.7 per share, which we weight 25% within our target price calculation. We include this valuation metric given the risks surrounding Lafarges debt burden and credit rating, which in our view, create continued risk to the share price if the group is forced to make further business disposals or raise additional equity.
HeidelbergCement Hold from Buy, TP lowered to 39.6 from 58.0

We downgrade HeidelbergCement (HC) to Hold from Buy with the target price lowered to 39.6 from 58.0. This target price reduction of 31.7% reflects: 1) downward revisions to our earnings forecasts, 2) the increase in the companys net debt given its reduced profitability and foreign exchange headwinds, and 3) the increased risk, in our view, of more challenging trading in 2011 in the developed markets of Europe and North America.
The more severe revision to FY11F earnings reflects no incremental news from the group on new cost-cutting initiatives and our more cautious view on US and European recovery
For normalised diluted earnings pre-intangible amortisation, we lower our FY10 forecast by 11.1% from 3.23 to 2.87 and our FY11 forecast by 13.2% from 4.55 to 3.95. We also lower our FY12 earnings forecast by 6.7% from 5.64 to 5.26. The more severe revision to FY11F earnings reflects no incremental news from the group on new cost-cutting initiatives and our more cautious view on US and European recovery. We discuss our target price in detail in the company section later in this report. It remains based on a weighted mix of P/E, sales multiple, DCF and normalised FY14F valuations. HC does not provide aggregated insurance cover data to allow the inclusion of an insurance-based valuation; however, the group is not in a position where it needs to protect an investment-grade rating and we therefore see less likelihood of forced business disposals.
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Holcim Buy maintained, target price reduced to SFr79.0 from SFr83.0

We maintain Holcim as Buy with our target price lowered 4.8% to SFr79.0 from SFr83.0. The change in target price again reflects: 1) revisions to our earnings forecasts, 2) the increased risk, in our view, of more challenging trading in 2H10 and 2011, and 3) higher net debt given lower profitability over the forecast period. For normalised diluted earnings pre-intangible amortisation, we lower our FY10 forecast by 8.7% from SFr5.40 to SFr4.93 and our FY11 forecast by 11.3% from SFr6.38 to SFr5.66. Our FY12 earnings forecast is SFr6.43.
Holcim, in our view, is under no pressure to make business disposals and is instead positioned for near-to-mediumterm debt reduction before embarking on a new step-up in cement investment growth
We discuss our target price in detail in the company section later in this report. It remains based on a weighted mix of P/E, sales multiple, DCF and normalised FY14F valuations. An insurance coverbased asset valuation for Holcim has been possible given insurance disclosures in the groups FY09 report and accounts, which suggest, on our calculations, an asset replacement cost valuation per share of SFr64.9. We have not weighted this within our target price calculation as Holcim, in our view, is under no pressure to make business disposals and is instead positioned for near-tomedium-term debt reduction before embarking on a new step-up in cement investment growth.
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Benchmarking valuations and debt metrics

Here we benchmark cement player valuations, with a particular focus on capturing all enterprise value claims to ensure enterprise-value-based comparisons are as comparable as possible. We also detail cement player debt metrics.
Deriving enterprise values

While equity capitalisation is relatively easy to calculate, enterprise values can be calculated in numerous ways, resulting in very different valuation metrics. Here we detail our enterprise values for each cement stock incorporating:
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The equity market capitalisation using either the past calendar year average for past periods or the current share price for prospective periods; Minorities based on 12.5x minority earnings in each reporting period, as opposed to the book value carried in the balance sheet, which is of limited use in arriving at an enterprise value. Our use of a 12.5x multiple to value minority claims is, in essence, a judgement call on our part. By way of example, Indian cement stocks currently trade at between 11.5x and 12.8x for FY10F and between 11.5x and 12.4x for FY11F whilst Indocement (100% consolidated by HeidelbergCement) is currently trading on 17.5x for FY10F and 14.5x for FY11F, according to Bloomberg consensus data. We adopt 12.5x as a minimum but the data is provided in the following table to allow investors to make their own assumption adjustments. Pension deficits as disclosed by each player; Net debt at period-end as reported by each player; Provisions (other than deferred tax) carried by each cement stock; Deduction of associate and financial investments that do not contribute to EBITDA, EBITA or EBIT.
Building Materials | Valuation Comment | 6 August 2010
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Building Materials | Valuation Comment | 6 August 2010 1010
Table 1 : Cement stocks valuation comparatives deriving enterprise values (FY09-13F)

HeidelbergCement Rating Next news event Currency Current share price Target price Potential upside / (downside) (%) Reporting period Current share price* Shares in issue (period end) Market capitalisation (m) Associates PAT Minorities PAT Associates BV Minorities BV Multiplier on minorities and associates Minorities - multiple-based valuation Associates - multiple-based valuation - Financial investments - Equity investments + Provisions + Minorities + Pension deficit + Net debt Enterprise value 3Q10 results 40.20 39.60 (1.5%) FY09 FY10F FY11F FY12F FY13F 33.10 187.5 6,206 28 125 349 602 12.5 1,563 350 (79) (350) 1,200 1,563 872 8,423 40.20 187.5 7,538 26 175 353 646 12.5 2,192 319 (106) (353) 1,230 2,192 1,072 8,212 40.20 187.5 7,538 28 197 321 696 12.5 2,465 344 (133) (344) 1,090 2,465 1,072 7,746 40.20 187.5 7,538 30 222 286 752 12.5 2,774 372 (163) (372) 950 2,774 1,072 7,160 40.20 187.5 7,538 32 249 248 815 12.5 3,106 405 (196) (405) 810 3,106 1,072 6,458 Hold 4 November 2010 1H10 results SFr 70.75 79.00 11.7% FY09 FY10F FY11F FY12F FY13F 58.56 327.1 70.75 327.1 70.75 327.1 70.75 327.1 70.75 327.1 Holcim Buy 19 August 2010 Sell side dinner 42.55 36.90 -11.9% FY09 FY10F FY11F FY12F FY13F 47.30 286.5 42.55 286.5 42.55 286.5 42.55 286.5 42.55 286.5 Lafarge Sell 2 September 2010
19,154 23,141 23,141 23,141 23,141 302 487 1,529 3,011 12.5 6,088 3,775 (677) 1,515 6,088 376 272 533 2,031 3,334 12.5 6,666 3,398 (677) 1,599 6,666 376 285 587 2,386 3,689 12.5 7,332 3,567 (677) 1,659 7,332 376 286 642 2,732 4,078 12.5 8,029 3,576 (677) 1,694 8,029 376 9,292 300 703 3,083 4,504 12.5 8,792 3,755 (677) 1,719 8,792 376 7,420
13,550 12,189 12,189 12,189 12,189 (18) 310 335 1,823 12.5 3,875 (225) (18) 235 402 2,033 12.5 2,938 (225) (5) 270 486 2,168 12.5 3,378 (64) 311 580 2,324 12.5 3,885 354 678 2,501 12.5 4,429 -
(1,591) (1,591) (1,591) (1,591) (1,591) (335) 1,075 3,875 1,178 (402) 1,075 2,938 1,428 (486) 1,075 3,378 1,428 (580) 1,075 3,885 1,428 (678) 1,075 4,429 1,428
(3,775) (3,398) (3,567) (3,576) (3,755)
13,833 12,790 11,020
13,795 14,191 13,218 12,173 10,970 31,547 29,827 29,211 28,579 27,822
17,835 19,783 19,433 18,958 18,383
36,514 40,498 39,284 38,280 37,017
FY09 share prices are average share prices in FY09. Share prices for FY10F-FY13F are at close on 2 August 2010. Source: RBS forecasts
Valuations compared
The valuations for each cement stock are detailed in the following table. We highlight that:
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FY10F EV/EBITDA multiples are within a relatively tight trading range from 7.8x for Holcim to 8.1x for Lafarge and 8.2x for HC. FY10F EV/EBITA multiples are again in a relatively tight range at 11.9x for HC, 12.0x for Holcim and 11.4x for Lafarge. On price to earnings multiples for FY10F, Holcim is trading on 14.3x, HC on 14.0x and Lafarge on 13.6x. On dividend yield, we forecast minimal yield from HC in FY10F at 0.4% with a dividend of 0.15 and yields of 2.1% from Holcim and 2.4% from Lafarge with the Lafarge dividend assumed at 1.00 a 50% cut from the 2.00 declared for FY09.
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Table 2 : Cement stocks - valuation comparatives (FY09-FY13F)

HeidelbergCement Rating Next news event Currency Current share price Target price Potential upside / (downside) (%) Reporting period EV/ sales (x) EV/ EBITDA (x) EV/EBITA (x) EV/EBIT (x) EBITDA margin (%) EBITA margin (%) EBIT margin (%) P/E (x) - normalised P/E (x) - normalised pre intang. amort. Dividend yield Dividend cover (x) Reported book value multiple (x) Invested equity multiple (x) Tangible equity multiple (x) Reported book value per share Invested equity per share Tangible assets per share Basic EPS Normalised diluted EPS Normalised diluted EPS pre amortisation DPS Dividend growth (%) YoY Average shares in issue (m) Fully diluted shares in issue (m) 1.60 8.5 13.1 13.5 18.9% 12.2% 11.8% 8.8 8.1 0.4% 31.5 0.60 0.53 18.68 55.47 62.51 1.77 0.30 3.78 4.08 0.12 0.0% 142.2 142.2 1.67 8.2 11.9 12.2 20.4% 14.0% 13.7% 15.2 14.0 0.4% 17.6 0.62 0.56 7.00 64.57 71.84 5.74 2.30 2.65 2.87 0.15 187.5 187.5 3Q10 results 40.20 39.60 (1.5%) FY09 FY10F FY11F FY12F FY13F 1.54 7.3 10.2 10.4 21.3% 15.2% 14.9% 10.8 10.2 1.9% 5.0 0.59 0.53 4.27 68.01 75.52 9.41 3.59 3.73 3.95 0.75 187.5 187.5 1.41 6.4 8.8 9.0 21.9% 16.1% 15.7% 8.0 7.6 2.5% 5.0 0.56 0.50 2.89 72.30 80.05 13.92 5.04 5.04 5.26 1.00 33.3% 187.5 187.5 1.27 5.7 7.6 7.7 22.4% 16.8% 16.5% 6.6 6.4 3.7% 4.1 0.52 0.47 2.09 77.39 85.39 19.24 6.09 6.09 6.32 1.50 50.0% 187.5 187.5 1.73 7.9 12.6 13.1 21.9% 13.7% 13.2% 11.9 11.0 2.6% 3.3 1.01 0.98 2.12 58.19 59.77 27.67 4.93 4.93 5.34 1.50 298.1 298.3 1.72 7.8 12.0 12.5 21.9% 14.3% 13.7% 15.5 14.3 2.1% 3.1 1.17 1.13 2.39 60.70 62.66 29.64 4.01 4.56 4.93 1.48 327.1 328.1 Hold 04 November 2010 1H10 results SFR 70.75 79.00 11.7% FY09 FY10F FY11F FY12F FY13F 1.57 6.9 10.4 10.7 22.5% 15.1% 14.6% 13.4 12.5 2.4% 3.1 1.10 1.06 2.09 64.53 66.86 33.84 5.30 5.29 5.66 1.70 14.8% 327.1 328.1 1.43 6.1 9.0 9.3 23.4% 15.8% 15.4% 11.7 11.0 2.7% 3.1 1.03 0.99 1.83 68.90 71.61 38.59 6.07 6.05 6.43 1.93 13.6% 327.1 328.1 1.30 5.4 7.9 8.1 24.1% 16.4% 16.0% 10.1 9.6 3.1% 3.2 0.96 0.92 1.60 74.02 77.11 44.09 7.05 7.03 7.40 2.22 15.1% 327.1 328.1 1.99 8.8 12.3 13.6 22.7% 16.2% 14.6% 15.2 13.2 4.2% 1.6 0.90 0.86 12.36 52.28 55.02 3.83 2.77 3.12 3.58 2.00 265.5 265.8 1.80 8.1 11.4 11.8 22.3% 15.8% 15.2% 15.1 13.6 2.4% 2.8 0.68 0.65 5.66 62.66 65.72 7.51 3.37 2.81 3.13 1.00 286.3 286.5 Holcim Buy 19 August 2010 Sell side dinner 42.55 36.90 -11.9% FY09 FY10F FY11F FY12F FY13F 1.65 7.5 10.2 10.6 22.0% 16.1% 15.6% 11.3 10.4 2.4% 3.8 0.65 0.62 4.01 65.43 68.81 10.60 3.76 3.76 4.09 1.00 0.0% 286.5 286.7 1.50 6.7 8.8 9.1 22.3% 17.0% 16.5% 9.3 8.7 2.4% 4.6 0.62 0.58 2.93 69.02 72.73 14.52 4.59 4.59 4.91 1.00 0.0% 286.5 286.7 1.37 5.9 7.7 7.9 23.0% 17.7% 17.3% 7.7 7.3 2.4% 5.5 0.58 0.55 2.20 73.53 77.57 19.36 5.52 5.51 5.84 1.00 0.0% 286.5 286.7 Lafarge Sell 02 September 2010
25.0% 400.0%
(33.3%) (1.4%)
15.1% (50.0%)
FY09 share prices are average share prices in FY09. Share prices for FY10F-FY13F are at close on 2 August 2010. Source: Company data, RBS forecasts
Debt metrics
Given the continued pressure on the cement stocks to deleverage, we detail gearing and debt metrics in the following table. This highlights that Lafarge and HC need to address debt levels, with net debt to EBITDA at Lafarge and HC forecast at 3.9x and 3.4x respectively at the end of calendar 2010. Holcim is, in our view, the only cement stock where debt concerns are limited, with net debt to EBITDA forecast at 2.4x at the end of calendar 2010. Critically, in our view, Holcim is the only cement group that can operate with a predominant focus on its shareholders rather than having to deal predominantly with debt investor and bank debt provider demands, which is, in our view, the situation with both Lafarge and HC.
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Table 3 : Cement stocks - debt metrics compared (FY09-FY13F)

Corporate Currency Reporting period Net debt (m) Net debt / EBITDA (x) EBITDA net interest cover (x) EBITA net interest cover (x) EBIT net interest cover (x) Debt / ordinary shareholders equity
Source: Company data, RBS forecasts
HeidelbergCement FY09 FY10F FY11F FY12F FY13F 8,423 4.0 3.3 2.1 2.0 81.0% 8,212 3.4 4.2 2.9 2.8 67.8% 7,746 2.9 4.6 3.3 3.2 60.7% 7,160 2.4 5.3 3.9 3.8 52.8% 6,458 2.0 6.2 4.7 4.6 44.5%
Holcim SFr FY09 FY10F FY11F FY12F FY13F 13,833 12,790 11,020 2.6 6.6 3.7 3.5 72.7% 2.4 7.1 4.4 4.3 64.4% 1.8 8.5 5.4 5.2 52.2% 9,292 1.4 9.8 6.3 6.1 41.2% 7,420 1.0 12.2 7.9 7.7 30.6%
Lafarge FY09 FY10F FY11F FY12F FY13F 13,795 14,191 13,218 12,173 10,970 3.8 3.9 2.8 2.5 92.1% 3.9 5.5 3.9 3.8 79.0% 3.4 4.6 3.4 3.3 70.5% 2.9 4.9 3.7 3.6 61.6% 2.3 5.8 4.5 4.4 52.1%
Long-term normalised potential revisited

In the following three tables, we update our normalised valuations looking out to 2014, which we view as the earliest time period for what might be considered mid-cycle for the cement stocks in terms of developed market recovery. As previously detailed in our research (Turbulence until conditions clear, 29 January 2010), we have taken forecasts out to 2014 to then consider the discount rate implicit in current share prices and our target prices if our forecasts prove deliverable. The first table below details past, peak, trough and 2014F forecasts for sales, EBITA and EBITA margin as well as past long-term EBITA margins generated. Table 4 : Normalised materials valuations past, peak, trough and 2014F forecasts for sales, EBITA and EBITA margin as well as past long-term EBITA margins
Heidelberg Peak sales year Past peak sales ( m or SFr m for Holcim) Peak EBITA year Past peak EBITA ( m or SFr m for Holcim) Implied peak EBITA margin (%) Average margin (1990-1998) * Average margin (1999-2008) Average EBITA margin (1990-2008) * * = Holcim margins from 1992 Trough year Trough sales ( m or SFr m for Holcim) Trough EBITA ( m or SFr m for Holcim) Trough EBITA margin (%) Absolute levels of sales recovery Absolute level of EBITA recovery Implicit operational gearing - drop-through 2014F sales ( m or SFr m for Holcim) 2014F EBITA ( m or SFr m for Holcim) 2014F EBITA margin (%) 2014F margin relative to 20-year average 2014F EPS ( or SFr for Holcim)
Holcim 2007 27,052 2007 5,163 19.1% 12.5% 16.1% 15.1%
Lafarge 2008 19,033 2008 3,624 19.0% 13.5% 16.5% 15.9%
2008 14,187 2008 2,146.7 15.1% 9.5% 12.2% 11.6%
2009 11,117 1359.3 12.2% 40.0% 100.3% 30.7% 15,559 2,723 17.5% 151.0% 7.5
2009 21,132 2,904 13.7% 43.3% 76.0% 24.1% 30,284 5,112 16.9% 111.8% 8.3
2009 15,884 2,570 16.2% 37.2% 55.7% 24.2% 21,791 4,002 18.4% 115.5% 6.75
The table below highlights EV/EBITA multiples applied to 2014 forecasts, resulting enterprise values implied and the nominal value per share after deducting the various claims on enterprise value. We also cross-check to the nominal P/E multiple implied in 2014F, based on this nominal value per share (after deducting dividends assumed in our forecasts).
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Table 5 : Normalised materials valuations from EV to equity valuations multiples on 2014F and resulting enterprise values
(m/SFr m) Normalised EBITA in 2014F (in local currency*) High EBITA multiple (x) Average EBITA multiple (x) Low EBITA multiple (x) EV - high EBITA multiple based EV - average EBITA multiple based EV - low EBITA multiple based Net (debt) / cash Pension (liabilities) / surplus Other cash provisions and factoring Minorities (12.5x PAT assumed) Associate investments (12.5x PAT assumed) Dividends forecast from FY10-FY13F Total deductions to arrive at equity valuation Shares in issue (m) Total equity value per share in 2014F high ( or SFr for Holcim) Total equity value per share in 2014F average ( or SFr for Holcim) Total equity value per share in 2014F low ( or SFr for Holcim) Implied share price in 2014F high ( or SFr for Holcim) Implied share price in 2014F average ( or SFr for Holcim) Implied share price in 2014F low ( or SFr for Holcim) Implied 2014F PE (x) at: High equity valuation Average equity valuation Low equity valuation
* Lafarge and HeidelbergCement are quoted in Euros with Holcim quoted in Swiss Francs Source: Company data, RBS forecasts
Heidelberg 2,723 9.5 9.0 8.5 25,869 24,507 23,146 (5,674) (1,072) (670) (3,324) 673 638 (9,429) 187.5 88 80 73 84 77 70
Holcim 5,112 10.0 9.5 9.0 51,117 48,561 46,005 (5,248) (376) (1,739) (9,627) 3,764 2,397 (10,830) 328.1 123 115 107 115 108 100
Lafarge 4,002 9.5 9.0 8.5 38,015 36,015 34,014 (9,641) (1,428) (1,075) (5,004) 2,373 1,146 (13,630) 286.5 85.1 78.1 71.1 81.1 74.1 67.1
11.2 10.2 9.2
13.9 13.0 12.1
12.0 11.0 9.9
As can be seen at the bottom of the above table, our normalised 2014F valuations would imply HC trading on 10.2x, Holcim on 13.0x and Lafarge on 11.0x 2014F earnings.
Normalised potential in 2014F what does it tell us?

In the table below, we detail the implicit discount rates required over the four years to arrive back at either the current share prices or our target prices.
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Table 6 : Normalised materials valuations implicit discount rates required 2010-2014F to derive either current share prices or target prices
Heidelberg Current share price ( or SFr for Holcim) Price target ( or SFr for Holcim) Potential upside / (downside) (%) Discount rate implied to derive current share price from High multiple based valuation Average multiple based valuation Low multiple based valuation Discount rate implied to derive target price from High multiple based valuation Average multiple based valuation Low multiple based valuation Implied equity value per share from average multiple based valuation at: Discount rate of 15.0% Discount rate of 12.5% Discount rate of 10.0% Discount rate of 7.5%
Holcim 70.8 79.0 11.7%
Lafarge 42.5 36.9 (13.2%)
40.2 39.6 (1.5%)
21.5% 18.9% 16.1%
14.8% 12.9% 11.0%
18.9% 16.4% 13.7%
22.0% 19.4% 16.6%
11.7% 9.8% 7.9%
22.7% 20.1% 17.4%
46.0 50.2 54.9 60.2
65.8 71.8 78.5 86.1
44.7 48.8 53.4 58.5
Key points
For HC and Lafarge, the implied compound returns are 18.9% and 16.4%, respectively, to arrive at the current share prices, which look highly attractive. However, for HC, we believe this rate of return of 18.9% reflects the risk that developed markets fail to recover in line with our forecasts the value trap risk and/or that debt constraints and limited debt reduction (if trading recovery disappoints) skew earnings in favour of debt rather than equity holders. For Lafarge, the clear risk remains around the balance sheet and a credit rating downgrade as well as, in our view, risks around both developed market recovery and pockets of more difficult trading in certain of its emerging markets, notably Egypt, Jordan and Kenya. The market is implying a much more modest compound return of 12.9% for Holcim, with which we concur given that: 1) Holcims debt position looks manageable, 2) it has a larger emerging market exposure than HC, and 3) as we highlight later in this report, it has, in our view, the most cautiously stated cement capacity from which to deliver growth as well as the greatest potential to deliver incremental growth in emerging markets as debt declines.
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US cement how dramatic will recovery be?

Our forecasts for cement demand recovery until FY14 are some 60% below those of the Portland Cement Association. We examine why and argue that our forecasts are realistic based on construction demand expectations and past cycles.
US construction/cement demand recovery is a key sentiment driver

US recovery critical for sector and volume-geared profit recovery
Although the US construction market is part of a wider portfolio of geographic exposures for Lafarge and Holcim and accounts for only 25% of HCs sales and 9% of its EBIT, it is, in our view, a critical ingredient both for both sentiment and operationally geared profit recovery for each of the players as well as being a key determinant of global economic recovery.
PCAs cement demand growth forecasts are upbeat, in our view

PCA is currently forecasting that cement demand will recover 5.0% in 2010, 13.3% in 2011, 18.7% in 2012, 12.6% in 2013 and 8.3% in 2014. The PCA forecasts are frequently adopted by the sell side and generally commented upon or given additional credence by the cement majors.
Ours are tempered by US housing recovery and state spending cuts

We remain fundamentally cautious on cement volume recovery
However, we continue to take a very different view on: 1) the scale of US housing recovery, and 2) the impact of state budget spending cuts as a neutralising impact on fiscal stimulus spending. We have therefore not adopted the PCA forecasts. We assume US cement volume growth will be 1% at best in 2010, and then 6.5% in 2011, 6.0% in 2012, 6.5% in 2013 and 6.8% in 2014.
Digging behind the forecasts is illuminating

The differences in growth rates between our forecasts and those of PCA are so stark that we have analysed further the PCA forecasts, as detailed in the table below. Table 7 : Portland Cement Association US cement forecasts (2008-14F)
(mt) 2008 2009 2010F 2011F 2012F 2013F 2014F 2009-2014F cumulative Total cement consumption Annual change (%) Portland cement consumption Masonry cement consumption Change in total cement consumed PCA forecasts ignoring timing and intensity Total cement consumption Annual change (%) Portland cement consumption Masonry cement consumption Total impact of construction output recovery Proportion of annual growth via construction output growth Total impact of timing & cement intensity increase Proportion of annual growth via intensity and timing Proportion of growth via construction spend recovery Proportion of growth via timing & cement intensity increase
Source: PCA, RBS
96,546 93,500 3,046
70,552 (26.9%) 68,403 2,149 (25,995)
74,107 5.0% 71,929 2,178 3,556
83,955 13.3% 81,555 2,400 9,847
99,691 18.7% 96,583 3,107 15,736
112,210 12.6% 108,550 3,660 12,519
121,524 8.3% 117,430 4,094 9,314
50,972 49,027 1,945 50,972
96,546
70,552 (26.9%)
72,061 2.1% 69,883 2,178 1,509 2.1%
80,240 11.3% 77,840 2,400 8,179 11.0%
89,954 12.1% 86,846 3,107 9,714 11.6%
96,720 7.5% 93,060 3,660 6,766 6.8%
101,135 4.6% 97,041 4,094 4,415 3.9%
30,583
93,500 3,046
68,403 2,149
28,638 1,945 30,583
2,046 2.9% 42.5% 57.5%
1,669 2.3% 83.1% 16.9%
6,022 7.2% 61.7% 38.3%
5,753 5.8% 54.0% 46.0%
4,899 4.4% 47.4% 52.6%
20,389
60.0% 40.0%
Building Materials | Industry Dynamics | 6 August 2010
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In summary, we have found that:

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PCA is forecasting cement demand growing 51mt from 70.5mt in 2009 to 121.5mt in 2014. 40% of this forecast recovery is based on the impact of cement intensity increasing for every US dollar spent and/or the timing of cement spend relative to construction recovery. If we strip out intensity and timing effects from the PCA forecasts (as we are sceptical these will be delivered), this suggests demand recovery of 30.6mt over this period, based on the PCAs pure construction recovery forecasts.
PCA forecasts adjusted to our housing recovery scenario If we additionally factor our much more muted residential recovery forecasts into the PCA forecast framework, this reduces the cement demand recovery forecast by a further 12.4mt to 18.2mt, with an annual volume recovery in the range of 4.8% to 6.3%. The table below details the PCA forecasts adjusted for our US housing recovery forecasts. Table 8 : Portland Cement Association forecasts adjusted for RBS US housing forecasts (2008-14F)
2008 (mt) Total cement consumption Annual change (%) Portland cement consumption Masonry cement consumption Change in total cement consumed PCA forecasts ignoring timing and intensity Total cement consumption Portland cement consumption Masonry cement consumption Total impact of construction output recovery Proportion of annual growth via construction output growth Total impact of timing & cement intensity increase Proportion of annual growth via intensity and timing Proportion of growth via construction spend recovery Proportion of growth via timing & cement intensity increase
Source: PCA, RBS forecasts
2009
2010F
2011F
2012F
2013F
2014F
2009-14F Cumulative
96,546 93,500 3,046
70,552 (26.9%) 68,403 2,149 (25,995)
71,513 1.4% 69,335 2,178 962
76,127 6.5% 73,727 2,400 4,614
80,709 6.0% 77,601 3,107 4,582
85,975 6.5% 82,315 3,660 5,266
91,827 6.8% 87,733 4,094 5,853
21,276 19,331 1,945 21,276
96,546 93,500 3,046
70,552 (26.9%) 68,403 2,149
71,263 1.0% 69,085 2,178 712 1.0% 250 0.4% 74.0% 26.0%
74,677 4.8% 72,277 2,400 3,414 4.8% 1,200 1.7% 74.0% 26.0%
79,009 5.8% 75,901 3,107 4,332 5.7% 250 0.3% 94.5% 5.5%
84,025 6.3% 80,365 3,660 5,016 6.2% 250 0.3% 95.3% 4.7%
88,727 5.6% 84,633 4,094 4,703 5.5% 1,150 1.3% 80.4% 19.6%
18,176 16,231 1,945 18,176
3,100
85.4% 14.6%
We do assume cement intensity increases but intensity will be volatile

We do assume intensity increases
We should also point out that our cement volume recovery forecasts of 6.5% in 2011, 6.0% in 2012, 6.5% in 2013 and 6.8% in 2014 (detailed at the top of the table) are predicated on the cement intensity of US dollar spending increasing, particularly in 2011 (through later cementintensive ARRA projects) and 2014 (when we expect any new six-year transport programme to contribute materially to cement-intensive infrastructure build). We do not, however, forecast a consistent ongoing sequential increase in the intensity of cement consumed relative to US dollar spending on construction.
Our forecasts still equate to a Reagan-like recovery

Our forecasts for recovery are by no means modest
It should also be noted that our forecasts do effectively equate to a scale of recovery from the cycle trough not seen since the 1980s Reagan recovery, which was boosted by tax incentives and falling interest rates, the latter being an additional obstacle to the current recovery cycle. The chart below details the compound rates of growth as well as peak-to-trough demand growth over the past cycles in the US cement market.
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Chart 3 : US - cement consumption (mt) (1975-2020F)

140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F -24.6% (-9.0%) +40.8% (+5.9%) +24.1% (+5.6%) -14.4% (-5.0%) +57.1% (+4.6%) -43.6% (-10.8%) +72.4% (+6.2%)
Source: USGS
US cement demand recovery at risk of disappointment, in our view

While we dont have PCAs databank of information, we believe the scale of cement demand recovery inherent in its forecasts looks increasingly at risk given:
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data points on the US new housing recovery, which are broadly following the pattern we have been expecting; general weakening in US business and consumer survey data; and risks around securing longer-term federal funding for infrastructure, with a replacement for the last six-year programme likely to fall victim to mid-term election timing.
We therefore expect significant downward adjustments to market expectations of US construction and cement demand recovery and US divisional profit rebound for each cement stock which will, in our view, dampen both sentiment and profit recovery expectations for the European listed cement stocks we cover, with consequent risks to their share price performance.
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Cement consolidated and deconsolidated

Cement plays expansion into emerging markets, in search of growth, has created complex structures with material minorities. We examine the implications for their income statements, cash flows and balance sheets.
Sales, EBITDA and net income

Consolidated sales, EBITDA and EBITA can mislead given minority claims
As a general rule, cement stocks are frequently compared based on sales, EBITDA and EBITA. Quite sensibly, much is made of sales exposure and the EBITDA and EBITA being generated by region as these three metrics are easily gathered from the consolidated accounts of the cement players and segmental information is provided on this basis. However, we highlight that the complex range of ownership structures and the degree to which interests are consolidated fully, consolidated proportionally, equity-accounted or treated as investments has a material impact on sales, EBITDA and EBITA. The end result is a potentially misleading picture in terms of what is truly driving the net income and earnings for equity investors deciding whether to invest in one or other or all of the cement stocks. The appropriation from sales, EBITDA and EBITA is effectively seen through the minority charge in the income statement, which absorbed 24.9%, 29.6% and 74.9% of FY09 reported net income for Holcim, Lafarge and HC, respectively. We are therefore naturally drawn to net income and earnings per share as the ultimate leveller in terms of stock comparison. By way of example of some of the different accounting treatments:
The three cement stocks apply different consolidation methods
Holcim consolidates the full sales, EBITDA and EBITA of its Indian interests, although its shareholdings are respectively 46.2% in ACC Limited and 45.6% in Ambuja Cement. The result is that almost 65% of the groups minority charge in FY09 was driven by the minority interests in the Indian operations. HC consolidates the full sales, EBITDA, EBITA of its Indocement subsidiary, where 49% of the ownership is now held by minorities following the sell-down of the groups equity position in midJune 2009. As a result, Indocement is the most significant minority interest, which reduces net income for HC shareholders. Lafarge consolidates the full sales, EBITDA and EBITA of Lafarge Cement Egypt (formerly the Egyptian Cement Company), which is also currently the groups most significant profit generator in the Middle East and Africa region, but again Lafarge only owns 53.7% of the business with the balance being held by Holcim, where it consolidates only as an investment (ie, recognising only dividend receipts with no credit for its sales, EBITDA, EBITA exposure in this region).
Sales, EBITDA and EBITA mix can therefore be misleading

In our view, these complex ownership structures and different degrees of accounting consolidation mean that sales, EBITDA and EBITA metrics, in particular, can be misleading in terms of deriving both valuation and credit metrics. Valuation comparisons can be adjusted to take account of both the consolidated debt and to include an estimate for the respective claim on the consolidated EBITDA from minority interests. Credit metrics are more difficult to adjust for, but the consolidation or deconsolidation of non100%-owned operations can have material impacts on debt metrics. This is also a concern as debt metrics such as net debt to EBITDA tend to be taken at face value at present by both debt and equity investors, while credit rating agencies appear to take limited consideration of these issues. In essence, we would argue that taking simple net debt to EBITDA without considering the ownership of EBITDA misses a chasm of information as to the true quality and accessibility of this EBITDA for cash and debt management purposes.
Disclosure is relatively poor

While we are naturally drawn towards net income and earnings per share in valuation comparisons, we acknowledge that the cement stocks are, given their complex ownership structures, relatively poor in respect of their disclosure to facilitate detailed forecasting through to net income. The most significant issue is limited financial information on the degree to which sales, EBITDA and EBITA are sourced from non-100%-owned ,subsidiaries which can have a Building Materials | Industry Dynamics | 6 August 2010
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material impact on each of the cement groups generation of earnings that actually accrue to the parent company shareholders. Even if certain information is available through separate public listings, there remain issues around accounting treatments and how the various interests have been consolidated.
Deconsolidating Holcim and HeidelbergCement

By way of example, we have sought to break out Holcims sizeable minority positions in ACC Limited and Ambuja Cement if these two interests were to be deconsolidated and treated as equity investments. The table below details the desktop-based deconsolidation of ACC Limited and Ambuja Cement. We highlight that, by separating out these two interests for FY09:
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sales would have been 16.5% lower; operating EBITDA would have been 24.0% lower; EBIT would have been 34.5% lower; of Holcims reported net income of SFr1.471bn in FY09, SFr286.4m or 19.5% was generated by the groups two Indian businesses, equating to 19.5% of net income; net debt (depending on the Swiss accounting treatment of mutual fund holdings) would have been higher by either SFr199m or SFr576m; headline net debt to EBITDA would have increased from 2.6x to 3.4x; net debt to operating EBITDA would have increased from 3.0x to 4.0x for the groups operations if the Indian interests were deconsolidated based on the lower net cash position in the Indian subsidiaries and 4.1x if the higher net cash position were consolidated.
Table 9 : Holcim Indian operations deconsolidated (FY09)

(SFr m) Consolidated capacity (mt) Consolidated cement sales volume (mt) Consolidated Asia Pacific cement volume (mt) Sales EBITDA Operating EBITDA EBIT Net interest income (expense) Other items Tax Net income Minorities Minority shareholding Net income due to Holcim Holcim shareholding Shareholder net income 1) Net debt 2) Net debt excl Mutual fund investments Net debt/EBITDA (x) Net debt / operating EBITDA (x)
Source: Company data, RBS
Holcim consolidated 202.9 131.9 67.3 21,132 5,229 4,630 2,781 (708) 508 (623) 1,958 (487)
ACC 28.3 21.5 21.5 1,899 658 658 575 (10) (61) (154) 350 (188) 53.8% (162) 46.2%
Ambuja 22.3 18.8 18.8 1,585 452 452 385 11 7 (131) 273 (148) 54.3% (125) 45.7% (158) (282) (0.3)
Holcim ex India 152.3 91.6 27.0 17,647 4,119 3,520 1,821 (710) 561 (338) 1,335 (151) 286
Impact (%) (24.9%) (30.6%) (60.0%) (16.5%) (21.2%) (24.0%) (34.5%) 0.2% 10.5% (45.7%) (31.8%) (69.1%)
1,471.00 13,833 13,833 2.6 3.0
(41) (294) (0.1)
1,471.00 14,032 14,409 3.4 4.0
0.0% 1.4% 4.2% 28.8% 33.4%
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In respect of HC, we have deconsolidated Indocement to look at the group without the full consolidation of this 51% interest. We highlight that for FY09:
!
Sales would have been 6.6% lower; EBITDA would have been 14.0% lower; EBIT would have been 19.4% lower; Of HCs reported net income of 42.6m, 109.3m or 256% was generated by Indocement; Net debt would have been higher by 177m or 2%; Net debt to EBITDA would have increased from 4.0x to 4.8x for the groups operations if the Indocement interest had been deconsolidated.
Table 10 : HeidelbergCement Indocement deconsolidated (FY09)

(m) Consolidated capacity (mt) Group Cement sales volume (mt) Asia Pacific cement sales volume (mt) Sales EBITDA EBIT Net interest income (expense) Other items Tax Net income Minorities Minority shareholding Net income due to HC HeidelbergCement shareholding Extraordinary items Shareholder net income Net debt Net debt / EBITDA (x)
Heidelberg consolidated 109.7 79.3 25.5 11,117.0 2,102.0 1,317.3 (636.2) (695.6) 190.1 175.7 (125.1)
Indonesia 14.8 11.8 11.8 732.4 295.2 255.7 2.7 4.4 (72.6) 190.2 (80.9) 0.4 (109.3) 0.6
Heidelberg ex Indonesia 94.9 67.5 13.7 10,384.6 1,806.8 1061.6 (638.9) (700.0) 262.7 (14.6) (44.1) 109.3
Impact (%) (13.5%) (14.9%) (46.3%) (6.6%) (14.0%) (19.4%) 0.4% 0.6% 38.2% (108.3%) (64.7%)
(8.0) 42.6 8,423.0 4.0
(177.0)
(8.0) 42.6 8,601.0 4.8 0.0% 2.1% 18.8%
In respect of Lafarge, we have not been able to deconsolidate the most material component of its minority interests as financial data for Lafarge Cement Egypt is not available. We have, however, deconsolidated the Malaysian subsidiary Lafarge Malayan Cement Berhad (LMCB), which, though not the most significant minority, does exhibit very similar dynamics ie, an emerging market position with robust EBITDA and net cash as opposed to net debt. This business has also been the subject of the 11.2% shareholding placing announced on 16 July.
Lafarge's largest minority is Lafarge Egypt, but no financial data is available to allow deconsolidation
We have deconsolidated LMCB to look at the Lafarge group without the full consolidation of the 62.2% interest through 2009. We would highlight that for FY09:
!
sales would have been 3.2% lower; EBITDA would have been 3.3% lower; EBIT would have been 3.6% lower; of reported net income of 1.046bn, 82.8m or 7.9% was generated by LMCB; net debt would have been higher by 11.1m; and net debt to EBITDA would have increased from 3.8x to 4.0x for the groups operations if the LMCB interest had been deconsolidated.
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Table 11 : Lafarge Lafarge Malayan Cement Berhad deconsolidated (FY09)

(m) Consolidated capacity (mt) Sales EBITDA EBIT Net interest income (expense) Other items Tax Net income Minorities Minority shareholding Net income due to HC Lafarge shareholding Shareholder net income Net debt Net debt / EBITDA
Lafarge 186.2 15,884.0 3,600.0 2,477.0 (941.0) (230.0) (260.0) 1,046.0 (310.0)
LMCB 12.5 506.4 120.5 89.2 (2.8) 3.7 (7.3) 82.8 (31.3) 37.8% (51.5) 62.2%
Lafarge ex LMCB 173.7 15,377.6 3,479.5 2,387.8 (938.2) (233.7) (252.7) 963.2 (278.7) 51.5 736.0 13,806 4.0
Impact (%) (6.7%) (3.2%) (3.3%) (3.6%) (0.3%) 1.6% (2.8%) (7.9%) (10.1%)
736.0 13,795 3.8
(11.1) (0.1)
0.0%
Why are we focusing on this issue?

In our view, this complexity in respect of ownership below headline sales, EBITDA and EBITA has a number of important ramifications:
Sales and EBITDA analysis can mislead
!
Firstly, a cursory review of sales mix and/or EBITDA and EBITA can materially mislead an investor as to the sales and eventual earnings generating drivers of an investment in the cement space. Secondly, minority interests, while sometimes necessary (shareholder ownership regulation) and sometimes desirable (as a lower risk to make a new market entry), can lead to conflict and disagreement with different shareholders driven by different strategic agendas. Thirdly, and most critically in the current environment, in our view, the presence of minority interests does limit the flexibility in terms of: 1) cost-cutting and the centralisation of costs, and 2) the ability to rearrange or pool financing and access trading cash flows. The reality is that where there are minority interests, the parent group can only extract cash by way of a dividend. This, in our view, has serious ramifications for the credit dynamics of each of the cement stocks, although the credit rating agencies, to date, seem content to operate with consolidated data irrespective of the true debt financing position and earnings or cash generation of the underlying parent and its 100%-owned subsidiaries. Finally and maybe most critically, the fact that deconsolidation can produce such different credit metrics, in our view, highlights that:
Minorities can limit cost-cutting and cash flow management
Debt reduction will remain paramount
Cash flow is likely to be focused on debt reduction, not acquisitions Free cash flow generation where trading cash flows are fully controlled is likely to remain focused on further debt reduction for the cement plays for some considerable period unless, of course, the cement majors look to raise additional equity to support the parent and their 100% consolidated interests. Core debt reduction may be challenging If mature or developed markets fail to show significant volume recovery in order to drive operational gearing improvement gains through to profitability and free cash flow generation, then, again, debt reduction will likely prove more challenging.
Limited developed market recovery may delay debt reduction
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Developed vs emerging market tensions are likely
Mature vs emerging market conflict of priorities There is likely to be an increased probability of internal conflicts if mature or developed markets fail to show significant recovery. There is, in our view, a risk that the European cement majors will have to curtail organic expansion activity in emerging markets in order to dividend more cash generation back to the parent entities to reduce indebtedness and restore financial firepower. This in itself may well create tensions in emerging markets, where management teams are focused on driving cement capacity investment to capture both market growth and increased market share.
Two transactions to date

HeidelbergCement and Lafarge have both completed sell-down transactions
The developed vs emerging conflict is also evident in the partial sell-down of shareholdings by the European majors. HC divested 14.2% of Indocement in mid-2008. Lafarge has sold an 11.2% stake in Lafarge Malayan Cement Berhad. In the short term, these sell-downs crystallise cash proceeds back to the parent, thereby reducing reported net debt while allowing continued full consolidation, even though the sums involved are not materially debt-metric changing. On a medium-to-longer-term view, however, we suspect these transactions may reflect each cement majors desire to limit the taking-on of additional debt to fund commitments for growth capital expenditure. In our view, for the cement majors, reducing and widening the shareholding base in these emerging market operations offers the potential to access additional expansion funding using equity proportionally from new shareholders rather than using net debt, which would require 100% consolidation something that may prove difficult to deliver given ongoing creditmetric pressures.
Credit rating agencies may ignore, but we cant

Our simple deconsolidation of the two key Indian operations in Holcim and the Indocement business consolidated in HC highlights that simple credit rating metrics such as net debt to EBITDA can move dramatically if deconsolidation is attempted with, in reality, dividends the fundamental driver of debt reduction for the cement parent. If economic recovery proves muted in the more developed economies, emerging market growth stalls, price pressure exerts further downward pressure on profitability and cash generation or foreign exchange movements add to net debt, then we suspect a more critical credit rating approach and analysis will likely be applied to the cement sector.
More debt, less EBITDA = an ongoing constraint

While generalisation can be dangerous, it is clear from the desktop deconsolidation exercises above that both Holcim and HC after deconsolidation carry disproportionately more debt and less EBITDA, suggesting their emerging market interests (despite significant ongoing expansionary capital expenditure) do operate with either significantly less debt than their ultimate cement parent or net cash. Without access to detailed accounts, we cannot draw firm conclusions in respect of Lafarges position if more material minority interest operations were deconsolidated. However, we suspect the picture would be similar Lafarge Cement Egypt operated with limited debt at the time it was deconsolidated by Holcim and we suspect this operation is now holding a net cash position given the strength seen in the Egyptian market since 2007 with sales growing from 504m to 704m from FY08 to FY09.
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Benchmarking cement capacity

The cement players different growth strategies and geographic footprints have resulted in very different consolidation techniques and very different levels of cement asset ownership. Here we explore the differences.
Cement capacity
We have sought to benchmark the cement players comparing cement capacity by geography and by ownership, separating influenced, consolidated and equity-owned capacity in order to adjust for the various accounting treatments and consolidation methodologies. While research tends to focus on what each player consolidates in its reported results, different levels of equity ownership and accounting treatments do create material differences between consolidated data and the assets that equity investors are actually acquiring when investing in each cement stock.
What have we done?

Current capacity data is frequently confused. Here we seek to clearly identify influenced, consolidated and equity-owned positions
The different cement players have different consolidation and disclosure policies in respect of their cement capacity as well as the consolidation of sales, EBITDA and EBITA. Here we have sought to drill down into the cement capacity position of each cement stock. We have sought to discriminate the cement players interests at three levels:
!
Influenced capacity This measure captures the total cement capacity to which each cement player has some degree of equity interest. This is the most broad measure and thus, for example, includes Lafarges 35.92% shareholding in the United Cement Company of Nigeria at the full capacity of this operation at 2.5mt per annum. Correspondingly, where Holcim holds 39.9% of Huaxin in China, its full capacity of 51mt per annum has been included. Consolidated capacity This measure captures capacity equivalent to that which each cement player is incorporating in its reported sales, EBITDA and EBITA. This measure is influenced by different consolidation treatments. For example, Holcim consolidates all of its Indian interests although its shareholdings in ACC and Ambuja are 46.2% and 45.6% respectively. The rationale for full consolidation being Holcims ability to control the board of each company. Equity-owned capacity This measure seeks to strip out consolidation and influence impacts and looks instead to examine precisely what level of annual cement capacity each cement stock holds effectively in full ownership. By way of example, Lafarge holds 55.3% of Lafarge Cement Egypt and our calculations would take 55.3% of the capacity quoted by Lafarge at 10.0mt to arrive at a Lafarge equity-owned capacity of 5.5mt per annum.
Not all capacity is created (or at least quoted) equal

Although our analysis takes account of the capacity positions disclosed by each player, one factor that we have difficulty adjusting for is the potential for different definitions of what exactly constitutes annual cement capacity. The differences can, however, be material. For example, with Lafarge Cement Egypt, its capacity is quoted at 10mt per annum by Lafarge, but the last time Holcim quoted the annual capacity for this business (of which it still owns 44.7%), it was disclosed at 8.2mt. Interestingly, when we pursued this point, we found that Holcim has a stated policy that annual capacity is defined around either rated capacity or the best recorded daily production level multiplied by 365 and then discounted by 15%. Lafarge, in contrast, has a policy to take rated production capacity as the annual cement capacity. We have no problem with either definition; each has its merits, but Holcims policy will as a general rule:
!
result in a lower level of quoted annual capacity as the Egyptian example highlights; and effectively underpin Holcims ability to drive production and ensuing sales levels to 100% of quoted capacity and, in theory, still have production upside of theoretically 17.5% if the plant is still capable of performing at close to optimum performance.
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We do not have access to data to compare and adjust capacity to a uniform definition but we do believe a capacity comparison between Lafarge and HeidelbergCement is broadly valid. However, Holcims quoted capacity arguably requires upward revisions of between 10.0% and 17.5%, in our view, to create a broadly comparable capacity measure.
Key conclusions
Which is the biggest?
!
Holcim is the global leader with 270.8mt of influenced capacity, 202.9m of consolidated capacity and equity ownership equivalent to 182.6mt. Lafarge is second with 208.7mt of influenced capacity, 186.2mt of consolidated and equity ownership equivalent to 159.5mt. HC is third with 127.3mt of influenced capacity, 109.7mt of consolidated capacity and equity ownership equivalent to 98.6mt.
The three following charts detail the relative size of each cement player by capacity looking at: 1) influenced capacity; 2) consolidated capacity; and 3) equity-owned capacity. Chart 4 : Influenced capacity split 2009 (mt)
300
250
200 218.2 146.6 100 74.9
150
50 52.6 0 Holcim Heidelberg Mature Regions Emerging Regions Lafarge 52.4 62.1
Source: Company data, RBS estimates
Chart 5 : Consolidated capacity split 2009 (mt)

250
200
150 150.3 100 61.2 50 52.6 0 Holcim Heidelberg Mature Regions Emerging Regions Lafarge 48.5 59.1 127.1
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Chart 6 : Equity-owned capacity split 2009 (mt)

200 180 160 140 120 100 80 60 40 20 0 Holcim Heidelberg Mature Regions Emerging Regions Lafarge 51.1 48.2 59.2 50.4 131.5
100.4
Which is the most emerging market biased? In order to allow benchmarking along identical lines, we have segmented each cement players capacity into comparable regions, with Eastern Europe separated from Western Europe and Australia, New Zealand and Japan (here grouped as Oceania) separated from Asia as well as breaking the Middle East, Africa and the Mediterranean into the Middle East and North Africa and separating out Sub-Saharan Africa. The charts below show each cement players capacity distribution by both geographic region and degree of influence, consolidation and equity ownership. Chart 7 : Holcim capacity split 2009 (mt)
300 2.9 250 17.0 2.4 200 144.8 150 85.6 71.3 8.8 2.3 8.9
Sub-Saharan Africa Middle East and North Africa Asia Latin America Eastern Europe Oceania North America Western Europe 4.0
100
31.0 22.5 5.1
31.0 22.5 20.6 26.9 Consolidated 5.1
27.9 21.0 20.6 26.5 Equity owned
50
20.6 26.9
0 Influenced
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Chart 8 : Lafarge capacity split 2009 (mt)

250
200
16.2 38.0 13.4 33.1 63.6 12.3 23.6 51.9 8.5 3.0 20.3 21.2 37.9 Consolidated 8.5 0.0 17.6 21.2 36.8 Equity owned Sub-Saharan Africa Middle East and North Africa Asia Latin America Eastern Europe 7.1 1.2 Oceania North America Western Europe
150
100 20.3 50 21.2 37.9 0 Influenced
39.8
Chart 9 : Heidelberg capacity split 2009 (mt)

140 6.2 120 100 80 60 40 20 0 Influenced Consolidated Equity owned 7.6 6.2 3.0 26.8 0 27.1 4.5 14 13.5 0 25.2 1.1 13.5 4.9 3.0 17.9 0 24.7 1.1 Sub-Saharan Africa Middle East and North Africa Asia Eastern Europe Oceania North America Western Europe
34.1
33.9
33.9
33.5
Who owns the larger part of what they consolidate?

Holcim owns 91.7% of its consolidated capacity
!
Holcim owns the larger share of the cement capacity it consolidates. At 31 December 2009, the group reported 202.9mt of consolidated cement capacity, 11.1% above the equity-owned position of 182.6mt. HC is close behind with reported consolidated capacity of 109.7mt and equity-owned capacity of 98.6mt, with the consolidated position being 11.3% above the equity-owned position. Lafarge is somewhat out of kilter with consolidated capacity of 186.2mt, 16.7% above the equity-owned position of 159.5mt.
Lafarge owns 85.7% of its consolidated capacity
Who has the most known capacity to acquire or consolidate? The corollary of the above is the degree to which each stock has cement capacity over which it has influence that could strategy, finance, minority-party appetite and valuation permitting over time be acquired to either: 1) reduce minority interests and their claims on net income, or 2) increase ownership of associate or investment interests. The gradual acquisition of this capacity would, in our view, offer a lower risk profile to future acquisition spend given the knowledge and understanding of both particular markets and particular cement assets that the existing investment should have created.
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In terms of absolute capacity over which each stock has influence but does not own:
!
Holcim has 88.2mt of potential capacity over which its ownership can expand over the coming years (before considering limits on ownership imposed in certain markets) the most significant opportunities being in Asia, where the group has influence over 144.8mt but owns just 71.3mt, leaving 73.5mt of expansion potential. Lafarge has 49.2mt of potential capacity over which its ownership can expand over the coming years (again before considering limits on ownership imposed in certain markets) the most significant opportunity again being in Asia, where the group has influence over 63.6mt but owns 39.8mt, leaving 23.8mt of expansion potential. HC has 28.7mt of potential capacity over which its ownership can expand over the coming years (again before considering limits on ownership imposed in certain markets). The most significant opportunity again is in Asia or more particularly in Indonesia. In Asia, HC has influence over 34.1mt but owns 17.9mt, leaving 16.2mt of expansion potential.
Developed and emerging market exposures at equity ownership level

Holcim has the least capacity in developed markets, with Western Europe, North America and Oceania (Australia, New Zealand and Japan) accounting for 28.0% of its capacity with 72.0% in emerging markets. Heidelberg has the greatest proportion of its capacity in developed markets at 48.8% with 51.2% in emerging markets.
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Building Materials | Industry Dynamics | 6 August 2010 3131
Table 12 : Cement capacity by geography and ownership structure (FY09)

(mt) Holcim Mature regions Western Europe North America Oceania Emerging regions Eastern Europe Latin America Asia Middle East and North Africa Sub-Saharan Africa TOTAL 52.6 26.9 20.6 5.1 218.2 22.5 31.0 144.8 17.0 2.9 270.8 Influenced Heidelberg 52.4 33.9 14.0 4.5 74.9 27.1 0.0 34.1 7.6 6.2 127.3 Lafarge 62.1 37.9 21.2 3.0 146.6 20.3 8.5 63.6 38.0 16.2 208.7 Holcim 52.6 26.9 20.6 5.1 150.3 22.5 31.0 85.6 8.8 2.4 202.9 Consolidated Heidelberg 48.5 33.9 13.5 1.1 61.2 25.2 0.0 26.8 3.0 6.2 109.7 Lafarge 59.1 37.9 21.2 0.0 127.1 20.3 8.5 51.9 33.1 13.4 186.2 Equity-owned Holcim Heidelberg 51.1 26.5 20.6 4.0 131.5 21.0 27.9 71.3 8.9 2.3 182.6 48.2 33.5 13.5 1.1 50.4 24.7 0.0 17.9 3.0 4.9 98.6 Lafarge 59.2 36.8 21.2 1.2 100.4 17.6 7.1 39.8 23.6 12.3 159.5 Total held by the three Influenced Consolidated 167.1 98.7 55.8 12.6 439.6 69.9 39.5 242.5 62.5 25.3 606.7 160.2 98.7 55.3 6.2 338.6 68.0 39.5 164.2 44.9 22.0 498.8 Equity-owned 158.4 96.9 55.3 6.3 282.3 63.3 35.0 129.0 35.5 19.5 440.7
Mature regions Western Europe North America Oceania Emerging regions Eastern Europe Latin America Asia Middle East and North Africa Sub-Saharan Africa TOTAL
19.4% 9.9% 7.6% 1.9% 80.6% 8.3% 11.4% 53.5% 6.3% 1.1% 100.0%
41.2% 26.6% 11.0% 3.5% 58.8% 21.3% 0.0% 26.8% 5.9% 4.9% 100.0%
29.8% 18.2% 10.2% 1.4% 70.2% 9.7% 4.1% 30.5% 18.2% 7.8% 100.0%
25.9% 13.3% 10.2% 2.5% 74.1% 11.1% 15.3% 42.2% 4.3% 1.2% 100.0%
44.2% 30.9% 12.3% 1.0% 55.8% 23.0% 0.0% 24.4% 2.7% 5.7% 100.0%
31.7% 20.4% 11.4% 0.0% 68.3% 10.9% 4.6% 27.9% 17.8% 7.2% 100.0%
28.0% 14.5% 11.3% 2.2% 72.0% 11.5% 15.3% 39.1% 4.9% 1.3% 100.0%
48.8% 34.0% 13.7% 1.1% 51.2% 25.1% 0.0% 18.1% 3.0% 4.9% 100.0%
37.1% 23.1% 13.3% 0.7% 62.9% 11.0% 4.5% 25.0% 14.8% 7.7% 100.0%
27.5% 16.3% 9.2% 2.1% 72.5% 11.5% 6.5% 40.0% 10.3% 4.2% 100.0%
32.1% 19.8% 11.1% 1.2% 67.9% 13.6% 7.9% 32.9% 9.0% 4.4% 100.0%
36.0% 22.0% 12.5% 1.4% 64.0% 14.4% 7.9% 29.3% 8.1% 4.4% 100.0%
Geographic concentration of equity-owned capacity for each player

The three following charts and the table above summarise cement capacity at the various levels of influence and ownership on a side-by-side basis.
Key geographic plays looking at equity-owned capacity

At the equity-owned capacity level, as can be seen in the last of the three charts overleaf, the cement players with the most significant relative exposure by geographic region are as follows:
!
Western Europe is most dominant for HC with 34.0% of its cement capacity in this region. Lafarge is second with Western Europe accounting for 23.1% of its equity-owned capacity. North America is again most dominant for HC with 13.7% of its cement capacity in this region. Lafarge is second with this region accounting for 13.3% of its equity-owned capacity. Eastern Europe is most dominant for HC with 25.1% of its cement capacity in this region. Holcim is second with Eastern Europe accounting for 11.5% of its equity-owned capacity. Latin America is most dominant for Holcim with 15.3% of its equity-owned capacity in this region. Lafarge is second at 4.5%, although this proportion will grow to approximately 9% with the Brazilian cement asset swap in relation to the sale of its Cimpor holding. Asia is most dominant for Holcim with 39.1% of its equity-owned cement capacity in this region. Lafarge is second with 25.0%. The Middle East and North Africa is most dominant for Lafarge with 14.8% of its equity-owned capacity in this region. Holcim is second with 4.9%. Sub-Saharan Africa is most dominant for Lafarge with 7.7% of its equity-owned capacity in this region. HC is second with 4.9%.
In Appendix 1 at the back of this note, we include global maps which highlight the countries in which each player has operations.
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Chart 10 : Influenced capacities 2009 (mt)

160 140 120 100 80 60 40 20 0 Western Europe North America Oceania Eastern Europe Holcim Latin America Lafarge Asia Heidelberg Middle East and North Africa Sub-Saharan Africa 33.9 26.9 20.6 14.0 37.9 21.2 5.1 4.5 3.0 0.0 22.5 27.1 31.0 20.3 8.5 34.1 17.0 7.6 2.9 6.2 38.0 16.2 144.8
63.6
Chart 11 : Consolidated capacity 2009 (mt)

90 80 70 60 50 40 30 20 10 0 Western Europe North America 26.9 33.9 37.9 31.0 20.6 13.5 5.1 21.2 22.5 25.2 20.3 13.4 8.5 1.1 0.0 Eastern Europe Holcim 0.0 Latin America Lafarge Asia 8.8 3.0 Middle East and North Africa 2.4 6.2 33.1 26.8 51.9 85.6
Oceania
Sub-Saharan Africa
Heidelberg
Chart 12 : Equity-owned capacity 2009 (mt)

80 71.3 70 60 50 40 30 20 10 0 Western Europe North America Oceania Eastern Europe Holcim Latin America Lafarge Asia Heidelberg Middle East and North Africa Sub-Saharan Africa 26.5 20.6 13.5 4.0 7.1 1.1 1.2 0.0 8.9 3.0 2.3 4.9 36.8 33.5 21.2 24.7 17.6 27.9 23.6 17.9 12.3 39.8
21.0
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Macro outlook in summary

On the macro outlook, emerging market growth remains underpinned, in our view. However, developed markets in the US and Europe are at risk of downgrades to expectations as to the speed and scale of construction demand recovery. Public spend rundown vs private sector recovery As our cycle work discussed later in this report suggests, the most material risk in our view is an extended period of limited construction demand recovery as slower private sector recovery combines with the rundown of fiscal stimulus spending that acted as a support during 2009-10.
On the US outlook
We remain of the view that the US housing recovery will, after the tax-driven boost of 2009 and spring 2010, ease back during 2Q/3Q10 before a gradual housing starts recovery resumes. Our views remains significantly out of line with consensus expectations for US housing starts recovering at growth rates of +40% for FY11 and FY12. We assume that housing starts will recover 4.7% from 554,000 in 2009 to 580,000 in 2010 before growing more robustly at 15.5% to 670,000 in 2011 and 14.2% to 765,000 in 2012. In contrast, PCA assumes that starts will recover 7.4% to 595,000 in 2010 and then grow 49.9% to 895,000 in 2011, with a further 43.8% to 1,283,000 in 2012, 15.5% to 1,482,000 in 2013 and 7.2% to 1,588,000 in 2014. The different views on US housing are detailed below. Table 13 : US housing starts - forecasts compared (2008-14F)
(thousands of units) Portland Cement Association - Winter 2009 Portland Cement Association - Spring 2010 Annual change National Association of Home Builders (19/5/10) Annual change National Association of Realtors Annual change Average Annual change RBS Annual change RBS v average
Source: NAHB, PCA, NAR, RBS forecasts
2008 906 906 906 906 906
2009 548 553 554 553 553
2010F 627 595 7.6% 664 19.9% 639 15.6% 633 14.3%
2011F 930 892 49.9% 991 49.2% 1,036 62.1% 973 53.8% 670 15.5% (31.1%)
2012F 1,249 1,283 43.8%
2013F 1,478 1,482 15.5%
2014F 1,594 1,588 7.2%
2010-14F 5,878 5,840
1,283 28.4% 765 14.2% (38.7%)
1,482 18.3% 880 15.0% (40.5%)
1,588 7.8% 1,012 15.0% (36.5%)
5,927
906 (33.1%) 0.0%
554 (38.9%) 0.1%
580 4.7% (8.3%)
3,908 (34.1%)
The basis for our view is discussed later in this report, but remains centred on: 1) vacant existing homes; 2) foreclosure pressures, which remain significant; 3) shadow new home inventory levels (which are missed in US Census Bureau data); 4) the degree to which activity has been supported by the US homebuyer tax credit (which has now ended); 5) issues around mortgage finance and a new world order of more prudent and regulated lending; and 6) limited employment recovery and volatile consumer confidence.
Non-residential
On US non-residential activity, the latest Architectural Billings Index proved to be weak and we see little reason other than the speed at which this market is declining to expect a turnaround until mid-2011 at the earliest. Non-residential construction declined 17.4% on an inflation-adjusted basis in 2009 from the December 2008 peak and, at the end of May 2010, non-residential was 28.1% down from the peak. For 2010, we continue to forecast a decline of 25%, implying a total 38% decline from the December 2008 peak in activity levels with a further 4% decline in 2011 taking the total peak-to-trough decline to 40.25%.
Building Materials | Macro Dynamics | 6 August 2010
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Chart 13 : Inflation-adjusted total non-residential construction (US$bn)

440 400 360 320 280 240 200 160 120 80 40 0 35 60 13 7 23 52 30 7 49 73 20 15 25 80 68 19 25 66 19 16 28 68 37 12 32 66 17 14 33 75 43 16 June 2006 resident. peak 33 68 17 14 33 77 58 45 17 37 19 20 40 87 110 106 14 17 36 52 39 26 12 15 33 43 31 18 May 2010 current 113 59 50 55 Total non residential down 17.4% during 09 Down 28.1% through May10 Private manufacturing Private transport, comm., power Private relig., amus. & entert. Private educational Private healthcare Private commercial Private office Private lodging
December 1993 July 2001 - Non August 2003 -series start resident. peak Non resident. trough
August 2006 - December 2008 December 2009 Private const. - Non resident. - 12 month peak peak decline
Source: US Census Bureau
Non-residential ex manufacturing/transport/power has been harder hit

The chart below highlights that transport, communication and power spending have actually been significant offset factors within non-residential construction activity. If these three components are excluded, then non-residential activity in the remaining areas fell 37.1% in 2009 on an inflationadjusted basis, again highlighting how difficult conditions have been in the more speculative areas of non-residential construction. Chart 14 : Inflation-adjusted non residential construction (ex manufacturing, transport and power) (US$bn)
260 240 220 200 180 160 140 120 100 80 60 40 20 0 30 7 52 68 37 19 12 August 2003 Non resident. trough 43 16 June 2006 resident. peak 13 7 23 80 20 15 25 19 16 28 75 77 58 45 17 August 2006 Private const. peak 37 39 26 19 20 17 14 33 17 14 33 87 40 14 17 36 52 43 31 18 May 2010 current 12 15 33 Private relig., amus. & entert. Private educational Private healthcare Private commercial Private office Private lodging Non residential ex man. trans. & power Down 37.1% in 09
68
December 1993 July 2001 - Non -series start resident. peak
December 2008 December 2009 - Non resident. - 12 month peak decline
Source: US Census Bureau, RBS
Infrastructure
On US infrastructure, ARRA funds are now being spent but within a competitive pricing environment for both cement and aggregates and, while funding should support activity in 2010 and to some extent in 2011, state budgets remain under intense pressure and are likely to continue to act as an offset to direct ARRA-driven infrastructure spending stimulus. There are plans being proposed to increase interim spending on the Federal roads program from US$41bn through to December 2010 to US$45bn through to December 2011, which could help offset what will be an expected decline in the ARRA impact in 2011 relative to spend in 2010. However, signing-off at such a spending level still requires US Senate approval. Beyond 2011, there remains a significant risk that cement and aggregates volume recovery will be muted at best as Federal ARRA funding falls away and state budgets, which will still require rebalancing, have to focus on meeting existing revenue expenditure before significant capital projects can incrementally drive state-funded public construction spending.
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State budgets remain challenged

We have not been able to find data explaining the degree to which state budget cuts have impacted construction activity. However, the two charts below do highlight that US states remain in very difficult financial positions, with budget shortfalls in 2009 and 2010 dwarfing the experience of the 2002-04 state budget crisis. The Center on Budget and Policy Priorities (CBPP) is forecasting shortfalls of US$200bn for 2010, US$180bn for 2011 and US$120bn for 2012, as shown in the chart below. Chart 15 : Total state budget shortfall in each fiscal year (US$bn)
Last recession 2002 0 (40) (75) (50) (80) (110) (112)* (45) (76)* 2003 2004 2005 2009 2010 2011 2012
(100)
(200) (180)
(120)
(150)
Estimates
(200)
Source: Center on Budget and Policy Priorities survey
ARRA funds help cut deficits but spending will remain under pressure
ARRA funds are being deployed directly to states to help reduce state deficits but as the next chart highlights these are likely to be fully utilised by end-2011, leaving a total shortfall of US$119bn in 2012. In 2012, there is therefore a significant risk that state budgets will again be under severe pressure to deliver cuts to negate this US$119bn shortfall unless another federal stimulus programme is enacted to help bridge the funding gap. Chart 16 : Large deficits remain after the Recovery Act (US$bn)
FY2009 0 (39) (63) (50) (71) (100) (137) (150) (144) (119) (36) FY2010F FY2011F FY2012F
(200) Budget gaps offset by Recovery Act Remaining budget gaps after Recovery Act
Source: CBPP analysis using data from US Department of Health and Human Services, state budget documents
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A risk too for any new infrastructure programme if matching remains

This state level pressure also remains a significant risk to any new six-year federal infrastructure programme as the basis of previous programmes has been that matching funds are required from each state to access federal funds. Given the outlook for state budgets, there is clearly a significant risk that individual states will struggle to deliver matching funds.
ARRA spending
US fiscal stimulus is incrementally positive in 2010 at US$6.5bn, but incrementally negative in 2011F (US$2.7bn) and 2012F (US$9.3bn)
As at June 2010, approximately US$9.9bn or 37% of the total obligated ARRA funds of US$26.8bn had been dispersed on contracts, with spending in the month of June 2010 increasing mom to US$1.3bn. There thus remains US$16.9bn to be spent through to February 2012. As spending currently stands, it looks likely that ARRA funds will be delivered at US$5.5bn in 2009, US$12.0bn for 2010 and US$9.3bn in 2011, equating to year-on-year incremental positive impacts of US$5.5bn in 2009 and US$6.5bn in 2010 before negative year-on-year impacts of US$2.7bn in 2011 and US$9.3bn in 2012. While some way off, in 2012 the industry will be reliant on private sector recovery and state budget spending recovery to offset the fall-away in ARRArelated spending.
SAFETEA-LU replacement looks some way off

Elections likely to delay new sixyear federal spending plan
We caution that, with mid-term elections ahead and any new programme likely to require new revenue-raising initiatives (most likely around a change in the gas tax), a delay in agreeing to a new six-year programme is a very probable outcome given the political cost a gas tax proposal could create. A sizeable step-up in spending for a new program, at least in the early years, is also unlikely, in our view, given the increasing pressure to rein in federal spending.
US construction forecasts in summary

Below we detail the PCA forecasts with winter 2009 and spring 2010 detailed. In essence, the bottom in terms of short-term revisions was not reached in the winter 2009 forecasts and we remain to be convinced that spring 2010 forecasts are underpinned. As mentioned above, we believe a new residential recovery is the most at risk component to the PCA forecasts. Table 14 : PCAs US construction output and cement consumption forecasts (2007-14F)
Residential Winter 2009 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F
Source: PCA (Autumn 2009/Spring 2010)
Non-residential Winter 2009 12.4% 7.9% (18.5%) (22.4%) (3.3%) 10.4% 15.2% Spring 2010 8.0% (17.0%) (29.3%) 0.6% 15.4% 18.2% 11.3% Winter 2009 4.8% 2.0% (4.9%) 3.6% 2.9% 3.4% 2.7% -
Public Spring 2010 2.0% (0.9%) 1.1% 1.4% 1.5% 2.2% 3.5%
Overall output Winter 2009 (5.7%) (7.7%) (16.6%) (2.9%) 14.9% 10.7% 11.1% Spring 2010 (5.7%) (7.7%) (13.7%) (5.5%) 11.2% 13.9% 8.6% 4.6%
Cement consumption Winter 2009 (9.6%) (15.1%) (26.3%) 5.2% 16.5% 14.5% 11.5% Spring 2010 (15.6%) (26.9%) 5.0% 13.3% 18.7% 12.6% 8.3%
Spring 2010 (20.3%) (25.1%) (27.0%) 5.8% 31.2% 26.5% 10.3% 4.1%
(20.3%) (25.1%) (29.1%) 9.5% 43.1% 16.9% 16.5% -
Europe
Trading has been mixed so far this year. Reaching a clear-cut view on each major European economy with any degree of conviction has been challenging given the degree of impact from poor weather conditions in the early months of the year, restock dynamics in parts of Europe in new residential activity and underlying demand recovery stability or weakness. What does stand out, however, is that the concerns around the euro, the European banking sector and the growing consensus to control and shrink public deficits do not bode well for long-term capital investment ie, new build construction. In the following table, we detail Euroconstructs latest summary forecasts for its 19 European members.
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Table 15 : Euro-area GDP change forecasts (%) (2005-12F)

2005 GDP December 2008 June 2009 December 2009 June 2010 Total construction output December 2008 June 2009 December 2009 June 2010 Cement consumption December 2009 June 2010
Source: Euroconstruct, Dublin 2010
2006 3.0 3.1 3.1 3.1
2007 2.9 2.8 2.8 2.8
2008E 1.2 0.8 0.8 0.7
2009F 0.1 (3.7) (4.0) (4.0)
2010F 1.4 0.0 0.7 1.1
2011F 2.0 1.6 1.6 1.6
2012F
1.9 2.0 2.0 2.0
2.0 2.0
-4.3 1.7 1.7 1.7 3.9 3.7 3.8 2.6 2.3 2.4 (3.1) (3.0) (3.1) (7.5) (8.4) (8.8)
0.4 (1.0) (2.2) (4.0)
2.2 1.6 1.6 1.2
2.5 2.4
5.8 5.9
0.9 0.8
(8.5) (8.2)
(16.7) (17.3)
(4.2) (6.8)
2.1 1.2
2.8 2.3
Total construction output still downward revisions

As the table above highlights, GDP growth expectations have been revised positively for 2010 and held stable for 2011 and total construction output growth estimates have been revised lower: from -8.4% to -8.8% for 2009, more sharply from -2.2% to -4.0% for 2010, and to +1.2% from +1.6% for 2011.
Sub-segments revised lower, except for CEE civil engineering

As of June 2010, Euroconstruct forecasts across residential, non-residential and civil engineering have been revised lower with one exception: Central and Eastern European civil engineering, where forecasts for 2010-12 have been revised upwards. Table 16 : Residential annual change forecasts (%) (2005-12F)
2005 Total residential December 2008 June 2009 December 2009 June 2010 New residential December 2008 June 2009 December 2009 June 2010 Renovation residential December 2008 June 2009 December 2009 June 2010 Housing completions (units) December 2008 June 2009 December 2009 June 2010
2006 4.4 4.4 4.3 4.4
2007 0.6 1.0 0.6 0.7
2008E (6.9) (7.3) (7.3) (7.6)
2009F (7.1) (11.3) (12.3) (13.1)
2010F (0.5) (0.7) (2.1) (3.0)
2011F 1.8 1.9 2.1 2.3
2012F
2.5 2.5 2.5 2.5
2.9 3.6
4.5 4.4 4.4 4.4
6.3 6.2 6.1 5.5
(1.1) (0.4) (0.7) (2.2)
(13.4) (14.0) (14.1) (16.2)
(13.3) (19.7) (22.5) (24.7)
(1.7) (0.9) (4.3) (6.6)
2.5 2.2 3.1 3.7 4.1 6.3
0.5 0.6 0.6 0.6
2.5 2.5 2.4 3.3
2.5 2.6 2.0 3.7
0.0 (0.1) (0.2) 0.8
(1.5) (3.5) (3.2) (3.6)
0.6 (0.4) (0.6) (0.7)
1.3 1.7 1.3 1.5 2.1 1.8
2,377.9 2,378.3 2,378.3 2,378.3
2,547.4 2,548.4 2,552.3 2,573.9
2,612.6 2,620.8 2,619.0 2,653.6
2,361.0 2,431.3 2,385.8 2,421.1
1,824.7 1,727.0 1,887.6 1,908.0
1,747.3 1,529.6 1,450.6 1,461.2
1,799.0 1,556.4 1,449.9 1,461.2 1,545.6 1,491.7
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Table 17 : Non-residential annual change forecasts (%) (2005-12F)

2005 Total non-residential December 2008 June 2009 December 2009 June 2010 Total new non-residential (%) December 2008 June 2009 December 2009 June 2010 Total renovation non-residential (%) December 2008 June 2009 December 2009 June 2010
2006 3.7 3.5 0.3 3.2
2007 5.0 5.0 4.8 5.1
2008E 1.3 0.8 1.2 1.2
2009F (3.6) (8.1) (9.7) (8.9)
2010F (0.6) (4.3) (4.6) (6.9)
2011F 1.6 0.1 (0.3) (0.3)
2012F
0.6 0.6 0.6 0.6
1.5 1.3
0.7 0.8 0.8 0.8
5.0 4.7 4.4 4.1
6.4 6.5 6.4 7.0
1.6 1.2 1.8 1.4
(5.4) (10.7) (12.7) (12.4)
(1.5) (6.5) (6.9) (11.1)
1.7 (0.5) (0.8) (1.1) 1.5 0.8
0.5 0.3 0.3 0.3
1.9 1.8 1.8 2.1
2.9 2.8 2.7 2.8
0.8 0.2 0.3 0.9
(1.0) (4.3) (5.4) (4.3)
0.7 (1.3) (1.7) (1.9)
1.4 0.8 0.3 0.4 1.4 1.9
Table 18 : Civil engineering annual change forecast (%) (2005-12F)

2005 Euroconstruct countries December 2008 June 2009 December 2009 June 2010 CEE December 2008 June 2009 December 2009 June 2010
2006 3.3 3.3 3.1 3.6
2007 2.7 2.7 2.4 2.8
2008E 1.8 0.6 0.4 0.9
2009F 0.4 1.3 1.7 1.0
2010F 3.7 2.7 0.8 (1.6)
2011F 3.7 2.9 3.3 2.0
2012F
1.3 1.3 1.3 1.3
2.9 2.3
13.3 13.3 13.3 13.3
5.5 5.5 5.5 8.6
2.8 2.8 2.8 2.0
5.8 8.0 8.4 8.3
13.3 12.6 17.7 17.2
22.3 17.0 16.9 18.2
19.3 18.1 18.4 21.5 13.9 17.7
Cement consumption revised lower

Euroconstruct members have also reduced cement consumption forecasts, with a decline now estimated at 17.2% for 2009 and forecasts revised down from -4.2% to -6.8% for 2010 and from +2.1% to +1.2% for 2011.
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Table 19 : Cement consumption (mt) (2007E-12F)

2007E Germany Change year on year (%) France Change year on year (%) UK Change year on year (%) Italy Change year on year (%) Switzerland Change year on year (%) Netherlands Change year on year (%) Spain Change year on year (%) Portugal Change year on year (%) Ireland Change year on year (%) Denmark Change year on year (%) Sweden Change year on year (%) Poland Change year on year (%) Total cement consumption Change year on year (%) Euroconstruct universe (ex Germany from 2010) Change year on year (%)
Source: Euroconstruct June 2010, RBS estimates
2008E 27.59 1.1% 24.12 (2.7%) 10.97 (1.0%) 41.83 (9.8%) 4.63 0.6% 5.94 6.2% 42.68 (23.8%) 6.86 (6.1%) 4.21 (20.6%) 2.78 (4.2%) 2.47 (8.6%) 17.50 1.7%
2009E 25.38 (8.0%) 20.38 (15.5%) 10.16 (7.4%) 36.10 (13.7%) 4.73 2.2% 5.35 (10.0%) 28.64 (32.9%) 5.80 (15.4%) 2.40 (43.0%) 2.50 (10.0%) 1.95 (21.0%) 15.47 (11.6%) 158.90 (17.5%) 180.8 (17.3%)
2010F 24.75 (2.5%) 19.97 (2.0%) 9.88 (2.8%) 34.58 (4.2%) 4.79 1.2% 4.55 (15.0%) 22.34 (22.0%) 5.13 (11.5%) 1.92 (20.0%) 2.58 3.0% 1.99 2.0% 16.07 3.9% 148.87 (6.3%) 144.8 (6.8%)
2011F 25.24 2.0% 19.87 (0.5%) 9.92 0.5% 35.79 3.5% 4.92 2.8% 4.55 0.0% 21.11 (5.5%) 4.98 (2.9%) 1.82 (5.0%) 2.70 5.0% 2.17 8.9% 17.28 7.5% 150.64 1.2% 146.6 1.2%
2012F 25.93 2.8% 20.05 0.9% 10.06 1.4% 36.65 2.4% 5.06 2.9% 4.55 0.0% 21.09 (0.1%) 5.03 0.9% 1.88 3.0% 2.84 5.0% 2.49 14.8% 18.32 6.0% 154.09 2.3% 150.0 2.3%
2012F v 2007E (5.0%) (19.1%) (8.1%) (21.0%) 10.1% (18.8%) (62.3%) (31.1%) (64.6%) (2.1%) (7.9%) 6.5%
2012F v 2008E (6.0%) (16.9%) (14.3%) (12.4%) 9.4% (23.5%) (50.6%) (26.6%) (55.4%) 2.2% 0.7% 4.7%
2012F v 2009E 2.2% (1.6%) 0.0% 1.5% 7.1% (15.0%) (26.4%) (13.3%) (21.7%) 13.6% 27.5% 18.4%
27.3 24.8 11.1 46.4 4.6 5.6 56 7.3 5.3 2.9 2.7 17.2
211.20
192.50 (8.9%) 218.7 (8.2%)
(27.0%)
(20.0%)
(3.0%)
Bank sector health, euro doubts and austerity measures remain key
We believe the most significant risks remain the following:
!
That cutbacks in public funding which has been a key life support for the construction sector in a number of European markets will create demand weakness before a residential recovery can take up the demand slack. That a retrenchment in bank lending and the absence of quantitative easing in 2H10 will make it even more difficult for companies to secure debt finance and thus weaken the prospects for a potential recovery in non-residential demand.
Emerging markets
Emerging markets have, in general, been positive for construction demand with the positive macro drivers of urbanisation, infrastructure investment and population and demographics driving resilient growth in emerging markets, where debt problems have not shattered demand. Indonesia (HC), India (Holcim), Africa (Lafarge, Holcim and HC) and Brazil (Holcim and Lafarge) have been the standout strong performers, while activity in China has cooled and prospects look more uncertain. At this stage, we have not made significant adjustments to our forecasts for each of the emerging economies. However, Central and Eastern Europe country forecasts, in our view, look more at risk short term. In addition, we are increasingly concerned that China may suffer more significant weakness given the scale of build that has occurred and the accepted view of operators on the ground that incremental growth will likely now have to come from increased construction away from the more populous east of China to the more rural west, where the urgency for infrastructure and residential construction will prove less pressing. The next several months will be critical in terms of the degree to which government actions to curb the residential boom deliver a controlled slowdown rather than a more severe reversal in residential new build activity. Building Materials | Macro Dynamics | 6 August 2010
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US housing in focus
US housing remains critical to both global recovery and building material demand growth in the US. Here we look at US housing cycles, why our forecasts are so far below consensus and where we expect housing starts to move through the remainder of 2010.
US housing cycles compared

Below we chart the last four US housing cycles (trough to trough) from July 1970 through to May 2010 and our forecasts through to December 2012. The chart data is also summarised in the table that follows. Chart 17 : US housing starts cycles (July 1970-current)
2500 2300 2100 1900 Starts ('000's) 1700 1500 1300 1100 900 700 500 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 241 251 261 271 Months Duration July '70-'75 Aug '75-June '82 July '82- Nov '91 Dec '91-now Current Cycle Average Starts Forecast
Source: US Census Bureau, RBS forecasts
Table 20 : US housing cycles compared

(000) Jul 1970 Jul 1975 61 months 1341.1 2,358 1,071 1,831 76% 120% -55% 29 32 25.2% Aug 1975 Jun 1982 83 months 1077.1 2,030 932 1,552 88% 118% -54% 40 43 27.7% Jul 1982 Nov 1991 113 months 938.8 1,840 1,006 1,504 96% 83% -45% 51 62 28.2% Dec 1991 - Housing starts Dec 2009 trough in Dec 09 216 months 1014.0 2,084 554 1,503 106% 276% -73% 172 45 13.7% 11.0% 554 Jul 1970 Dec 2009 473 months 938.8 2,358 554 1,542 151% 326% -77% 172 45
Duration Starts level at start of cycle Starts at peak Starts at end of cycle Average starts Peak starts v start of cycle Peak starts vs end of cycle End trough vs peak Months to reach peak Months to correct from peak to trough CAGR - First 30 months from trough
Flatter and longer

US housing cycles have flattened and extended
The striking feature of the US housing cycles has been the degree to which they had, up until the latest cycle, followed a relatively symmetrical path with starts troughing between 932,000 and 1,071,000 and peaking at sequentially lower peaks of 2,358,000, 2,030,000 and 1,840,000. Each cycle has also become longer in duration from 61 months in the first cycle from July 1970 through to July 1975, extending to 83 months from August 1975 through to June 1982 and then 113 months from July 1982 through to November 1991. Data around timeframes from trough to peak and back are included in the table above.
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Interest rates, housing inventory and demographics were key drivers

Demographics housing inventory
During these past three cycles, falling interest rates were critical to driving demand recovery as was, as we argue separately in this report, the lack of vacant housing stock at the trough in each cycle. An important underlying demand driver to the US housing market over the long term has also been the demographic driver of population growth and the impact of the Baby Boom Generation on demand in the 1980s and 1990s. The Baby Boom generational impact is now easing, with immigration being the continuing driver to what has been approximately 1.0% per annum annual population growth.
The last cycle

The last cycle lasted 18 years
The last cycle, which began in December 1991, proved to be the longest and steadiest on the way up the cycle (as the chart highlights) with an arguable rollover that should have happened in 2000/01 delayed by the Greenspan-driven interest rate cuts in reaction to the technology, media and telecommunications bubble burst as well as the economic impact created by 9/11. The speed with which housing starts grew stands out firstly as much more pedestrian for two reasons, in our view. Firstly, this was the first cycle where recovery involved a significant overstock of existing vacant property for the market to absorb before housing starts needed to jump dramatically to meet housing demand. Secondly, this recovery came in a period of less volatile interest rates, which reduced the inherent cyclicality that housing demand can exhibit. In addition, the 1999 deregulation of mortgage lending created a dramatic new driver in the form of cheap finance to support homeownership for lower-income households. As such, the cycle lasted 216 months to a trough of 554,000 starts in December 2009.
Looking forward
The next cycle faces the challenges of excess inventory...
The next cycle will, in our view, fundamentally face challenges which will limit the speed and scale of recovery. The incremental factors that we believe will shape this recovery include:
!
Housing inventory There is today a level of vacant properties in the US (unseen in past history) that will be capable of meeting significant housing demand recovery before new house building needs to expand significantly, in our view. This inventory issue is discussed later in this section. Finance availability After a relative feast in terms of mortgage availability, cheap introductory interest rates and poor credit checking, the mortgage market will ultimately retrench to more cautionary lending behaviour until corporate memories of the 2006-10 debacle are forgotten. Interest rates The chart below details US housing starts and the 30-year mortgage rate available through Freddie Mac. What is striking is that, while mortgage rates did rise from around 5.5% in mid-2005 to 6.5% by mid-2006 and then touched a similar level in mid-2007, they have through government intervention since trended back to essentially a 40-year low of 4.7%. Much will depend on the degree to which interest rates can remain at this level going forward, but rising interest rates (at some point into the future) create a relatively untested challenge for US housing recovery.
... more restrictive financing and
... rising interest rates
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Chart 18 : US housing starts vs 30-year mortgage rate (Dec 1971-2012F) (% rate and 000s homes)
20.0 19.0 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Forecast 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 2009 2010 2011 2012
2400 Forecast 2200 2000 1800 1600 1400 1200 1000 800 600 400 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
2006
2007
30 Year Mortgage Rate - LHS
Rolling annual starts
Source: Datastream, US Census Bureau, Freddie Mac, RBS forecasts
Employment recovery is also critical to US housing recovery
Employment recovery The chart below details employment growth and US housing starts. Looking back to the start of the millennium, falling employment growth and employment contraction would, based on past history, have created a US housing starts downturn. This didnt happen a function, in our view, of the financial deregulation introduced into the US mortgage market in 1999 as well as the ensuing collapse in interest rates after the bursting of the TMT bubble, designed to steer the US economy away from recession. The end result, however, was a dramatic shot in the arm for the US housing market, which accelerated to new activity highs. Looking forward, we believe the sustaining of employment recovery is critical to clearing housing inventory and then driving a more sustained US new housing starts rebound.
Chart 19 : US employment growth vs housing starts (1969-current)

6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0
Employment Growth / Decline (% yoy) (LHS)
Rolling annual starts ('000) (RHS)
Source: Datastream, US Census Bureau, RBS forecasts
Buyer qualification Much housing demand growth since 2000 has been based on immigration trends. While immigration will continue into the US, its growth will be tempered by the economic situation. Until the US economy is growing at a rate to support significant immigration recovery, then new housing demand will again be partially suppressed. In addition, the deregulation of lending in 1999 and the growth of sub-prime lending did create a fast track to homeownership for many immigrants who would have otherwise have had to wait often six years or more to: 1) accumulate savings for a house deposit; and 2) build a credit score to support a mortgage application. Many immigrants successfully fast-tracked into homeownership only to lose their homes later. As a result, we expect to see credit disqualification over the next several years dramatically reduce the number of potential homebuyers. Foreclosure pressures Foreclosures continue to provide a significant re-supply of housing stock to the US housing market and, in the month of May 2010 alone, auctions and repossessions totalled 226,458 homes relative to new home sales of just 28,000 in the month.
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2008
The scale of repossession activity is likely to peak in 2010 but will continue to re-circulate housing stock. Latest foreclosure data is included in Chart 23. Chart 20 : US housing starts (1973-2012F) (000s homes)
2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009F
2010F
2011F
Single family starts
Multi family starts
2012F
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US housing inventory in focus

We view the scale of excess inventory as the fundamental challenge faced by the US new housebuilding industry, which drives our below-consensus expectations for housing starts recovery.
Vacant properties
At the end of 2009, vacant properties available for occupation, sale or rent equated to 12.7% of the occupied properties in the US, according to Census Bureau data. This level of vacant properties relative to occupied properties had actually expanded from 12.5% at the end of FY08. The chart below details the ratio of vacant property relative to occupied property over 1965 to 2009. Chart 21 : US housing vacant stock relative to occupied stock (1965-2009)
13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Vacant year round - relative to occupied 1965-1998 average vacant properties ex seasonal relative to occupied ('000's) Accumulating average of vacant properties ex seasonal relative to occupied ('000's)
Source: US Census Bureau
Between 3.9m and 4.8m of excess homes

The right level of vacant housing stock is subjective, however, we look at two basic yardsticks.
!
Using a long-term, straight-line, average vacant property percentage based on data from 1965 (data start) through to 1998 (before financial deregulation unleashed the sub-prime boom) would suggest a vacant-to-occupied percentage of 8.4%. The gap between 12.7% and 8.4% suggests an excess of 4.77m homes awaiting occupation or demolition. On the basis that changing societal and labour markets will affect the scale and degree of vacant property in the US, our alternative measure is to take the cumulative average level of vacant stock relative to that occupied over the whole period for which data is available. This covers 1965 through to 2009 and suggests a vacant-to-occupied percentage of 9.2%. The gap between 12.7% and 9.2% suggests an excess of 3.86m homes awaiting occupation or demolition.
Does geographic concentration limit concerns on the above?

We have dug deeper to look into geographic data on housing inventory
A frequent response from investors has been that excess housing in markets such as Florida, California and Nevada have created the scale of excess housing in very regional pockets and, therefore, a more broad-based recovery will not be affected. We have had some sympathy with this view, but have found additional Census Bureau data suggesting that, while the South faces the biggest overstock situation, with a vacant-to-occupied reading of 15.5%, all four US regions have a significant quantity of vacant stock. In our view, this stock would satisfy or at least partially meet demand recovery and thereby limit the speed and scale of starts recovery.
Looking at the regional picture

The following table details the scale of year-round vacant property based on the four-region breakdown available from the Census Bureau. The vacant-to-occupied percentage varies from a Building Materials | Macro Dynamics | 6 August 2010
45 45
low of 9.5% in the Northeast to a high of 15.5% in the South, with 11.9% in the West and 11.5% in the Midwest. We can apply the national averages calculated above at 8.4% straight-line from 1965 to 1998, or 9.2% based on an accumulating average, but the regional data can also be analysed back to 1984. Given different demographic, employment and homeownership rates in these four regions, we also have sought to replicate the vacant-to-occupied percentages for each region, albeit based on the shorter period of 1984-98 for the straight-line average and 1984-2009 for the accumulating-average-based approach. Table 21 : Residential inventory excess by region at 31 December 2009
Northeast Occupied properties (000s) Year-round vacant properties (000s) Vacant properties relative to occupied Vacancy rate suggested by: Regional accumulating regional averages (1984-2009) Regional straight-line averages (1984-98) National accumulating average (1965-2009) National straight-line average (1965-98) Excess inventory (000 homes) based on: Regional accumulating regional averages (1984-2009) Regional straight-line averages (1984-98) National accumulating average (1965-2009) National straight=line average (1965-98) Starts in 2008 (000 homes) Starts in 2009 (000 homes) Starts normalised at household demand growth and by occupied property concentration (000 homes) 256 340 58 225 121 62 226 684 963 588 797 135 97 283 1127 1602 2559 2896 453 278 457 670 696 653 852 196 117 269 2737 3601 3858 4771 906 554 1,235 8.3% 7.9% 9.2% 8.4% 8.9% 7.8% 9.2% 8.4% 12.7% 11.6% 9.2% 8.4% 9.2% 9.1% 9.2% 8.4% 10.2% 9.5% 9.2% 8.4% 20,416 1,944 9.5% Midwest 25,505 2,944 11.5% South 41,170 6,362 15.5% West 24,252 2,894 11.9% Total 111,343 14,144 12.7%
Implied months of excess inventory at 2008 starts run rate (months supply): Regional accumulating regional averages (1984-2009) Regional straight-line averages (1984-98) National accumulating average (1965-2009) National straight-line average (1965-98) Implied months of excess inventory at 2009 starts run rate (months supply): Regional accumulating regional averages (1984-2009) Regional straight-line averages (1984-98) National accumulating average (1965-2009) National straight-line average (1965-98) 50 66 11 44 85 119 73 98 49 69 110 125 69 71 67 88 59 78 84 103 25 34 6 22 61 86 52 71 30 42 68 77 41 43 40 52 36 48 51 63
Implied months of excess inventory at household growth based projections (months supply): Regional accumulating regional averages (1984-2009) Regional straight-line averages (1984-98) National accumulating average (1965-2009) National straight-line average (1965-98)
14 18 3 12
29 41 25 34
30 42 67 76
30 31 29 38
27 35 37 46
What does the data highlight?

The table details:
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the distribution of occupied properties, year-round vacant properties and the percentage ratio derived by region and for all of the US; in the second block, the vacant-to-occupied long-term ratios, either accumulating or straightline, first based on regional data, then with the national metrics; and in the third block, the scale of excess inventory, based first on the regional vacant-to-occupied ratios, then on the national ratios. This suggests an excess using differentiated ratios by region of between 2.7m and 3.6m homes. The national ratios as discussed earlier suggest either 3.86m or 4.77m homes.
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How much supply for how long?

We have then sought to compare the scale of excess inventory with the level of housing starts by region for calendar years 2008 and 2009 as a measure of the excess inventory challenge. This, however, creates a potential double count given that starts are themselves being depressed by both the economic environment (critically, employment and consumer confidence) and the excess inventory position itself. As such, we have included what we have termed normalised starts based on return-to-household-demand growth relative to population growth over the past several years, which equates to 1.235m. We then distribute this level of normalised demand based on occupied properties by region. The timeframes to which the excess inventory equates in terms of calendar year 2008 and calendar year 2009 and our normalised starts assumption are shown in the final three blocks in the table. On the assumption that the regional vacant-to-occupied property ratios are more reflective of regional trends, then:
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At 2008 start rates, there are 25-34 months of supply in the Northeast, 61-86 months of supply in the Midwest, 30-42 months of supply in the South and 41-43 months of supply in the West. At 2009 start rates, there are 50-66 months of supply in the Northeast, 85-119 months of supply in the Midwest, 49-69 months of supply in the South and 69-71 months of supply in the West. The above are exposed to double-counting risk. Therefore, using a normalised starts assumption of 1.235m would suggest there are 14-18 months of supply in the Northeast, 2941 months of supply in the Midwest, 30-42 months of supply in the South and 30-31 months of supply in the West. The excess relative to the total US picture equates to 27-35 months at our normalised rate of demand at 1.235m.
Conclusions
Only the Northeast region appears to have a limited excess vacant property problem; the rest of the US looks severely challenged
There can be little doubt that the South, Midwest and West face the most difficult overstock situations, with excess vacant inventory equating to 29-42 months of what we would consider to be normalised demand. This is despite demand being unlikely to approach what we term normalised for a significant period given the current difficult economic situation in these regions and the US overall. The Northeast looks best placed to clear inventory and emerge out of the doldrums but still has 14-18 months of excess to work through at normalised demand levels.
Excess inventory, starts and underlying demand recovery

Over time, excess inventory will either be occupied meeting occupier or buyer demand through rental or purchase fall derelict, or be demolished. In the table below, we have sought to at least rationalise how housing starts could evolve, based on our below-consensus forecasts and the interaction with underlying housing demand and the demolition of housing deemed unsellable.
Can starts and demand be rationalised?

In the table below, we have sought to rationalise demand in terms of population projections and household formation (assuming 2.5 heads per household). We then look at supply based on a gradual erosion of the excess housing stock given our below-consensus housing starts forecasts and an assumption that 1.0m excess homes will be demolished or abandoned as being uninhabitable over the period to 2014. Using these projections, the level of vacant housing stock decreases from 14.14m units with an excess of 3.86m-4.77m units to an overall stock of vacant homes of 10.75m and a shortfall of 0.12m homes, using the moving average national vacant-tooccupied ratio, or an excess of 0.85m homes, using the national straight-line average vacant-tooccupied ratio.
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Table 22 : US housing starts forecast reconciliation (2009-14F)

(000 houses) Annual population growth (%) Population (m) Households (population change/2.5 per household) Households added (000) Vacant inventory excess start of year (MAV based) Vacant inventory excess start of year (SLA based) Vacant properties start of year Households created reducing inventory Housing starts added Demolitions Vacant properties end of year Vacant inventory excess end of year (MAV based) Vacant inventory excess end of year (SLA based) Occupied properties Vacant relative to occupied Moving accumulating average vacant to occupied ratio (MAV) Straight line average vacant to occupied ratio (SLA)
2009 0.9% 309 111,636
2010F 1.0% 312 112,871 1,235
2011F 1.0% 315 114,118 1,247 2,837 3,761 13,238 (1,247) 670 (225) 12,436 1,920 2,853 113,826 10.9% 9.2% 8.4%
2012F 1.0% 318 115,378 1,260 1,920 2,853 12,436 (1,260) 765 (200) 11,741 1,109 2,053 115,086 10.2% 9.2% 8.4%
2013F 1.0% 321 116,650 1,272 1,109 2,053 11,741 (1,272) 880 (175) 11,174 424 1,378 116,358 9.6% 9.2% 8.4%
2014F 1.0% 324 117,935 1,285 424 1,378 11,174 (1,285) 1,012 (150) 10,750 (118) 847 117,643 9.1% 9.2% 8.4%
2010-14F 15.75 6,299 2.5 3,856 4,770 14,143 (6,299) 3,907 (1,000) 10,750 (118) 847 117,643 9.1% 9.2% 8.4%
3,755 4,557 13,936 (214) 554 (133) 14,143 3,856 4,770 111,344 12.7% 9.2% 8.4%
3,856 4,770 14,143 (1,235) 580 (250) 13,238 2,837 3,761 112,579 11.8% 9.2% 8.4%
How would recovery compare with past cycles?

This US housing recovery should be next the second time it has happened from an excess inventory situation at the trough
Finally, on the US housing macro environment, we have compared the scale of recovery inherent in our forecasts with that seen in the early rebound period in previous cycles. In the table below, we summarise the salient features of each US housing cycle from July 1970. We have assumed that the latest cycle delivered a trough in housing starts in December 2009 at 554,000 starts and we are now in the early stages of recovery. The final line in the table details the rate of compound growth in housing starts in the first 30 months of recovery. The first three cycles saw dramatic starts growth rates of 25.2%, 27.7% and 28.2%, respectively, which perhaps explains the optimism in the equity market and from some US house builders that the same can be delivered this time. However, the last cycle which in our view was the first to develop from a starting point of excess inventory saw starts grow at a much more modest compound rate of 13.7%. In comparison, our forecasts for the current recovery equate to a compound growth rate of 11.0% over the first 30 months, from December 2009 through to mid-2012. While lower than the last cycle, we would argue that our forecast looks justified and realistic with such significant inventory overhang and this cycles backdrop of flat-to-rising rather than falling interest rates.
Table 23 : US housing cycles compared

(000) Jul 1970 Jul 1975 61 months 1341.1 2,358 1,071 1,831 76% 120% (55%) 29 32 25.2% Aug 1975 Jun 1982 83 months 1077.1 2,030 932 1,552 88% 118% (54%) 40 43 27.7% Jul 1982 Nov 1991 113 months 938.8 1,840 1,006 1,504 96% 83% (45%) 51 62 28.2% Dec 1991 - Housing starts Dec 2009 trough in Dec 09 216 months 1014.0 2,084 554 1,503 106% 276% (73%) 172 45 13.7% 11.0% 554 Jul 1970 Dec 2009 473 months 938.8 2,358 554 1,542 151% 326% (77%) 172 45
Duration Starts level at start of cycle Starts at peak Starts at end of cycle Average starts Peak starts v start of cycle Peak starts vs end of cycle End trough vs peak Months to reach peak Months to correct from peak to trough CAGR - First 30 months from trough
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US housing current state of play

In the following charts and tables, we highlight the latest data points on existing single-family home prices, existing home sales, foreclosures and repossessions. In addition, we include a table detailing current sales and stock in the new build and existing home markets. We also detail our expectations for US housing starts on a seasonally adjusted annual basis, effectively the data points we expect the US Census Bureau to report on over the coming months. Table 24 : Existing single-family home sales ('000 AR) and median house prices (US$)
US Transaction volumes: May 2010 ('000) Cycle maximum ('000) Cycle minimum ('000) Peak to trough change May 2010 v peak May 2010 v trough May 2010 on May 2009 Median prices: May 2010 Cycle maximum (US$) Cycle minimum (US$) Peak to trough change May 2010 v peak May 2010 v trough May 2010 on May 2009
Source: NAR
Mid West 1,210 1,450 930 (35.9%) (16.6%) 30.1% 19.8%
North East 660 880 500 (43.2%) (25.0%) 32.0% 10.0%
South 1,940 2,540 1,530 (39.8%) (23.6%) 26.8% 21.3%
West 1,170 1,530 800 (47.7%) (23.5%) 46.3% 13.6%
4,980 6,340 4,040 (36.3%) (21.5%) 23.3% 17.5%
179,400 230,900 163,800 (29.1%) (22.3%) 9.5% 2.7%
150,000 176,900 126,700 (28.4%) (15.2%) 18.4% 2.6%
238,200 303,300 221,200 (27.1%) (21.5%) 7.7% (3.3%)
161,400 199,500 142,600 (28.5%) (19.1%) 13.2% 0.9%
226,800 361,400 206,000 (43.0%) (37.2%) 10.1% 7.6%
Chart 22 : US median house prices (US$)

250,000 18% 15% 13% 200,000 10% 8% Median Price 150,000 5% 3% 0% 100,000 -3% -5% -8% 50,000 -10% -13% -15% 0 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Median Price US$ (LHS) Index rate of change yoy (RHS) -18% US rate of change
Source: NAR
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Chart 23 : Total foreclosure filings by month (Aug 2006-current)

400,000 350,000
Properties with Foreclosure Filings
300,000 250,000 200,000 150,000 100,000 50,000
Dec-06
Dec-07
Dec-08
Dec-09
Oct-08
Oct-09
Feb-08
Feb-09
Aug-08
Aug-09
Feb-07
Feb-10 Mar-10
Feb-10
Oct-06
Oct-07
Jun-08
Jun-09
Jun-07
Aug-07
Aug-06
Source: RealtyTrac
Chart 24 : Annual accumulating repossessions auctions and combined (Jan 2007-current)

3,000,000
2,500,000 2,000,000
1,500,000 1,000,000
500,000 0
Mar-07
May-07
Apr-07
Mar-08
May-08
Apr-08
Mar-09
May-09
Apr-09
YTD repossessions
YTD auctions
YTD auction or repossessions
Source: RealtyTrac
Chart 25 : Monthly default notices, auction and repossessions (Aug 2006-current)

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Oct-06 Oct-07 Oct-08 Feb-09 Oct-09 Dec-09 Feb-08 Dec-08 Aug-08 Dec-07 Dec-06 Aug-07 Aug-06 Aug-09 Feb-07 Apr-09 Jun-07 Jun-08 Jun-09 Apr-07 Apr-08 Apr-10
Default
Auction
Repossesed
Source: RealtyTrac
May-10
Nov-07
Nov-08
Nov-09
Jan-07
Jan-08
Jan-09
Sep-07
Sep-08
Sep-09
Jan-10
Jul-07
Jul-08
Jul-09
Apr-10
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Building Materials | Macro Dynamics | 6 August 2010 5151
Table 25 : US housing stock and sales analysis

New build stock as reported New build stock adding back 5.0% of estim. 20% cancellation rate May 2010 - Stock for sale Median months to sell from build complete (May 2010) Suggested stock position Current sales rate 25 year average adjusted for household growth Current sales rate vs normalised rate Current months supply on Current sales rate 25 year average rate adjusted for household growth Average 25 year stock holdings in May Optimum stock based on Current sales rate 25 year average rate adjusted for household growth Excess stock based on Current sales rate (A) 25 year average rate adjusted for household growth (C) Excess stock duration to clear Current sales rate 25 year average rate adjusted for household growth 3.1 (2.3) 6.3 (1.2) 9.6 (0.1) 1.0 1.5 1.9 2.3 7.7 2.3 3.5 2.3 85,405 (187,293) 176,705 (95,993) 268,005 (4,693) 466,075 651,859 979,446 1,151,254 2,292,366 1,151,254 1,523,130 1,151,254 141,695 414,393 141,695 414,393 141,695 414,393 2,943,925 2,758,141 3,049,554 2,877,746 1,736,634 2,877,746 2,505,870 2,877,746 8.1 2.8 5.1 11.4 3.9 5.1 14.6 5.0 5.1 7.4 7.9 6.4 7.7 8.1 5.8 13.5 8.1 5.8 9.3 8.1 5.8 28,000 81,887 (65.8%) 227,100 318,400 14.2 397,600 28,000 81,887 (65.8%) 28,000 81,887 (65.8%) 462,000 432,844 6.7% 526,000 496,366 6.0% 299,542 496,366 (39.7%) 432,223 496,366 (12.9%) New build stock adding back 10.0% of estim. 20% cancellation rate 409,700 Existing single homes stock and sales as reported 3,410,000 Existing all homes stock as reported 4,029,000 Existing homes stock as reported REO & auctions 4,029,000 Existing homes stock as reported sales less 93,777 auctions 4,029,000
and sales sales less 226,458
Note - existing single-family homes sales rates for all existing single-family homes are based on averages from 1984 to 2008 Note - existing homes sales rates for all existing homes are based on averages from 1989 to 2008 Source: US Census Bureau, RBS estimates
Table 26 : US Housing starts Real world v SAAR

Yoy change in monthly starts 15 January 2008 15 February 2008 15 March 2008 15 April 2008 15 May 2008 15 June 2008 15 July 2008 15 August 2008 15 September 2008 15 October 2008 15 November 2008 15 December 2008 15 January 2009 15 February 2009 15 March 2009 15 April 2009 15 May 2009 15 June 2009 15 July 2009 15 August 2009 15 September 2009 15 October 2009 15 November 2009 15 December 2009 15 January 2010 15 February 2010 15 March 2010 15 April 2010 15 May 2010 15 June 2010 15 July 2010F 15 August 2010F 15 September 2010F 15 October 2010F 15 November 2010F 15 December 2010F 15 January 2011F 15 February 2011F 15 March 2011F 15 April 2011F 15 May 2011F 15 June 2011F 15 July 2011F 15 August 2011F 15 September 2011F 15 October 2011F 15 November 2011F 15 December 2011F 15 January 2012F 15 February 2012F 15 March 2012F 15 April 2012F 15 May 2012F 15 June 2012F 15 July 2012F 15 August 2012F 15 September 2012F 15 October 2012F 15 November 2012F 15 December 2012F
Source: US Census Bureau, RBS estimates
Monthly starts ('000) 70.8 78.4 82.2 89.5 91.7 102.5 86.7 76.4 73.9 68.2 47.5 37.7 31.9 39.8 42.7 42.5 52.2 59.1 56.8 52.9 52.6 44.5 42.3 36.6 38.9 40.7 54.7 60.1 56.3 54.2 52.5 49.5 50.2 43.4 42.3 37.5 41.8 44.8 61.3 68.5 66.2 64.6 62.8 58.9 58.8 50.5 49.1 42.9 47.9 51.3 70.5 78.8 76.1 74.3 72.2 67.4 67.0 57.1 55.0 47.8
SAAR implied multiple (x) 15.3 14.1 12.2 11.3 10.6 10.2 10.6 11.0 11.1 11.4 13.7 14.9 15.3 14.6 12.2 11.2 10.5 9.9 10.3 11.1 11.1 11.9 13.9 15.7 15.7 14.9 11.6 11.0 10.5 10.3 10.7 11.0 11.3 11.9 13.9 15.7 15.7 14.9 11.6 11.0 10.5 10.3 10.7 11.0 11.3 11.9 13.9 15.7 15.7 14.9 11.6 11.0 10.5 10.3 10.7 11.0 11.3 11.9 13.9 15.7
SAAR starts ('000) 1084 1103 1005 1013 973 1046 923 844 820 777 652 560 488 581 520 477 550 583 587 585 586 529 589 576 612 605 634 659 593 559 564 545 569 517 587 589 658 666 710 751 697 666 674 649 666 603 681 673 753 762 817 864 801 766 775 743 759 681 762 751
Actual rolling starts ('000) 1331 1306 1265 1219 1174 1138 1097 1052 1025 978 937 906 867 828 789 742 702 659 629 605 584 560 555 554 561 562 574 591 596 592 586 583 580 579 579 580 583 587 594 602 612 623 633 642 651 658 665 670 676 683 692 702 712 722 731 740 748 754 760 765
Actual rolling Starts v SAAR 22.8% (12.6%) (15.1%) (13.9%) (18.9%) (15.9%) (17.5%) (11.0%) (18.9%) (18.3%) (9.7%) (16.5%) (21.4%) (17.6%) (22.2%) (23.8%) (32.9%) (28.6%) (25.5%) (26.2%) (24.9%) (14.1%) (0.9%) 13.5% (3.5%) 8.0% 20.3% 7.5% 2.1% 0.8% 0.2% (0.5%) 9.7% (1.6%) 0.6% (5.2%) (3.6%) (7.4%) (9.9%) 1.5% 9.8% 10.3% 16.1% 12.9% 25.8% 12.1% 12.8% 1.8% 1.6% (3.9%) (7.9%) 0.8% 6.9% 7.0% 12.7% 11.1% 24.1% 10.9% 12.9% 1.6%
(25.5%) (24.0%) (33.6%) (34.0%) (32.8%) (25.6%) (32.2%) (37.0%) (27.2%) (40.7%) (46.5%) (45.3%) (54.9%) (49.2%) (48.1%) (52.5%) (43.1%) (42.3%) (34.5%) (30.8%) (28.8%) (34.8%) (10.9%) (2.9%) 21.9% 2.3% 28.1% 41.4% 7.9% (8.5%) (7.5%) (6.5%) (4.5%) (2.5%) 0.0% 2.5% 7.5% 10.0% 12.0% 14.0% 17.5% 19.5% 19.5% 19.0% 17.0% 16.5% 16.0% 14.3% 14.5% 14.5% 15.0% 15.0% 15.0% 15.0% 15.0% 14.5% 14.0% 13.0% 12.0% 11.5%
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Construction cycles how long?

We believe investors must consider the later, longer and more pedestrian recovery cycle that we think the construction sector will see in developed economies. Here we analyse several cycles in the UK and the US.
UK construction output the long-term picture

Before looking in detail at the cycles, the chart below details the long-term picture on total construction output in 2005 constant prices since 1955. Chart 26 : Total UK construction output (m 2005 constant prices)
120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000
4Q55
2Q57
4Q58
2Q60
4Q61
2Q63
4Q64
2Q66
4Q67
2Q69
4Q70
2Q72
4Q73
2Q75
4Q76
2Q78
4Q79
2Q81
4Q82
2Q84
4Q85
2Q87
4Q88
2Q90
4Q91
2Q93
4Q94
2Q96
4Q97
2Q99
4Q00
2Q02
4Q03
2Q05
4Q06
2Q08
Source: Business, Enterprise and Regulatory Reform (BERR)
UK construction output and aggregates consumption vs GDP

Putting UK construction output and aggregates consumption in some context relative to GDP growth, the chart below highlights that over the period from 1955 to the end of 2009:
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UK GDP has delivered a CAGR of +2.3% UK construction output has delivered a CAGR of +1.6% UK aggregates consumption has grown at +1.4% UK virgin (or non-recycled) aggregates consumption has grown at +0.8%
Chart 27 : Indexed UK aggregate consumption vs GDP (1955=100) (1955-2014F)

400 375 350 325 300 275 250 225 200 175 150 125 100 75 50 25 0 UK total aggregates CAGR: +1.4% UK virgin aggregates CAGR: +0.8%
UK GDP CAGR 1955-2009: +2.3% UK construction output CAGR 1955-2009: +1.6%
Source: MPA, National Statistics
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F
Aggregate Consumption (mt) Gross Domestic Product (constant prices)
4Q09
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The composition of aggregates consumption is also then detailed in the chart below, highlighting the impact of increased use of recycled aggregates. Chart 28 : UK aggregate demand (1955-2012F) (mt)
350 325 300 275 250 225 200 175 150 125 100 75 50 25 0
Source: MPA
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F
Crushed Rock Sand & Gravel Marine Dredged Recycled Aggregates
A mature construction market example the UK

In the table below and following charts, we have taken UK construction output data based on constant 2005 prices to look at the duration of building cycles in the various components of construction activity. The data is provided on a quarterly basis, so we have adopted rolling fourquarter data points to mark the peaks and troughs as well as the points when previous peaks were retraced and the timing to subsequent peak and then trough.
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Table 27 : Construction cycles in the UK peak, trough, retrace and peak cycle timings compared
Peak Trough Retrace past peak 3Q86 75,369 18 26 6.50 1Q88 47,534 24 38 9.50 2Q87 17,517 23 34 8.50 4Q84 7,198 31 51 12.75 1Q98 4,816 18 34 8.50 4Q83 33,202 5 11 2.75 2Q79 14,012 9 20 5.00 Peak Trough Retrace last peak 3Q02 97,243 34 50 12.50 4Q99 51,929 21 45 10.25 2Q06 18,263 47 62 15.50 3Q03 47,177 53 67 16.75 Peak Current
Turning point Total construction output Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Total new construction output Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Private new housing output Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Private new commercial Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Private new industrial Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Total RM&I Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Total housing RM&I output Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years) Turning point Private housing RM&I output Duration inter period (quarters) Duration from peak (quarters) Duration from peak (years)
Source: BERR
1Q80 74,684 0 0 0.00 3Q78 46,311 0 0 0.00 4Q78 17,466 0 0 0.00 1Q72 7,198 0 0 0.00 3Q89 4,699 0 0 0.00 1Q81 32,471 0 0 0.00 2Q74 13,456 0 0 0.00
1Q82 62,511 8 8 2.00 1Q82 32,557 14 14 3.50 3Q81 11,499 11 11 2.75 1Q77 5,065 20 20 5.00 3Q93 3,431 16 16 4.00 3Q82 29,778 6 6 1.50 1Q77 10437 11 11 2.75
1Q90 97,217 14 40 10.00 3Q89 51,746 6 44 11.00 4Q88 21,495 6 40 10.00 4Q90 18,095 6 57 14.25 4Q99 5,028 7 41 10.25 2Q90 46,037 26 37 9.25 2Q90 25,976 44 64 16.00 1Q90 16,031
1Q94 83,532 16 16 4.00 3Q95 45,286 24 24 6.00 2Q92 11,178 14 14 3.50 3Q94 10,324 15 15 3.75 1Q03 3,379 9 9 2.25 4Q93 36,829 14 14 3.50 3Q93 20,458 13 13 3.25 4Q93 11,609 15 15 3.75
2Q08 112,163 23 73 18.25 1Q08 65,299 33 78 18.50 2Q07 18,841 60 74 18.50 2Q08 23,129 8 70 17.50 2Q07 4,917 17 26 6.50 1Q04 48,969 2 69 17.25 2Q04 24,711 56 69 17.25 3Q04 15,932 58 73 18.25
4Q09 97,152 6 6 1.50 4Q09 54,649 7 7 1.75 4Q09 10,682 10 10 2.50 4Q09 16,546 6 6 1.50 4Q09 2,535 10 10 2.50 4Q09 42,503 23 23 5.75 4Q09 21,501 22 22 5.50 4Q09 13,619 21 21 5.25
Key points to note

Total construction output Total construction output took between two and four years to reach a trough, looking back to the 1981-82 recession, when a peak in 1Q80 saw the trough reached in 1Q82, and the 1992 recession, which saw the peak in 1Q90 and the trough in 1Q94. Retracing the past total construction cycle peak took 6.5 years through to 3Q86 after the 1Q82 trough and 12.5 years to 3Q02 after the 1Q94 trough.
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The next cycle peak took 10 years to materialise in 1Q90. The second cycle took 18.25 years to reach a new peak in 2Q08 from the previous peak in 1Q90. Total construction output has now been declining for 1.5 years after peaking in 2Q08. Chart 29 : Total new and RM&I UK construction output cycles (index of 100=cycle peak) (Quarters)
150 140 130 120 110 100 90 80 70 60 50 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 Total construction: 1Q80-1Q90 Total construction: 1Q90-2Q08 Total construction: 2Q08-
Source: UK BERR
Total new build construction

!
Looking at new build total construction, the trough in each cycle took 1.5 to 2.0 years longer to trough. The first downturn from 3Q78 troughed in 1Q82, a period of 3.5 years. The second cycle took 6.0 years from the peak in 3Q89 through to 3Q95. Retrace the past peak took 9.5 years from the 3Q78 peak through to 1Q88. The second cycle took 10.25 years to retrace the peak from 3Q89 through to 4Q99. The next cyclical peak took 11.0 years from the peak in 3Q78 through to 3Q89. The second cycle took 18.5 years from the 3Q89 peak through to 1Q08. Total new build construction has now been in decline for 1.75 years through to 4Q09 after peaking in 1Q08.
Chart 30 : Total new UK construction output cycles (index of 100=cycle peak) (Quarters)
150 140 130 120 110 100 90 80 70 60 50 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 Total new construction: 3Q78- 3Q89 Total new construction: 3Q89- 1Q08 Total new construction: 1Q08-
Source: UK BERR
New housing Looking at new build housing construction, the trough in each cycle came relatively rapidly at 2.75 years from the peak in 4Q78 to the trough in 3Q81 and 3.5 years from the 4Q88 peak to the trough in 2Q92.
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To retrace the past peak took 8.5 years from the peak in 4Q78 through to 2Q87. The past peak wasnt surpassed after the 1992 recession. The next cycle peak took 10.0 years to reach a new peak in 4Q88 from the 4Q78 trough. The later cycle took 18.5 years from the 4Q88 peak to the subsequent peak in 2Q07. New housing has now been declining for 2.5 years since peaking in 2Q07.
New commercial construction

!
Looking at new commercial construction the cycles retrace further back into history. The trough in each cycle came more slowly, as would be expected given the lead times and construction periods involved in commercial building. Back in the 1970s the peak in 1Q72 took 5.0 years to trough in 1Q77. The second cycle from a peak in 4Q90 took 3.75 years to trough in 3Q94. To retrace the past peak however took 12.75 years from the peak in 1Q72 through to 4Q84 and 15.5 years from the peak in 4Q90 through to 2Q06. The next cycle peak took 14.25 years to materialize in 4Q90 from the 1Q72 peak and 17.5 years through to 2Q08 from the 4Q90 peak. One re-assuring feature is the degree to which the last cycle proved far less of a boom than the 1972-1990 cycle as the chart below highlights with commercial construction volumes 2.5 times the previous peak in the 1972-1990 cycle but only 1.25x the prior cycle peak in the 1990-2008 cycle. New commercial construction has been declining now for 1.5 years after peaking in 2Q08.
Chart 31 : New UK commercial construction output cycles (index of 100=cycle peak) (Quarters)
250 225 200 175 150 125 100 75 50 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 Total new commercial:1Q72-4Q90 Total new commercial: 4Q90-2Q08 Total new commercial: 2Q08-
Source: UK BERR
New industrial construction Looking at new industrial construction cycles, we retrace more recent history. Back in the 1992 recession, the industrial new build construction market took 4.0 years to reach a trough from 3Q89 through to 3Q93. In the post-TMT downturn from 1999, new industrial construction took 2.25 years to trough in 1Q03 from the peak in 4Q99.
!
To retrace the past peak, however, took 8.5 years from the 3Q89 through to 1Q98 and the later cycle did not see the past peak retraced. The next cycle peak took 10.25 years to materialise from the trough in 3Q93 through to 4Q99. The later cycle took 6.5 years to peak in 2Q07 after troughing in 1Q03. New industrial construction has now been declining for 2.5 years from the 2Q07 peak.
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Repair, maintenance and improvement (RM&I)

In contrast, the repair, maintenance and improvement segments of construction demand have shown, in general, more rapid recovery in past cycles after less dramatic volume adjustments. The chart below details total aggregated UK RM&I construction output over the past two cycles both of which proved shorter than their new build equivalents. It should also be noted that UK aggregate RM&I actually peaked in 1Q04 and was in a period of moderate decline before collapsing more sharply from late 2008. Chart 32 : Total UK RM&I construction output cycles (index of 100=cycle peak) (Quarters)
150 140 130 120 110 100 90 80 70 60 50 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 Total RM&I:4Q80-2Q90 Total RM&I: 2Q90-1Q04 Total RM&I: 1Q04-
Source: UK BERR
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US construction cycles
Data in relation to US construction is more difficult to assess given changing definitions and the publication of nominal US dollar-related spending. However, we believe certain aspects of the US construction cycle can be analysed relatively accurately.
Long-term dynamics
First, putting some context to construction growth relative to GDP, the table below details longterm growth rates in GDP, construction output and aggregates consumption. We highlight two points about the long term.
!
First, construction growth in the US, as would be expected in a developed economy, has a slower rate of growth than GDP. Second, aggregates consumption also grows at a slower rate than the growth exhibited by the wider economy. Notably through to 2006, effectively before the construction market collapse, total aggregates demand grew at a CAGR from 1971 of 1.9%, while the US economy grew at a CAGR of 3.1% over the same period.
Table 28 : US aggregates demand vs GDP, long-term CAGRs compared

Real GDP growth CAGR 1971-81 CAGR 1981-91 CAGR 1991-2001 CAGR 2001-09 CAGR 1971-2006 CAGR 1971-2007 CAGR 1971-2008 CAGR 1971- 2009
Source: USGS, Datastream, RBS
Nominal US construction growth 9.0% 4.1% 6.9% 1.4% 6.7% 6.4% 6.0% 5.1%
Crushed stone demand growth 0.1% 2.3% 4.7% (4.1%) 2.4% 2.1% 1.6% 1.0%
Sand & gravel demand growth (2.8%) 1.2% 4.8% (4.6%) 1.3% 1.1% 0.6% (0.2%)
Total aggregates demand growth (1.3%) 1.9% 4.7% (4.3%) 1.9% 1.6% 1.2% 0.4%
3.1% 3.0% 3.5% 1.7% 3.1% 3.1% 3.0% 2.9%
Building materials demand over the cycles

In the following three charts, we detail demand changes pa for the key basic US building materials of cement, aggregates and ready-mix concrete. The charts are self explanatory, but we highlight that our recovery forecasts represent attractive rates of growth relative to previous cycles, particularly given the tighter credit environment in the current market and our expectation of rising interest rates, which is relatively unique when compared with previous cycles. Consumption per capita over this period is also charted in the last chart below. Chart 33 : US cement consumption (mt) (1975-2020F)
140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 -24.6% (-9.0%) +40.8% (+5.9%) +24.1% (+5.6%) -14.4% (-5.0%) +57.1% (+4.6%) -43.6% (-10.8%) +72.4% (+6.2%)
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
2015F
2016F
2017F
2018F
2019F
Source: USGS
2020F
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Chart 34 : US aggregates consumption (mt) (1975-2020F)

3,750
3,250 -2.6% (-2.6%) 2,750 +59.0% (+4.7%)

+
+17.4% (+4.1%)
-40.1% (-9.7%)
+68.6% (+6.0%)
2,250
20.8% (+4.8%)
-32.2% (-12.2%)
+56.9% (+7.8%)
-13.4% (-4.7%)
1,750
1,250
750
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
2015F
2016F
2017F
2018F 2018F
2019F
Source: USGS
Chart 35 : US ready-mix concrete consumption (mcum) (1975-2020F)

375 350 325 300 -3.9% (-3.9%) +17.4% (+5.5%) -46.1% (-11.6%) +85.5% (+6.4%) +53.8% (+7.4%) -18.0% (-6.4%) +74.5% (+6.4%)
Cubic Meters (mn)
275 250 225 200 +31.1% 175 (+7.0%) 150 125 100 75 -23.9% (-8.7%)
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
2015F
2016F
2017F
2019F 2019F
Source: NRMCA
Chart 36 : Key US building materials per capita consumption

12.0 10.0 8.0 6.0 4.0 2.0 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
2015F
2016F
2017F
2018F
Aggregates t / capita (LHS) Ready mixed concrete m3 / capita (RHS)
1975-2009 average t /capita (LHS) 1975-2009 average cum RMC / capita (RHS)
Cement t / capita (RHS) 1975-2009 average cement t / capita (RHS)
2020F
2020F
2020F
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The US isnt just one economy or is it?

We readily accept that the US is an aggregation of several economies, but the US housing cycle and building product demand have been affected on a pan-US basis. While the scale of decline may have differed sharply from one state to another, the credit crisis and collapse in house prices and budget spending have left few states undamaged. By way of example, the chart below details the change in ready-mix concrete demand from calendar 2005 through to calendar 2009 by US state. Only in Louisiana, where construction materials demand rose after Hurricane Katrina, and North Dakota have seen demand growth over the four-year period. Every other state experienced differing degrees of demand decline. Chart 37 : Ready-mix concrete production by US state (2009 vs 2005)
10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% -50% -55% -60% -65% -70%
Cubic metres (mn)
Source: NRMCA
Vermont Alaska Rhode Island Dist. Of Columbia Delaware New Hampshire Maine North Dakota Montana Other Hawaii Wyoming South Dakota West Virginia Idaho Connecticut New Mexico Mississippi Arkansas Oregon Massachusetts Nebraska Kentucky Kansas Utah Maryland Oklahoma Alabama South Carolina Pureto Rico Iowa Louisiana New Jersey Minnesota Tennessee Indiana Washington Wisconsin Colorado Nevada Virginia Missouri Michigan North Carolina New York Pennsylvania Ohio Illinois Georgia Arizona Florida Texas California
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Building Materials | Macro Dynamics | 6 August 2010 6262
Table 29 : US construction material demand volatility over the cycles (1975-2019F)

Period GDP at start of cycle upswing/downswing GDP at finish of cycle upswing/downswing Change in GDP (US$bn) Change in GDP (%) turn to turn CAGR in GDP (%) Cement demand at start (000t) Cement demand at finish (000t) Change in cement demand (000t) Change in cement demand (%) turn to turn CAGR in cement demand (%) Aggregates demand at start (mt) Aggregates demand at finish (mt) Change in aggregates demand (mt) Change in aggregates demand (%) turn to turn CAGR in aggregates demand (%) Ready-mix concrete (RMC) demand at start (000 cu m) Readymix concrete (RMC) demand at finish (000 cu m) Change in RMC demand (000 cu m) Change in RMC demand (%) turn to turn CAGR in RMC demand (%) US population at start (m) US population at finish (m) Change in population (m) Change in population (%) turn to turn CAGR in population (%) Housing starts at start (000) Housing starts at finish (000) Change in starts (000) Change in starts (%) turn to turn CAGR in starts (%)
Source: Datastream, NRMCA, Census Bureau, RBS forecasts
1975-79 4,880 5,855 976 20.0% 4.7% 63,608 78,964 15,356 24.1% 5.6% 1,533 1,852 320 20.8% 4.8% 133,066 174,408 41,342 31.1% 7.0% 219 227 8.3 3.8% 0.9% 1,160 1,745 585 50.4% 10.7%
1979-82 1982-88 1988-91 1991-2001 5,855 5,871 16 0.3% 0.1% 78,964 59,572 (19,392) (24.6%) (9.0%) 1,852 1,256 (597) (32.2%) (12.2%) 5,871 7,614 1,743 29.7% 4.4% 59,572 83,851 7,614 8,015 401 5.3% 1.7% 83,851 71,800 8,015 11,347 3,332 41.6% 3.5% 71,800 112,800 41,000 57.1% 4.6% 1,705 2,711 1,006 59.0% 4.7% 167,377 310,497 143,120 85.5% 6.4% 258 291 33.1 12.8% 1.2% 1,014 1,603 589 58.1% 4.7%
2001-02 2002-05/06 2005/06-09F 2005/06-10F 2010F-19F 11,347 11,553 206 1.8% 1.8% 112,800 110,020 (2,780) (2.5%) (2.5%) 2,711 2,640 (71) (2.6%) (2.6%) 310,497 298,424 (12,073) (3.9%) (3.9%) 291 294 3.0 1.0% 1.0% 1,603 1,705 102 6.4% 6.4% 11,553 12,638 1,085 9.4% 3.0% 110,020 128,260 18,240 16.6% 5.2% 2,640 3,100 460 17.4% 4.1% 298,424 350,409 51,985 17.4% 5.5% 294 303 8.7 3.0% 1.0% 1,705 2,068 363 21.3% 6.6% 12,638 12,987 349 2.8% 0.7% 128,260 73,800 (54,460) (42.5%) (12.9%) 3,100 1,903 (1,197) (38.6%) (15.0%) 350,409 196,852 (153,557) (43.8%) (13.4%) 303 314 11.7 3.9% 1.0% 2,068 554 (1,514) (73.2%) (28.1%) 12,638 13,442 803 6.4% 1.2% 128,260 72,324 (55,936) (43.6%) (10.8%) 3,100 1,857 (1,243) (40.1%) (9.7%) 350,409 188,978 (161,431) (46.1%) (11.6%) 303 317 14.6 4.8% 0.9% 2,068 580 (1,488) (72.0%) (22.5%) 13,442 16,811 3,369 25.1% 2.5% 72,324 124,682 52,358 72.4% 6.2% 1,857 3,131 1,274 68.6% 6.0% 188,978 329,775 140,798 74.5% 6.4% 317 346 28.4 8.9% 1.0% 580 1,335 755 130.2% 9.7%
1975-2002 2002-19F 1975-2019F 3.2% 2.2% 2.9%
2.1%
0.7%
1.5%
24,279 (12,051) 40.8% (14.4%) 5.9% 1,256 1,970 714 7.8% (5.0%) 1,970 1,705 (265) (4.7%)
2.0%
1.0%
1.6%
56.9% (13.4%)
174,408 132,695 204,033 132,695 204,033 167,377 (41,713) (23.9%) (8.7%) 227 234 6.3 2.8% 0.9% 1,745 1,062 (683) (39.1%) (15.3%) 71,338 (36,656) 53.8% (18.0%) 7.4% 234 249 15.2 6.5% 1.1% 1,062 1,488 426 (6.4%) 249 258 9.0 3.6% 1.2% 1,488 1,014 (474)
3.0%
0.6%
2.1%
1.1%
1.0%
1.0%
1.4%
-1.4%
0.3%
40.1% (31.9%) 5.8% (12.0%)
India in focus
We remain fundamentally positive on India as a long-term attractive growth market for the cement industry. Here we look at the latest data on India in terms of the wider economic indicators, as well as the latest cement industry data.
Short-term pricing weakness, but long-term attractions remain

Additional capacity and the onset of the monsoon season have created signs of some pricing squeeze, but we believe Indias growth will underpin continued cement demand growth of 8.59.5% through to 2012.
Asia-Pacific India
!
Indias industrial output growth moderated to 11.5% yoy in May 2010 compared with 17.6% yoy in April 2010. The annual inflation rate was 10.2% in May 2010, higher than economists expectations mainly due to higher non-food prices. RBS economists expect Inflation to rise due to resetting fuel prices to market-driven from July onwards. The central bank, Reserve Bank of India (RBI), increased key lending rates twice by 25bp each in July to contain the continuing high inflation rate. Cement output and despatches remained more or less stable at 18.3mt (9.5% yoy) and 17.8mt (8% yoy) in May 2010 vs 18.4mt and 18.1mt in April, respectively. Prices cooled by Rs15-20 per 50kg bag in several states in May and are likely to exhibit weakness over 2H10, reiterating our earlier view. The Cement Manufacturing Association (CMA) reported a May 2010 pan-India average cement price decline of Rs8 per 50kg bag to Rs245 per bag, with the South reporting a decline of Rs21 per bag. We have revised our effective cement capacity forecast to 272mt from 267mt and 308mt from 296mt for 2010 and 2011, respectively. We now see additions of 39mt in 2010 and 36mt in 2011. We have revised our effective capacity utilisation downward to 79% and 76% from 80.5% and 79%, respectively, for 2010 and 2011, based on information from the Cement Manufacturers Association about new potential capacity additions. In our April 2010 note, Emerging market cement update, we highlighted that the industry expected capacity utilisation to reach 80-85% in 2010. Holcim group companies beat Aditya Birla Group in 12-month cumulative despatches ending May 2010. However, the growth rate of despatches was significantly lower at 2.9% yoy vs AB Groups 9.2% yoy. ACC is expanding capacity with a 3mt capacity plant at Chandrapur in Western India and Heidelberg has received board approval to expand by 0.625mt at Raigad, also in the West. The combined market capitalisation of four leading cement stocks increased 2.3% ytd and underperformed the benchmark BSE 30 Index, which was up 3% ytd. The stocks traded at average PE ratios of 12.1x and 10.9x their 2010E and 2011E earnings, respectively, based on Bloomberg consensus estimates.
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Table 30 : Indian cement industry snapshot and forecasts* (2009-12F)

2009 GDP % Gross fixed capital formation %** Inflation rate % Cement capacity (m tonnes per annum) Capacity growth % Cement demand (m tonnes) Demand growth % Cement production (m tonnes) Capacity utilisation % 5.7% 4.0% 12.3% 233.1 12.6% 194.5 11.8% 195.9 84.1% 2010F 9.1% 6.9% 6.9% 272.4 16.9% 212.3 9.2% 215.2 79.0% 2011F 8.0% 13.2% 3.7% 307.9 13.0% 231.3 8.9% 234.6 76.2% 2012F 8.0% 16.6% 3.7% 326.6 6.1% 250.8 8.4% 254.6 77.9%
*Calendar-year forecasts **Fiscal-year forecast Source: DataStream, Cement Manufacturers Association (CMA) reports, RBS estimates
Our view
Demand growth forecast maintained at 9.2% amid regional differences We maintain our demand growth forecast of 9.2% for 2010 because we see lower demand growth in North and South India offsetting better growth in the East, West and Central regions. We see demand tapering in the North region as construction activity slows due to completion of the Commonwealth Games projects. However, the Central region, which is also affected by the games, has grown at a robust rate, and we believe it will continue growing at a higher rate before slowing. East India is seen as growing faster due to rural infrastructure and housing projects, and hence we slightly raise our forecast for growth in FY10F. We see steady growth in the West region offsetting the demand slowdown in the South region due to delays in infrastructure and real estate projects. We raise our 2011 forecast to 8.9% from 8.7% given our expectation of better growth in East India. We also raise our effective capacity forecast (considering time taken for plant stabilisation) to 272mt and 308mt from 267.5mt and 295.6mt, respectively, by the end of 2010 and 2011, indicating effective additions of 39mt and 36mt in 2010 and 2011. However, we expect actual additions to be 52.5mt in 2010. Based on revised supply and no marked change in demand, we expect effective capacity utilisation to drop to 76.2% in 2011 from our earlier expectation of 79%. We continue to believe utilisation will increase steadily, but remain below 85% till 2014. Table 31 : Indian cement industry forecasts*
2009 North and Central regions Capacity Demand (domestic) Capacity utilisation East region Capacity Demand (domestic) Capacity utilisation South and West regions Capacity Demand (domestic) Exports Capacity utilisation Total Capacity Growth (yoy %) Demand (domestic) Growth (yoy %) Capacity utilisation *Calendar-year forecasts Source: CMA, RBS estimates 233.1 12.6% 194.5 11.8% 84.1% 272.4 16.9% 212.3 9.2% 79.0% 307.9 13.0% 231.3 8.9% 76.2% 326.6 6.1% 250.8 8.4% 77.9% 343.2 5.1% 270.9 8.0% 80.2% 356.9 4.0% 290.6 7.3% 82.8% 119.6 92.9 2.5 78.9% 142.1 100.6 2.9 72.8% 161.3 109.5 3.3 69.9% 172.7 119.2 3.8 71.2% 181.5 129.2 4.4 73.6% 188.8 139.0 5.0 76.3% 33.9 32.8 96.7% 37.6 37.1 98.7% 40.6 41.2 101.4% 43.5 44.9 103.2% 46.0 48.5 105.3% 48.1 51.9 107.8% 79.6 68.8 86.4% 92.8 74.7 80.5% 106.0 80.6 76.1% 110.4 86.7 78.5% 115.7 93.2 80.6% 120.1 99.8 83.1% 2010F 2011F 2012F 2013F 2014F
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Risks
Downside risks to our forecasts include lower-than-expected growth in East India, financing difficulties for public infrastructure projects and delays in contract awards and execution. Upside risk includes better growth in the South and West.
Economic review
Industrial output moderates in May; lending rate increased Indias industrial output growth moderated to 11.5% yoy in May 2010 compared with 17.6% yoy in April 2010. Manufacturing output growth continued to be in the double digits, at 12.3% yoy compared with 19.4%yoy in April, the fastest in 15 years. Core infrastructure output growth comprising crude oil, coal, refinery, steel and cement grew at a modest rate of 5.0% yoy in May compared with 5.4% yoy in April. The countrys benchmark annual inflation rate (wholesale price index) rose 10.2% in May 2010, higher than economists forecasts, mainly due to higher prices for fuel and primary articles. Aprils provisional annual inflation rate of 9.6% was raised to 11.2%. Reserve Bank of India increased the key lending rate by 25bp for the second time to 5.75% on 27 July due to higher non-food inflation. The change in fuel price policy to market-driven is likely to have a significant impact on the benchmark inflation rate from July 2010 onwards, according to a news release. Table 32 : Economic indicators (% change yoy)
March 2010 Core infrastructure growth Cement Annual inflation (WPI)
Source: Ministry of Commerce, Bloomberg
April 2010 5.4% 8.7% 11.2%
May 2010 5.0% 8.6% 10.2%
7.3% 7.8% 11%
Demand factors
Cement output and despatches remain stable in May
Cement output was up 9.5% yoy to 18.3mt; despatches up 8% yoy to 17.8mt
Cement output and despatches remained more or less stable at 18.3mt (9.5% yoy) and 17.8mt (8% yoy) in May 2010 compared with April volumes of 18.4mt and 18.1mt, respectively. Railway wagon shortages in several markets and delays in large government infrastructure projects continued to limit any improvement in despatch volumes, according to media reports1. CMA raised its total installed capacity to 268mt (52.3mt for ACC and Ambuja together) from 244.7mt for all the three months over March-May 2010. Cement consumption (excluding ACC and Ambuja Cement volumes) grew at a high rate of 9.7% yoy in April 2010. Preliminary media reports for June indicate slowing cement offtake to less than 8% yoy across the country, seen especially in the North, due to construction related to the Commonwealth Games nearing completion.
Table 33 : Cement industry indicators (mt)

March 2010 Production Despatches (including exports) Annual production capacity at month-end Capacity utilisation (%)*
*Excluding ACC and Ambuja Source: CMA
April 2010 18.4 18.1 268.08 83
May 2010 18.3 17.8 268.08 88
19.60 19.64 268.08 90
Reuters/ Accord Fintech
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Chart 38 : Growth in cement production and consumption

May consumption growth estimated at 7.6% yoy reaching 17.5mt
25%
20%
15%
10%
5%
0% Mar-08 May-08 Mar-09 May-09 Nov-08 Dec-08 Nov-09 Dec-09 Feb-08 Feb-09 Aug-08 Sep-08 Aug-09 Sep-09 Feb-10 Mar-10 Jan-08 Jun-08 Jan-09 Jun-09 Jan-10 Oct-08 Oct-09 Apr-08 Apr-09 Apr-10 Jul-08 Jul-09
Production growth
Consumption growth
*Consumption growth estimated from May 2009 onwards Source: CMA
Industry trends
Despatch volumes higher in May, with double-digit growth rates
Holcim despatch volumes were higher, but yoy growth rates significantly lower than those of AB Group
Rolling 12-month cement and clinker despatches of leading cement manufacturers grew steadily mom to 139.1mt (11.6% yoy) in May from 137.9mt (12% yoy) in April 2010. Holcim subsidiaries ACC and Ambuja cements despatches stood at 40.9mt up 2.9% yoy, beating Aditya Birla Groups 39.8mt (9.2% yoy). Capacity constraints, especially that of ACC, resulted in lower volume despatch growth of the Holcim group ACCs volume growth was negative at 1%, while Ambujas cement volumes grew 7.5% yoy in May.
Table 34 : Cement and clinker despatches of top manufacturers (rolling 12 months in mt)
March 2010 ACC Binani Cement Grasim Industries Ambuja Cement India Cements Madras Cements Shree Cement UItraTech Cement J.K. Cement J.K. Lakshmi Cement Prism Cement Jaypee Group Total
Source: Company reports, CMA
April 2010 21.2 5.4 19.7 19.4 10.9 7.8 10.3 20.0 4.1 4.6 2.9 11.6 137.9
May 2010 21.2 5.3 19.8 19.7 11.0 7.8 10.4 19.9 4.2 4.6 2.9 12.2 139.1
21.2 5.5 19.6 19.2 10.8 7.7 10.3 20.0 3.9 4.5 2.9 11.1 136.9
Prices fell as much as Rs15-20 per bag in May; weakness may persist due to monsoons
Prices decline led by South in May; pricing in North and Central continue to be strong
With demand conditions losing steam in some markets and the addition of new capacities, cement prices fell as much as Rs15-20 per 50kg bag in May 2010, according to media news releases. The fall in prices reiterates our view that 2H10 may have a weaker pricing environment compared with 1H10. South India was the weakest, having witnessed the largest fall of Rs15-20 per 50kg bag. Pockets in a southern state are reported to be selling cement at prices matching or below manufacturing cost. East India is considered to have seen prices fall Rs5-7 per bag. Prices remained mostly stable in the North and Central regions, where demand is stable. However, both these regions, which have been banking upon demand from construction related to the Commonwealth Games, may see prices moderate over 2H10. Prices are likely to cool further due to the current monsoon season across the country, which may last for the next one to two months. CMA reported that May 2010 pan-India average cement prices declined Rs8 per 50kg bag to Rs245 per bag. A steep fall of Rs21 per bag was reported in the South, followed by the West with Rs12 per bag, reaching Rs232 and Rs225 per bag, respectively. The East continued to hold the highest average price of Rs264 per bag. A minor price fall of Rs1-3 per bag was reported in the North and Central regions.
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Chart 39 : Cement price movement (Rs per 50kg bag)

280 270 250 260 Rs. per 50 kg bag 250 240 230 230 220 210 210 200 190 May-09 Jun-09 Jul-09 Aug-09 All India Average Sep-09 North Oct-09 East Nov-09 Dec-09 West Feb-10 South Mar-10 Central Apr-10 May-10 200 220 240 260
Source: CMA
Pricing outlook weak for FY11, but modest for FY12 Indias leading research and rating company CRISIL said cement prices will decline 2-3% triggered by the addition of about 50mt capacity at a capacity utilisation rate of 78% over fiscal year ending March 2011. Prices, however, will rise by 5-6% during FY12 as the pace of capacity addition slows to 35mt during that year and utilisation improves to 82%, according to the company2. ACC to expand capacity by 3mt in West India in addition to a captive power plant Further to Holcims plans to invest about US$1.1bn to ramp up production capacity, its subsidiary ACC will expand capacity by 3mt in Chandrapur in Western India at an investment of Rs15bn. The project, which includes a new 25MW power plant, is expected to be completed by 3Q10. Post the current projects, ACCs capacity is to reach 30mt from 27mt amidst inorganic growth plans of buying out suitable companies3.
2 http://economictimes.indiatimes.com/news/news-by-industry/indl-goods-/-svs/cement/Cement-prices-to-fall-by-up-to3-pc-in-2010-11-CRISIL/articleshow/6008234.cms 3 http://www.dnaindia.com/money/report_acc-to-spend-rs-1500-cr-to-up-capacity-in-chanda-by-3m-tonnes_1390409
67 67
Figure 1 : Holcim cement plants India
ACC Ltd cement plants Ambuja Cements Ltd plants
Source: Company data
East India state of Bihar is the fastest-growing cement market The state of Bihar in East India, with a low per capita consumption of 53kg, is currently the fastestgrowing cement market in India due to rural infrastructure and housing construction. Consumption is considered to have grown 35% yoy, three times the national average, during the 12 months ending May 2010, according to Lafarge, a market leader in the Eastern region. Holcims ACC holds the second-largest market share after Lafarge there4. Heidelberg to expand by 0.625mt in Western India Heidelberg India plans to expand its capacity by 0.625mt at its Raigad unit in Western India from 3mt currently. This follows the in-principle approval from the companys board in early June 2010.
Other industry and corporate developments

Temasek to set up India-focused infrastructure fund Temasek, Singpores state investment company, may set up a US$2bn fund for investing in Indias infrastructure, confirmed by Indias Minister for surface transportation. The minister indicated that of the 70,000km of highways, 16,000km require overhaul and are not suitable for transportation. To facilitate the building of roads, Indian companies have signed US$5bn in construction deals in the last financial year alone. Investments are only expected to rise given the significant need to expand the countrys road transportation infrastructure. Aditya Birla Group capacity to reach 52mt post restructuring and UAE acquisition Indias leading cement manufacturer Aditya Birla Group, through Grasim, has acquired UAEbased ETA Star Cement Company and its operations in Bahrain and Bangladesh (total capacity of
4
http://www.livemint.com/2010/05/31235121/Bihar-surges-to-become-nation.html?d=2
68 68
3mt). The Middle East is one of the key exports market for Indian manufacturers and the acquisition there will help strengthen presence and gain access to neighbouring markets. Grasims cement business is being brought under a separate entity Samruddhi Cement, which will merge itself with Aditya Birla Groups Ultratech Cement, creating the largest Indian cement manufacturer with 52mt capacity. KKR invests in South India-based Dalmias cement subsidiary Kohlberg Kravis Roberts & Co is investing close to Rs7.5bn in South India-based Dalmias cement subsidiary, which will own post-restructuring Dalmia Cements 9mt cement capacity and the latters stake in OCL, with 5.3mt capacity. The proceeds from the investment will be utilised for the groups greenfield projects of 10mt capacity, in addition to exploring inorganic growth opportunities.
69 69
Appendix 1
In the following world maps, we highlight the countries in which each cement player carries out operations, with orange highlighting areas of operation and grey where each player is absent. Figure 2 : HeidelbergCement worldwide
Building Materials | Appendix | 6 August 2010
70 70
Figure 3 : HeidelbergCement worldwide
71 71
Figure 4 : Holcim worldwide
72 72
Figure 5 : Holcim worldwide
73 73
Figure 6 : Lafarge worldwide
74 74
Figure 7 : Lafarge worldwide
75 75
Appendix 2
Here we detail country-by-country forecasts for construction output and cement demand as forecast by Euroconstruct in June 2010. We also detail previous forecasts (from June and December 2009), to show forecast evolution. Key points Looking at the scale of longer-term cement demand recovery from 2009 through to 2012F, Euroconstructs forecasts indicate net cement demand growth over this three year period in:
!
Germany at 2.2%; Sweden at 27.5%; Denmark at 13.6%; Switzerland at 7.1%; Italy at 1.5%; and Poland at 18.4%.
Euroconstruct, however, forecasts net cement demand decline over this five-year period in:
!
France at (1.6%); Netherlands at (15.0%); Spain at (26.4%); Ireland at (21.7%); and Portugal at (13.3%).
76 76
Table 35 : Euroconstruct Germany (m at 2009 prices)

Euroconstruct Conference date Annual forecast change Residential new Residential RM&I Total residential Non residential new Non residential RM&I Total non residential Building new Building RM&I Total building Civil engineering new Civil engineering RM&I Total civil engineering Total construction Change in output Output forecast Output v 2008 Cement consumption (mt) Change in cement consumption
Source: Euroconstruct (June 2010)
2009 output 30,116 101,396 131,512 33,071 42,937 76,008 63,187 144,333 207,520 27,311 20,603 47,914 255,434 (1,801) 255,434 (0.7%) 25.38 (8.0%)
Jun 2009 2009F (3.3%) (2.8%) (3.0%) (9.5%) (2.8%) (6.5%) (6.2%) (2.8%) (4.2%) (2.0%) (0.7%) (1.5%) (3.7%)
Dec 2009 2009F (4.5%) 1.0% (0.6%) (4.5%) (2.5%) (3.5%) (4.5%) 0.0% (1.6%) 0.5% 1.5% 0.9% (1.2%)
Jun 2010 2009E (1.2%) (0.5%) (0.7%) 1.5% (2.1%) (0.6%) 0.2% (1.0%) (0.6%) (0.4%) (1.5%) (0.9%) (0.7%) 255,434 (0.7%) 25.38 (8.0%)
Jun 2009 2010F 1.3% 1.6% 1.5% (0.5%) 1.5% 0.5% 0.5% 1.6% 1.1% 4.0% 5.2% 4.5% 1.8%
Dec 2009 2010F (0.5%) 1.0% 0.6% (1.5%) 0.0% (0.7%) (1.0%) 0.7% 0.1% 3.0% 5.0% 3.9% 0.8%
Jun Jun Dec 2010 2009 2009 2010F 2011F 2011F 3.0% 0.5% 1.1% 2.4% 1.8% 2.0% 1.5% 2.0% 1.9%
June 2010 2011F 6.0% 1.5% 2.6%
Dec 2009 2012F 2.0% 2.0% 2.0%
Jun 2010 2012F 6.0% 2.0% 3.0% (1.0%) 1.0% 0.1% 2.6% 1.7% 2.0% (1.0%) (1.5%) (1.2%) 1.4% 3,605 261,086 2.2% 25.93 2.8%
2012F v 2009 34,853 105,500 140,508 6.8% 30,959 42,503 73,442 (3.4%) 65,792 148,109 213,782 3.0% 27,153 20,177 47,351 (1.2%) 261,086 2.2%
(4.0%) (2.5%) (1.5%) (1.0%) (0.5%) (1.5%) (2.3%) (1.5%) (1.5%) (0.7%) 0.1% (0.2%) 0.2% 1.2% 0.8% 0.1% 1.1% 0.7%
(1.5%) (0.5%) (1.0%) (1.2%) 2.2% 0.8% 1.2% 1.0% 0.3% 0.8% 1.7% 1.4%
3.0% (1.0%) (2.0%) 2.5% (2.2%) (3.0%) 2.8% (1.5%) (2.4%) 0.4% 1,022 256,456 0.4% 24.75 (2.5%) 0.3% 0.1%
(2.5%) (0.5%) (3.0%) (1.5%) (2.7%) (0.9%) 0.4% 1,026 257,482 0.8% 25.24 2.0% 1.0%
2.2%
Table 36 : Euroconstruct France (m at 2009 prices)

2009 output 51,654 93,832
Jun 2009 2009F 2.0% (4.6%)
Dec 2009 2009F (1.5%) (7.0%)
Jun 2010 2009E (2.0%) (7.0%)
Jun 2009 2010F 1.6% 3.0% 2.4% (6.3%) 1.0% (2.4%) (1.5%) 2.2% 0.5% 1.2% 0.6% 1.0% 0.6%
Dec 2009 2010F (2.8%) 1.0% (0.7%)
Jun Dec Jun 2010 2009 2009 2010F 2011F 2011F (4.9%) (1.0%) (2.8%) 2.5% 2.5% 2.5% 1.0% 1.5% 1.3%
June 2010 2011F 1.1% 1.5% 1.3%
Dec 2009 2012F 1.4% 2.0% 1.7% 3.5% 1.0% 2.2% 2.2% 1.6% 1.9% 1.8% 1.7% 1.8% 1.9%
Jun 2010 2012F (0.2%) 2.0% 1.0% 0.7% 1.5% 1.1% 0.1% 1.8% 1.1% 1.4% 0.5% 1.1% 1.1% 2,136 196,346 (1.8%) 20.05 0.9%
2012F v 2009 40,471 52,943 93,314 (0.6%) 24,124 32,591 56,684 (6.9%) 64,514 85,507 150,141 (3.0%) 31,477 14,705 46,158 2.3% 196,346 (1.8%)
42,178 (11.6%) (12.8%) (12.4%)
28,464 (12.7%) (12.7%) (13.0%) 32,436 60,900 0.5% (6.1%) (2.0%) (7.4%) (3.0%) (7.9%)
(5.4%) (13.5%) (0.8%) 1.5% (1.8%) (3.8%) 1.2% (1.1%) 0.8% 1.0% 0.9% (0.7%) (1.5%) (7.1%) (8.4%) (1.2%) (4.5%) 0.2% 0.2% 0.2% (3.4%) (6,795) 193,051 (3.4%) 19.97 (2.0%) 1.5% 0.5% 1.2% 2.1% 1.7% 0.8% 0.1% 0.6% 1.5%
2.0% (2.7%) 1.0% 0.5% 1.4% (0.9%) 1.4% (0.4%) 1.3% 1.3% 1.3% 1.1% 1.2% 1.3% 1.1% 0.5% 1.2% 0.7% 1.0% 0.6% 1,158 194,210 (2.8%) 19.87 (0.5%)
70,642 (12.1%) (12.7%) (12.6%) 84,090 154,732 30,613 14,501 45,114 199,846 (15,505) 199,846 (7.2%) 20.38 (15.5%) 199,846 (7.2%) 20.38 (15.5%) 1.4% (5.2%) (7.0%) (5.4%) (6.5%) (5.5%) (1.7%) (7.1%) (6.8%) (3.2%) (5.7%) (6.8%) (2.4%) (7.3%) (7.9%) (3.6%) (6.5%) (7.2%)
(1.6%)
77 77
Table 37 : Euroconstruct Netherlands (m at 2009 prices)

2009 output 16,456 32,224 12,262 9,728 21,990 28,030 26,184 54,214 9,634 7,763 17,397 71,611 (3,690) 71,611 (4.9%) 5.35 (10.0%)
Jun 2009 2009F (4.2%) (7.5%) (7.5%) (3.3%) (5.6%) (9.3%) (3.9%) (6.8%) (3.1%) (0.9%) (2.2%) (5.8%)
Dec 2009 2009F (4.5%) (7.3%) (9.8%) (3.7%) (7.1%) (9.8%) (4.2%) (7.2%) (2.3%) (0.8%) (1.6%) (6.0%) (4,297) 67,314 (6.0%) 4.55
Jun 2010 2009E (2.9%)
Jun 2009 2010F (7.3%)
Dec 2009 2010F (8.2%)
Jun Jun Dec June 2010 2009 2009 2010 2010F 2011F 2011F 2011F 2.6% 0.2% 1.3% (5.0%) (1.2%) (1.0%)
Dec 2009 2012F 2.8% 3.1% 3.0% 3.9% 3.7% 3.8% 3.2% 3.3% 3.3% (0.4%) 0.8% 0.1% 2.5%
Jun 2010 2012F 4.8% 1.8% 3.2% 1.1% 0.3% 0.7% 3.2% 1.2% 2.2% (1.0%) (0.3%) (1.2%) 1.3% 856 66,739 (6.8%) 4.55 0.0%
2012F v 2009 14,191 15,946 30,150 (6.4%) 10,160 9,514 19,678 (10.5%) 24,323 25,439 49,755 (8.2%) 9,433 7,632 16,982 (2.4%) 66,739 (6.8%)
15,768 (10.4%)
(9.8%) (10.4%) (13.3%) (13.9%) (16.3%) (2.1%) (2.6%) (6.7%) (10.3%) (11.1%) (10.5%) (1.7%) (1.8%)
(8.4%) (17.4%) (17.5%) (15.6%) (1.8%) (5.0%) (2.9%) (4.1%) (5.3%) (5.5%) (2.0%) 1.2% 1.5% (0.5%) (6.6%) (11.9%) (12.1%) (9.6%) (0.4%) (1.9%) (1.7%) 0.1% 0.0% 0.1%
(9.6%) (14.8%) (15.3%) (16.0%) (2.0%) (3.5%) (3.4%) (6.6%) (7.3%) (6.7%) (10.9%) (11.5%) (10.2%) (1.2%) (1.8%) 1.1% 1.3% 1.2% (4.9%) 71,611 (4.9%) 5.35 (3.6%) (1.4%) (2.6%) (9.0%) (2.5%) (1.2%) (1.9%) (9.3%) (1.2%) (1.0%) (1.1%) 1.4% (0.7%) 1.1%
(3.9%) (0.4%) (0.1%) (0.1%)
0.3% (0.4%)
1.3% (0.2%) (0.1%) 0.0% 65,882 (8.0%) 4.55 0.0%
(8.0%) (0.6%) (1.4%) (5,729) 65,882 (8.0%) 4.55 (15.0%)
(15.0%)
(15.0%) (10.0%)
Table 38 : Euroconstruct Sweden (m at 2009 prices)

Euroconstruct Conference date Annual forecast change Residential new Residential - RM&I Total residential Non residential new Non residential RM&I Total non residential Building new Building RM&I Total building Civil engineering new Civil engineering RM&I Total civil engineering Total construction Change in output Output forecast Output v 2008 Cement consumption (mt) Change in cement consumption
2009 output 5,780
Jun 2009 2009F (1.2%)
Dec 2009 2009F (1.4%)
Jun 2010 2009E 2.3%
Jun 2009 2010F 1.5% 1.9% 1.8% (2.5%) (1.0%) (1.4%) 0.0% 0.5% 0.4% 11.6% 6.0% 10.6% 4.2%
Dec 2009 2010F 3.9% 3.1% 3.4%
Jun Dec June Jun 2010 2009 2009 2010 2010F 2011F 2011F 2011F 4.8% 16.6% 17.3% 19.5% 2.9% 3.5% 3.8% 8.1% 3.9% 8.2% 2.8% 7.9%
Dec 2009 2012F 18.0% 2.9% 8.2% 17.0% 4.0% 7.1% 17.7% 3.4% 7.7% (4.0%) (1.6%) (3.6%) 2.9%
Jun 2010 2012F 20.3% 1.9% 8.2% 10.4% 2.9% 5.0% 16.4% 2.4% 6.8% (2.0%) 2.0% (1.4%) 3.4% 958 29,131 13.8% 2.49 14.8%
2012F v 2009 3,819 6,230 10,047 20.8% 2,296 5,496 7,797 -0.1% 6,116 11,720 17,840 10.7% 9,672 1,626 11,302 19.3% 29,131 13.8%
2,535 (31.3%) (34.6%) (37.8%) 8,315 (13.8%) (15.3%) (14.5%) 2,671 (16.5%) (22.0%) (22.2%) 5,136 7,807 (4.5%) (7.7%) (4.9%) (5.6%) (9.5%) (12.0%)
(5.0%) (21.1%) 10.4% 10.0% (1.3%) (1.5%) (2.3%) 0.6% 0.9% 0.8% 10.4% 7.0% 9.9% 4.3% 0.0% (7.2%) 3.0% 4.8% 3.0% 4.6% 4.0% 2.5%
5,206 (26.0%) (30.5%) (30.7%) 10,916 (2.8%) (3.1%) (1.6%) 16,122 (11.2%) (12.8%) (13.3%) 8,042 1,433 9,475 25,597 (1,178) 25,597 (4.4%) 1.95 (21.0%) 25,597 (4.4%) 1.95 (21.0%) 16.4% 8.0% 14.8% (2.9%) 17.0% 7.5% 15.4% (3.6%) 17.3% 8.0% 15.8% (4.4%)
(8.5%) 14.3% 14.7% 10.3% 1.5% (1.7%) 3.5% 6.6% 3.5% 6.6% 3.3% 5.4%
8.7% (3.1%) 13.7% 12.9% 8.0% 2.0% 2.5% 3.0% 8.6% (2.2%) 12.0% 11.4% 2.1% 538 26,135 2.1% 1.99 2.0% 3.1% 8.8% 7.8% 2,038 28,173 10.1% 2.17 8.9%
27.5%
78 78
Table 39 : Euroconstruct Denmark (m at 2009 prices)

2009 output 9,893
Jun 2009 2009F 2.0%
Dec 2009 2009F (3.0%)
Jun 2010 2009E (4.1%)
Jun 2009 2010F 0.0% 2.0% 1.5% 1.5% 0.0% 0.8% 0.8% 1.5% 1.2% 10.0% 0.0% 5.4% 2.3%
Dec 2009 2010F 2.0% 0.0% 4.6% 0.0% 2.7%
Jun Jun Dec June 2010 2009 2009 2010 2010F 2011F 2011F 2011F 0.0% 10.0% 2.0% 1.5% 4.5% 0.0% 2.7% 2.5% 1.5% 1.9% 2.0% 3.5% 5.2% 2.0% 3.8% 7.0% 2.0% 3.6% 0.0% (4.6%) (8.2%) 0.0% (4.8%) 2.0% 4.0% 5.0% 0.0% 2.8% 7.2% 1.5% 3.6%
Dec 2009 2012F 10.0% 2.0% 4.1% 7.8% 0.0% 4.7% 8.8% 1.5% 4.3% 10.0% 0.0% 5.8% 4.7%
Jun 2010 2012F 20.0% 2.0% 5.7% 10.2% 2.0% 6.7% 14.0% 2.0% 6.1% 10.0% 0.0% 5.8% 6.0% 1,608 28,407 7.1% 2.84 5.0%
2012F v 2009 3,120 10,293 13,409 4.4% 4,459 3,081 7,540 5.4% 7,574 13,373 20,950 4.8% 4,499 2,972 7,473 14.7% 28,407 7.1%
2,955 (40.0%) (30.0%) (34.2%) 12,848 (13.3%) (12.7%) (13.2%) 4,190 (15.7%) (12.5%) (18.1%) 2,961 7,151 0.0% (9.5%) (3.0%) (12.2%) (8.7%) (15.7%)
(5.0%) (20.0%) 10.0%
7,145 (28.1%) (21.7%) (25.6%) 12,854 1.5% (3.0%) (6.1%) 19,999 (12.0%) (11.3%) (14.1%) 3,541 2,972 6,513 26,512 (3,378) 26,512 (11.3%) 2.50 (10.0%) 26,512 (11.3%) 2.50 (10.0%) 10.0% 0.0% 5.1% (8.2%) 10.0% 0.0% 5.1% 4.0% (6.8%) (1.2%)
0.1% (13.1%) 1.5% 0.9% 10.0% 0.0% 5.4% 2.0% 0.0% (4.7%)
5.0% 10.0% 10.0% 10.0% 0.0% 2.7% (2.9%) (769) 25,743 (2.9%) 2.58 3.0% 0.0% 5.6% 4.1% 0.0% 5.6% 2.8% 0.0% 5.6% 4.1% 1,055 26,799 1.1% 2.70 5.0%
(7.7%) (11.3%)
13.6%
Table 40 : Euroconstruct Spain (m at 2009 prices)

2009 output
Jun 2009 2009F
Dec 2009 2009F
Jun 2010 2009E
Jun 2009 2010F (5.0%) (9.1%)
Dec 2009 2010F (5.5%)
Jun Dec Jun 2010 2009 2009 2010F 2011F 2011F 4.0% 1.5% 2.9% 6.0% 1.5% (8.5%)
June 2010 2011F (5.0%) 0.8%
Dec 2009 2012F 4.5% 2.0% 3.3% 2.5% 1.5% 2.1% 3.5% 1.8% 2.8% 0.5% 2.0% 0.8% 2.0%
Jun 2010 2012F 7.0% 2.5% 4.4% 3.0% 1.5% 2.3% 4.9% 2.1% 3.4% (8.5%) (4.0%) (7.7%) (0.1%) (103) 102,976 (21.6%) 21.09 (0.1%)
2012F v 2009 17,180 21,725 38,884 (9.8%) 17,945 15,917 40,612 1.2% 35,104 37,650 72,740 (12.6%) 24,496 5,715 30,201 (37.3%) 102,976 (21.6%)
20,120 (42.0%) (55.0%) (63.0%) (12.0%) 22,980 (18.0%) (16.5%) (18.0%) 43,100 (33.9%) (42.0%) (47.7%)
(8.5%) (16.0%) (7.0%) (12.0%)
3.8% (1.8%) (0.8%) (1.5%) (1.1%) (2.9%) (0.2%)
23,895 (20.0%) (18.8%) (23.4%) (13.5%) (12.0%) (26.5%) 16,245 (14.0%) (6.3%) (3.2%) (7.0%) (8.0%) 40,140 (17.9%) (14.5%) (16.3%) (11.2%) (10.5%) 44,015 (34.0%) (41.9%) (48.6%) (12.7%) (10.3%) (21.7%) 39,225 (16.5%) (12.7%) (12.5%) 83,240 (28.1%) (32.0%) (36.2%) 39,510 8,675 48,185 2.0% 10.0% 3.4% 1.7% 11.5% 3.4% 0.8% 5.3% 1.6% (5.8%) (9.9%) 1.5% (6.5%) (5.8%) (8.6%) (14.2%) (9.5%) (23.0%)
2.0% (1.0%) 0.8% 1.7% (0.3%) 3.1% 1.4% 2.4% 2.5% 1.2%
(2.0%) (1.5%)
1.9% (1.5%)
3.5% (1.1%) (12.0%) 2.0% 2.0% (6.0%) 3.2% (0.6%) (11.0%) 2.7% 1.0% (4.7%) (5,084) 103,079 (21.6%) 21.11 (5.5%)
(6.0%) (20.0%) (27.0%) 0.1% (11.5%) (23.7%) (6.1%) (9.7%) (17.7%) (23,262) 108,163 (17.7%) 22.34 (22.0%)
131,425 (18.7%) (21.5%) (26.1%) (46,417) 131,425 (26.1%) 28.64 (32.9%) 131,425 (26.1%) 28.64 (32.9%)
(26.4%)
79 79
Table 41 : Euroconstruct Ireland (m at 2009 prices)

Euroconstruct Conference date Annual forecast change Residential new Residential RM&I Total residential Non residential - new Non residential RM&I Total non residential Building new Building RM&I Total building Civil engineering new Civil engineering RM&I Total civil engineering Total construction Change in output Output forecast Output v 2008 Cement consumption (mt) Change in cement consumption
2009 output
Jun 2009 2009F
Dec 2009 2009F
Jun 2010 2009E
Jun 2009 2010F
Dec 2009 2010F
Jun 2010 2010F
Jun 2009 2011F 2.5% (5.1%)
Dec 2009 2011F 0.0% (1.4%) (0.9%)
June Dec 2010 2009 2011F 2012F 0.0% 25.0% (3.7%) 3.2% (2.3%) 11.4% 3.4% 2.0% 3.0%
Jun 2010 2012F 6.7% 3.2% 4.6% (0.1%) 2.0% 0.4% 3.0% 3.0% 3.0% (1.7%) 2.0% (1.0%) 1.6% 194 12,329 (31.7%) 1.88 3.0%
2012F v 2009 2,006 3,137 5,147 (33.7%) 2,255 803 3,058 (37.0%) 4,258 3,939 8,204 (35.0%) 3,270 860 4,125 (24.2%) 12,329 (31.7%)
3,650 (60.8%) (61.0%) (58.6%) (30.0%) (41.2%) (48.5%) (14.3%) 4,110 (10.0%) (8.9%) (14.9%) (9.9%) (10.0%) (23.2%) 7,760 (46.0%) (44.4%) (43.1%) (20.2%) (24.9%) (35.1%)
3,873 (37.8%) (37.3%) (39.2%) (27.0%) (27.3%) (32.7%) (12.9%) (17.7%) (13.4%) 984 (30.2%) (12.8%) (29.9%) (5.0%) (15.0%) (20.0%) 3.5% (5.0%) 0.0% 4,857 (36.7%) (33.1%) (37.5%) (23.5%) (24.5%) (30.1%) (9.7%) (14.5%) (10.3%)
7,523 (51.6%) (51.6%) (50.5%) (28.5%) (34.0%) (40.4%) (13.6%) (10.0%) 5,094 (14.3%) (9.8%) (18.3%) (9.1%) (11.1%) (22.6%) 2.7% (6.8%) (2.2%) (6.3%) 12,617 (42.7%) (40.4%) (41.1%) (21.5%) (24.7%) (33.2%) 4,385 5,439 0.2% (3.5%) 0.1% (9.3%)
(7.8%) 13.8% (3.0%) (5.5%) 3.0% 8.4% 4.8% 2.0% 4.2% 7.1%
(3.0%) (14.7%) (12.9%) (10.2%) (11.3%) (12.9%) (5.0%) (15.0%) (20.0%) (3.3%) (14.7%) (14.3%) 3.5% (7.9%) (7.2%) (5.0%) 0.0% (9.9%) (10.6%) (7.5%) (7.3%) (956) 12,135 (32.8%) 1.82 (5.0%)
1,054 (18.2%)
(4.8%) (23.2%) (1.0%) (12.4%)
18,056 (34.6%) (32.2%) (34.6%) (16.0%) (21.7%) (27.5%) (9,553) 18,056 (34.6%) 2.40 (43.0%) 18,056 (34.6%) 2.40 (43.0%) (4,965) 13,091 (27.5%) 1.92 (20.0%)
(21.7%)
Table 42 : Euroconstruct Switzerland (m at 2009 prices)

2009 output 11,822 3,997 15,819 5,357 6,558 11,915 17,179 10,554 27,734 3,939 4,880 8,819 36,553 362 36,553 1.0% 4.73 2.2%
Jun 2009 2009F 0.2% (0.1%) 0.1% (0.6%) 0.4% (0.1%) (0.1%) 0.2% 0.0% 6.9% 7.0% 7.0% 1.6%
Dec 2009 2009F 2.4% 1.9% 2.3% 0.1% 1.5% 0.9% 1.7% 1.7% 1.7% 8.8% 8.8% 8.8% 3.3%
Jun 2010 2009E (2.9%) (3.3%) (3.0%) 0.3% 1.8% 1.1% (1.9%) (0.2%) (1.3%) 8.8% 8.8% 8.8% 1.0% 36,553 1.0% 4.73 2.2%
Jun 2009 2010F 0.6% 0.9% 0.7% 0.9% 1.6% 1.3% 0.7% 1.3% 0.9% 0.8% 1.0% 0.9% 0.9%
Dec 2009 2010F 3.2% 3.4% 3.2% (4.4%) (2.4%) (3.3%) 0.9% (0.1%) 0.5% 0.0% 0.3% 0.1% 0.4%
Jun Dec June Jun 2010 2009 2009 2010 2010F 2011F 2011F 2011F 0.8% 1.0% 0.9% 1.6% 2.2% 1.9% 1.1% 1.8% 1.3% 0.5% 0.9% 0.6% 1.7% 2.2% 1.8% 3.1% 3.4% 3.2% 2.6% 2.4% 2.5% 2.9% 2.8% 2.9%
Dec 2009 2012F 0.1% 0.2% 0.1% 0.0% (0.3%) (0.1%) 0.1% (0.1%) 0.0% (4.0%) (3.8%) (3.9%) (0.8%)
Jun 2010 2012F 3.4% 3.3% 3.4% 2.4% 1.5% 1.9% 3.1% 2.2% 2.8% (2.5%) (3.0%) (2.8%) 1.5% 559 37,847 3.5% 5.06 2.9%
2012F v 2009 12,704 4,312 17,032 7.7% 5,718 6,966 12,681 6.4% 18,426 11,288 29,719 7.2% 3,647 4,505 8,150 (7.6%) 37,847 3.5%
3.6% (0.1%) 3.5% 3.5% 1.4% 2.5% 1.9% 0.4% 0.2% 1.2% 1.1% 1.2%
0.5% (7.3%) (6.3%) (5.5%) 0.5% (7.1%) (5.5%) (5.3%) 0.5% (7.2%) (5.9%) (5.4%) 1.1% (0.3%) (0.5%) 402 36,955 1.1% 4.79 1.2% 0.9% 333 37,288 2.0% 4.92 2.8%
7.1%
80 80
Table 43 : Euroconstruct Italy (m at 2009 prices)

2009 output 57,803
Jun 2009 2009F (4.9%)
Dec 2009 2009F (4.0%)
Jun 2010 2009E (1.5%) (9.7%)
Jun 2009 2010F 14.1% (2.5%) 3.7% (0.2%) (1.1%) (0.6%) 8.0% (2.0%) 2.1% (3.6%) (1.2%) (2.3%) 1.1%
Dec 2009 2010F (0.4%) (2.0%)
Jun Jun Dec 2010 2009 2009 2010F 2011F 2011F 2.1% 0.9% 1.4% 2.0% 1.0% 1.4% 2.1% 1.0% 1.4% 2.0% 0.8% 1.3% 1.4% 1.7% 0.9%
June 2010 2011F 7.6% 1.7% 3.5% 2.0% 1.0% 1.4% 5.2% 1.5% 2.8% 1.6% 0.8% 1.1% 2.4% 4,204 179,389 (2.5%) 35.79 3.5%
Dec 2009 2012F 4.2% 1.1% 2.2% 1.4% 0.9% 1.1% 3.0% 1.0% 1.8% 1.0% 1.0% 1.0% 1.6%
Jun 2010 2012F 18.8% 1.1% 6.8% 1.4% 0.9% 1.1% 11.5% 1.0% 4.8% 1.0% 1.0% 1.0% 3.9% 6,996 186,385 1.3% 36.65 2.4%
2012F v 2009 34,128 60,443 94,517 6.3% 21,553 30,123 51,729 (5.2%) 55,773 90,639 146,493 2.1% 17,420 22,656 40,071 (1.3%) 186,385 1.3%
31,081 (18.0%) (19.2%) (21.8%) 88,884 (10.2%) (10.1%) 23,761 30,790 54,551
(4.8%) (14.1%) (3.3%) (3.8%) (0.8%) 2.0% 1.0% 1.4%
(6.6%) (13.5%) (13.3%) (5.6%) (6.0%) (6.8%) (9.8%) (6.3%) (9.5%)
(2.8%) (12.3%) (1.1%) (1.8%) (4.0%) (7.5%)
54,842 (13.5%) (16.9%) (18.4%) 88,593 143,435 17,851 22,731 40,582 184,017 (17,535) 184,017 (8.7%) 36.10 (13.7%) 184,017 (8.7%) 36.10 (13.7%) (5.1%) (4.9%) (3.1%) (9.7%) (7.0%) (3.8%) (5.2%) (8.7%) (8.7%) (10.1%) (2.5%) (3.8%) (3.2%) (7.5%) (6.0%) (4.5%) (5.2%) (9.0%)
(3.9%) (13.3%) (1.2%) (0.6%) (1.9%) (4.0%) (1.2%) (2.4%) (2.0%) (0.2%) (5.2%) (4.9%) (2.1%) (3.3%) (4.8%) (8,833) 175,184 (4.8%) 34.58 (4.2%) 1.0% 0.0% 2.0% 0.8% 1.3% 0.3%
1.5%
Table 44 : Euroconstruct Portugal (m at 2009 prices)

2009 output 4,021
Jun 2009 2009F (3.0%)
Dec 2009 2009F (3.0%)
Jun 2010 2009E (3.0%)
Jun 2009 2010F (1.0%)
Dec 2009 2010F (2.5%)
Jun Dec Jun 2010 2009 2009 2010F 2011F 2011F (2.5%) 0.0% 2.0%
Dec June 2010 2009 2011F 2012F (7.5%) 0.0% (3.6%) (5.0%) 2.0% (3.5%) (6.1%) 0.5% (3.6%) (3.0%) 1.0% (2.4%) (3.1%) (642) 20,058 (13.0%) 4.98 (2.9%) 0.0% 5.0% 2.7% 2.0% 3.0% 2.2% 1.2% 4.5% 2.5% 3.5% 1.5% 3.2% 2.7%
Jun 2010 2012F 0.0% 1.5% 0.8% 1.5% 2.0% 1.6% 0.9% 1.6% 1.2% 0.0% 1.5% 0.2% 0.8% 160 20,219 (12.3%) 5.03 0.9%
2012F v 2009 3,376 3,979 7,360 (23.6%) 4,488 1,357 5,841 (5.4%) 7,868 5,336 13,203 (16.5%) 5,846 1,182 7,025 (3.0%) 20,218 (12.3%)
5,615 (30.0%) (30.0%) (30.0%) (27.0%) (35.0%) (35.0%) (5.0%) (5.5%) 9,636 (20.8%) (20.8%) (20.8%) (16.2%) (21.4%) (21.4%) (2.5%) (1.6%) 5,087 1,087 6,174 (3.0%) 0.0% (2.5%) (1.0%) 5.0% 0.0% (4.0%) 5.0% (2.5%) (9.0%) 0.0% (7.5%) (8.5%) 20.0% (3.6%) (8.5%) 20.0% (3.5%) 2.0% 3.0% 2.2% 1.0% 7.5% 2.4%
10,701 (19.3%) (18.5%) (19.7%) (18.4%) (22.2%) (22.4%) (1.3%) (1.8%) 5,108 (2.4%) (1.4%) (1.4%) (0.8%) 2.3% 2.3% 0.6% 3.4% 0.2% 5.0% 1.0% 4.4% 1.6% 15,810 (14.5%) (13.7%) (14.5%) (12.8%) (14.4%) (14.4%) (0.6%) 6,088 1,153 7,241 2.0% 1.0% 1.8% 3.0% (5.0%) 1.6% (9.5%) 4.0% (5.0%) 2.5% (9.9%) 23,051 (9.9%) 5.80 (15.4%) 3.5% 1.5% 3.2% (7.8%) 2.5% 0.0% 2.1% (1.0%) 0.0% (0.8%) 5.0% 1.5% 4.4% 1.2%
23,051 (10.0%) (2,533) 23,051 (9.9%) 5.80 (15.4%)
(9.3%) (10.2%) (2,351) 20,700 (10.2%) 5.13 (11.5%)
(13.3%)
81 81
Table 45 : Euroconstruct Poland (m at 2009 prices)

2009 output 2,782 8,532 10,159 3,812 13,971 15,909 6,594 22,503 10,973 3,309 14,282 36,785 1,517 36,785 4.3% 15.47 (11.6%)
Jun 2009 2009F 1.6% (7.4%) 1.0% 0.4% 0.8% (3.8%) 0.9% (2.5%) 26.6% 5.5% 21.3% 5.5%
Dec 2009 2009F 1.2% (8.1%) 0.0% 0.4% 0.1% (4.7%) 0.7% (3.2%) 27.6% 6.5% 22.0% 5.3%
Jun 2010 2009E 1.2% (8.1%) (2.3%) 0.3% (1.6%) (4.7%) 0.7% (4.2%) 27.5% 6.5% 21.2% 4.3% 36,785 4.3% 15.47 (11.6%)
Jun 2009 2010F 2.3% 1.9% 2.2% 1.2% 1.2% 1.2% 1.6% 1.6% 1.6% 30.0% 5.5% 24.0% 10.2%
Dec 2009 2010F 2.5% 1.5% 2.2% 1.0% 1.2% 1.1% 1.6% 1.3% 1.5% 27.5% 5.1% 22.3% 9.6%
Jun Jun Dec June 2010 2009 2009 2010 2010F 2011F 2011F 2011F 1.5% 11.5% 11.5% 4.3% 2.4% (1.0%) 4.2% 0.4% 1.6% 1.3% 1.2% 2.8% 8.7% 5.5% 3.0% 4.8% 7.7% 2.9% 6.3% 2.8% 8.7% 5.0% 2.9% 4.4% 7.4% 2.8% 6.0% 8.5% 3.8% 6.9% 5.0% 2.9% 4.4% 7.4% 2.8% 5.4%
Dec 2009 2012F 10.0% 3.0% 7.9% 6.0% 3.7% 5.4% 7.5% 3.4% 6.3% 23.0% 7.0% 20.4% 13.2%
Jun 2010 2012F 10.1% 3.0% 7.8% 6.0% 3.7% 5.4% 7.5% 3.4% 6.3% 25.7% 7.4% 22.5% 14.1% 6,533 52,863 43.7% 18.32 6.0%
2012F v 2009 6,972 3,102 10,068 18.0% 11,194 4,239 15,435 10.5% 18,662 7,100 25,515 13.4% 23,202 4,176 27,356 91.5% 52,863 43.7%
5,750 (11.2%) (12.0%) (12.0%)
28.8% 33.0% 35.7% 30.6% 7.4% 4.5% 5.0% 9.4% 23.8% 27.4% 29.6% 26.3% 10.0% 15.4% 16.3% 14.5% 3,679 40,464 10.0% 16.07 3.9% 5,867 46,331 26.0% 17.28 7.5%
18.4%
82 82
Equity | Construction & Materials | Germany
6 August 2010
Change of recommendation
HeidelbergCement
Developed market recovery risk
We are increasingly concerned that a recovery in developed markets looks less certain and more protracted. Given HCs 58% sales reliance on these markets and sentiment and trading headwinds in 2H10, we cut our earnings forecasts by 11% for FY10 and 13% for FY11, downgrade to Hold and cut our target price 31.7%.
Key forecasts
FY08A Revenue (m) 14,187 2,946 1,808 2,179 17.50 0.12 0.30 2.26 7.43 1.02 0.00 FY09A 11,117 2,102 42.60 579.6 4.08 0.12 0.30 9.71 9.10 0.90 0.00 FY10F 11,814 2,412 FY11F 12,587 2,679 FY12F 13,440 2,941
Hold (from Buy)

Target price
39.60 (from 58.00)

Price
39.60
Short term (0-60 days)
n/a
Sector view
Neutral
Price performance
(1M) Price () Absolute (%) Rel market (%) Rel sector (%)
Aug 07 120 100 80 60 40 20 0 HEIG.DE Eur Construct & Materials Aug 08
EBITDA (m)
(3M) 43.95 -9.9 -13.1 -4.1
Aug 09
(12M) 30.07 31.7 15.5 22.3
Reported net profit (m) Normalised net profit (m) Normalised EPS () Dividend per share () Dividend yield (%) Normalised PE (x) EV/EBITDA (x) EV/invested capital (x) ROIC - WACC (%)
Use of %& indicates that the line item has changed by at least 5%. Accounting standard: IFRS Source: Company data, RBS forecasts
431.3 & 673.9 & 944.6 & 538.3 & 740.9 & 986.6 & 2.87 & 0.15 0.38 13.80 8.20 0.86 0.00 3.95 & 0.75 1.89 10.00 7.26 0.84 0.00 5.26 & 1.00 2.53 7.53 6.46 0.81 0.00
37.70 5.0 -4.9 -2.1
year to Dec, fully diluted
Developed market sentiment and recovery critical to HC We forecast 58% of HCs FY10 sales come from Europe (33%) and North America (25%), where construction recovery expectations now look less certain. We therefore think volumes could fail to rise significantly and price pressure could continue or increase; operational gearing benefits in FY11-12 would likely disappoint as a result. Balance-sheet constraints remain HC remains highly indebted, with debt reduction an ongoing priority. It has secured refinancing to protect the business in a more difficult trading environment and, as its credit rating is no longer investment-grade, HC is not under the same pressure as Lafarge. However, a slower recovery in developed markets would likely slow its deleveraging, particularly given that its profitability relies heavily on its 51% shareholding in Indocement. Value trap risk a concern HC holds significant long-term aggregate reserves and modern cement capacity. However, three years of sales volume collapse, poor capital turn in mature markets and the likely slow rebound in materials demand leave HC exposed to a more muted earnings recovery. We are also concerned that HC will begin to attract a value trap risk as Hanson frequently faced before HC acquired it in 2007. HC is trading on EV/EBITDA multiples of 8.2x for FY10F and 7.3x for FY11F, with normalised pre-intangible amortisation earnings multiples at 13.8x for FY10F and 10.0x for FY11F. We downgrade our rating to Hold and reduce our target price to 39.6 from 58.0 We reduce our earnings forecasts for HC and raise our net debt forecast for FY11 to 7.75bn from 6.85bn (based on our expectations on foreign exchange developments, lower underlying profitability and increased minority dividends). We also assume that investors will require a higher equity return for the earnings recovery risks inherent in HC. As a result, we lower our target price by 31.7% to 39.60 and downgrade our rating to Hold from Buy. Important disclosures can be found in the Disclosures Appendix.
Market capitalisation
7.42bn
Average (12M) daily turnover
56.64m
Market: FTSE Eurotop 300 Index RIC: HEIG.DE, HEI GR Priced 39.60 at close 5 Aug 2010. Source: Bloomberg
Analysts
John Messenger
William Jones
83
Target price reduced to 39.6 from 58.0

We reduce our target price for HC by 31.7% from 58.0 to 39.6, reflecting primarily:
!
Our reduced forecast of FY11 normalised pre-intangible amortisation EPS to 3.95 from 4.54; Our forecast of a significantly higher level of net debt at end-2011 at 7.75bn from our previous forecast of 6.85bn based chiefly on foreign exchange, lower underlying profitability and higher dividend payments; A re-weighting of our target price calculation to the cross-cycle low P/E multiple and crosscycle average EV/sales multiple given our concern that earnings recovery risk is increasing; and A re-weighting within our normalised 2014F-based valuations to a 15.0% discount rate from 10.0% and 12.5% previously given our maintained view that, with earnings recovery risk increasing, investors will look to price in higher return demands to reflect this higher risk. We also justify the 15.0% discount rate given HCs debt burden, which increases equity value volatility and, in our view, requires an incremental return for potential investors.
Our target price calculation is detailed in the table below. Table 1 : Heidelberg target price ()
Base case 2011F EPS () P/E - cross cycle average (14.3x) P/E - cross cycle low (9.7x) P/E - cross cycle high (19.0x) Sales multiple - cross cycle average (1.30x) Sales multiple - cross cycle low (0.8x) Sales multiple - cross cycle high (1.43x) DCF Normalised 2014F based on 15.0% discount rate Normalised 2014F based on 12.5% discount rate Normalised 2014F based on 10.0% discount rate Normalised 2014F based on 7.5% discount rate Insurance based valuation Suggested share price () Target price weighting Target price () Potential upside / (downside) to target price Current share price ()
Weighting 2011F
3.95 56.5 38.3 75.1 24.0 -9.7 32.2 44.5 46.0 50.2 54.9 60.2 N/A 39.6 100% 39.60 0.0% 39.60 0.0% 20.0% 0.0% 20.0% 0.0% 0.0% 30.0% 30.0% 0.0% 0.0% 0.0% 0.0% 100.0%
HeidelbergCement | Investment View | 6 August 2010
84 2
Target price risks

On the upside
!
HC offers the most significant mature market exposure among the three European cement stocks we cover: we forecast that mature markets will account for 58% of FY10 sales; 33% from Western Europe and 25% from North America. Therefore, if our concerns that the more developed construction markets in Europe and North America display weaker recovery dynamics than the market currently expects prove unfounded, HCs operational gearing to better demand and a volume rebound could drive material upgrades to earnings forecasts and share price performance. Given its significant aggregates and cement exposure in the US, any positive news on further Federal stimulus measures (for infrastructure or housing) or an earlier and more expansionary new Federal transport infrastructure plan to replace SAFETEA-LU could also act as a positive catalyst for the HC share price. The group is looking to divest its UK brick and North American brick and tile operations. A successful disposal could act as a positive share price catalyst through delivering more rapid deleveraging than currently assumed in our forecasts.
On the downside
!
Downward revisions to cement and construction market recovery expectations in Europe and North America represent a significant risk to the HC share price, given the groups more bullish comments on the timeframe over which a midcycle recovery might materialise notably 1Q12. Given that, with the Hanson acquisition, the group was seen by the market as having overpaid for developed market aggregates, asphalt and ready mixed operations, any significant shift in recovery expectations could create a risk of HC becoming viewed as a value trap stock in which invested capital (through goodwill on the balance sheet) is increasingly viewed as unjustified if earnings recovery fails to meet market expectations. Although the group does not hold an investment-grade rating, the Eurobonds it issued in 2009 do contain limitations on its ability to incur additional debt if the EBITDA interest cover ratio falls below 2.0x. However, the FY09 ratio was 2.55x and our forecasts do not currently assume a decline in this ratio. Nonetheless, a sharp deterioration in EBITDA or a sharp rise in interest rates could create financing and operational constraints from this limitation term. In addition, there remain other non-disclosed covenants that could have a detrimental impact on the group and the share price if trading deteriorated significantly. Investor expectations are for HC to: 1) continue deleveraging, and 2) maintain its focus on driving operational profit improvement from the existing business. However, there remains a risk that the group could seek to reactivate an acquisitive growth strategy over the coming 1224 months. Given HCs past acquisition record, this would, in our view, meet with justified investor unease and potential share price de-rating.
HeidelbergCement | Investment View | 6 August 2010
85 3
Income statement
m Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Other post-tax items Reported net profit Tot normalised items Normalised EBITDA Normalised PTP Normalised net profit
FY08A 14187 -5595 -5646 2946 -798.9 2147 n/a 2147 -740.4 51.4 -459.8 997.9 -327.4 -111.6 1249 1808 -370.7 2946 1369 2179
FY09A 11117 -4453 -4561 2102 -784.8 1317 n/a 1317 -636.2 38.1 -733.7 -14.5 190.1 -125.1 -7.95 42.6 -536.9 2102 522.4 579.6
FY10F 11814 -4505 -4897 2412 -795.1 1617 n/a 1617 -577.8 19.0 -243.6 814.3 -195.4 -175.3 -12.3 431.3 -107.0 2412 921.3 538.3
FY11F 12587 -4730 -5178 2679 -808.3 1870 n/a 1870 -585.3 20.7 -144.3 1161 -290.4 -197.2 0.00 673.9 -67.0 2679 1228 740.9
FY12F 13440 -5034 -5464 2941 -826.2 2115 n/a 2115 -556.8 22.5 -15.0 1566 -399.3 -221.9 0.00 944.6 -42.0 2941 1608 986.6
year to Dec
Balance sheet
m Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (incl gw) Oth non-curr assets Total assets Short term debt (2) Trade & oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab & sh equity Net debt
FY08A 1017 3976 9935 10151 1208 26288 317.6 3637 10581 3492 18027 8261 26288 11566
FY09A 902.3 3355 10220 10069 962.1 25508 285.6 2966 7881 3373 14505 11003 25508 8423
FY10F 1915 3357 10997 11030 993.1 28292 651.2 2604 8731 3554 15539 12752 28292 8212
FY11F 2602 3587 11021 10988 987.7 29185 651.2 2721 8952 3414 15737 13448 29185 7746
FY12F 1718 3865 11061 10946 982.4 28572 651.2 2857 7482 3274 14264 14308 28572 7160
year ended Dec
Cash flow statement

m EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex & disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)
Lines in bold can be derived from the immediately preceding lines. Source: Company data, RBS forecasts
FY08A 2946 -170.1 -660.6 -334.7 -226.6 1554 -1031 2369 -219.1 1118 512.5 -2909 -193.9 n/a 14.1 -2577 -83.5 12.1 522.4
FY09A 2102 557.2 -947.4 -219.4 -328.6 1164 -771.0 501.1 -54.9 -324.7 2233 -3046 -49.9 n/a 0.00 -862.9 34.5 10.7 392.9
FY10F 2412 0.84 -707.8 -195.4 -164.6 1345 -850.0 120.0 -29.8 -759.8 0.00 501.2 -153.5 n/a 0.00 347.7 80.0 1013 494.7
FY11F 2679 -113.3 -585.3 -290.4 -231.2 1459 -900.0 110.0 -27.0 -817.0 0.00 221.0 -175.5 n/a 0.00 45.5 0.00 687.0 558.5
FY12F 2941 -140.8 -556.8 -399.3 -97.5 1747 -925.0 100.0 -29.7 -854.7 0.00 -1470 -306.4 n/a 0.00 -1776 0.00 -884.2 821.9
year to Dec
HeidelbergCement | Key Financial Data | 6 August 2010
86
Standard ratios
Performance Sales growth (%) EBITDA growth (%) EBIT growth (%) Normalised EPS growth (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Return on avg assets (%) Return on avg equity (%) ROIC (%) ROIC - WACC (%) Valuation EV/sales (x) EV/EBITDA (x) EV/EBITDA @ tgt price (x) EV/EBIT (x) EV/invested capital (x) Price/book value (x) Equity FCF yield (%) Normalised PE (x) Norm PE @ tgt price (x) Dividend yield (%) Per share data Tot adj dil sh, ave (m) Reported EPS (EUR) Normalised EPS (EUR) Dividend per share (EUR) Equity FCF per share (EUR) Book value per sh (EUR)
HeidelbergCement FY08A FY09A FY10F FY11F FY12F 30.6 21.6 16.0 81.6 20.8 15.1 15.4 10.2 29.6 6.04 0.00 -21.6 -28.6 -36.7 -76.7 18.9 12.2 5.21 4.99 6.40 4.24 0.00 6.27 14.7 22.0 -29.6 20.4 14.0 4.56 4.79 4.78 5.95 0.00 6.54 11.1 15.3 37.6 21.3 15.2 5.89 5.10 5.96 6.26 0.00 6.78 9.80 12.8 33.2 21.9 16.1 7.34 5.66 7.50 6.94 0.00
Holcim FY10F FY11F FY12F 9.40 9.99 13.1 2.21 23.4 15.4 7.65 5.14 9.48 7.03 -2.76 6.53 11.0 15.0 18.1 24.4 16.6 8.48 5.68 10.9 8.33 -1.46 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a FY10F 0.61 0.69 -0.36 -4.27 22.5 15.6 6.11 5.06 6.75 6.48 -2.07
Lafarge FY11F 6.29 10.6 17.1 22.5 23.5 17.2 7.04 5.89 7.83 7.64 -0.91 FY12F n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
year to Dec
year to Dec
year to Dec
1.54 7.43 7.43 10.2 1.02 0.64 10.6 2.26 2.26 0.30
1.72 9.10 9.10 14.1 0.90 0.54 6.98 9.71 9.71 0.30
1.67 8.20 8.20 11.9 0.86 0.61 6.66 13.8 13.8 0.38
1.55 7.26 7.26 10.2 0.84 0.58 7.52 10.0 10.0 1.89
1.41 6.46 6.46 8.81 0.81 0.55 11.1 7.53 7.53 2.53
1.66 7.10 7.86 12.0 1.11 1.25 12.5 13.0 15.4 2.56
1.43 5.87 6.56 9.40 1.04 1.16 13.5 11.0 13.0 2.84
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
1.74 7.71 7.84 11.5 0.93 0.77 10.5 11.7 12.2 2.37
1.62 6.89 7.01 9.65 0.91 0.73 11.7 9.58 9.97 2.37
year to Dec
year to Dec
year to Dec
FY08A FY09A FY10F FY11F FY12F 124.3 142.2 187.5 187.5 187.5 14.5 0.30 2.30 3.59 5.04 17.5 4.08 2.87 3.95 5.26 0.12 0.12 0.15 0.75 1.00 4.20 2.76 2.64 2.98 4.38 62.1 73.2 64.6 68.0 72.3
year to Dec
Solvency Net debt to equity (%) Net debt to tot ass (%) Net debt to EBITDA Current ratio (x) Operating CF int cov (x) Dividend cover (x)
year to Dec
Priced as follows: HEIG.DE - 39.60; HOLN.VX - SFr70.30; LAFP.PA - 41.31 Source: Company data, RBS forecasts
Valuation methodology
Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Minorities Less: Net Debt / Leases (as at 05 Aug 2010) Equity Value No. Shares (millions) Per Share Equity Value Current Share Price Sensitivity Table 6.0% WACC 7.0% 8.0% 9.0% 10.0% Performance Summary 2009 Invested Capital Growth (%) Operating Margin (%) Capital Turnover (x)
Source: Company data, RBS forecasts 1. In periods following the Explicit Period i.e. Phase 2 and Phase 3 2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter 3. Net Investment is defined as capex over and above depreciation after Phase 1
m 19950.8 -532.6 1039.0 227.9 20685.1 -1948.6 2176.5 8211.7 8348.3 187.5 44.52 39.60
% 96 -3 5 1 100 -9 11 40 40
Discounted Cash Flow Valuation Value of Phase 1: Explicit (2009 to 2014) Value of Phase 2: Value Driver (2015 to 2022) Value of Phase 3: Fade (2023 to 2038) Terminal Value Enterprise Value FCF Grth Rate at end of Phs 1 implied by DCF Valuation FCF Grth Rate at end of Phs 1 implied by Current Price Returns, WACC and NPV of Free Cash Flow
12% 10% 8%
m 3169.4 7705.2 6682.0 3133.3 20689.9
% 15 37 32 15 100 1.6 1.2
1500 1000 500 0 (500) (1000) 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037
No of Years in Fade Period 15 76.54 60.97 47.61 36.10 26.14 18 78.48 62.08 48.13 36.22 25.98 20 79.68 62.76 48.45 36.29 25.89 23 81.37 63.70 48.89 36.39 25.77 25 82.42 64.29 49.16 36.46 25.70
6% 4% 2% 0%
Phase 2 Avg 2010 7.9 13.7 0.6 2011 1.1 14.9 0.6 (2015 - 2022) 1.0 17.6 0.7 -2.0 11.8 0.6
Phase 1 NPV of FCF (RHS) Phase 3 NPV of FCF (RHS) Growth Business ROIC WACC
Phase 2 NPV of FCF (RHS) Total Business ROIC Remaining Business ROIC
HeidelbergCement | Performance and Valuation | 6 August 2010
87
Company description
Hold
Price relative to sector

160 140 120 100 80 60 40 Aug Nov Mar 07 07 08
HeidelbergCement (HC) is the third-largest cement producer in the world (in terms of sales) after Lafarge and Holcim. It is also the global leader in aggregates and the number-three global producer of ready-mixed concrete behind Cemex and Holcim. It has a wide geographic base, although it is skewed towards the more mature markets of Europe and the US. In FY09, 11% of sales were generated in Eastern Europe / Central Asia, 33% in Western Europe, 25% in North America, 19% in Asia Pacific, 7% in Africa / Med, and 4% from HC's trading arm. The group raised 2.25bn of equity in late 2009 to bolster the balance sheet, reduce debt and increase free float. HC entered the DAX in 2010. Bonds of 1.4bn in January 2010 and a new 3.0bn bank facility to 2013 underpin debt finance.
Jun 08
Oct 08
Feb May Sep Dec 09 09 09 09
Apr 10
Jul 10
Strategic analysis Strengths
Average SWOT company score:
2 2
FY10F sales split

22% 7% 5% 32%
Strong aggregates and limestone reserve positions in key population centres in the US, UK and Europe with very extended reserve lives where regulatory pressures limit the potential for new permits and new competitor entry.
Weaknesses
Balance sheet remains fundamentally stretched with debt reduction vital. The Hanson acquisition has delivered cost synergies, but Hanson will have to prove its ability to grow when the market turns, something Hanson has historically struggled to deliver.
9% 25% Western - Northern Europe North America Eastern Europe - Central Asia Asia Pacific Africa - Mediterranean Basin Group services
Source: RBS forecasts
Opportunities
Limited until financial leverage is reduced significantly.
1 2 Market data
Headquarters Berliner Strasse 6, 69120 Heidelberg, Germany Website www.heidelbergcement.com Shares in issue 187.5m Freefloat 76% Majority shareholders
Threats
Any significant further deterioration in the group's markets could create new pressure on operating cash flow generation and the group's ability to reduce debt.
Scoring range is 1-5 (high score is good)
Sector view: Construction & Materials

Construction activity has collapsed, but the low interest rate environment and return of capex plans could help support the industry in 2010F. Credit rationing and valuations are the main obstacles to a more optimistic view. While the industry is undergoing structural changes, our mixed views on the sector prompt us to maintain a Neutral weighting.
The sector view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team.
Sector rel to Europe

105 100 95 90 85 80 75 70 Aug Nov Mar 07 07 08
Jun 08
Oct 08
Feb May Sep Dec 09 09 09 09 MarketIndex
Apr 10
Jul 10
Industry competitive position Supplier power
Average competitive score:
33-
Broker recommendations
30 25 20 15 10 5 0 Buy Sell Hold
Vertical integration provides some control over inputs but asphalt cost volatility and energy cost pressures are outside HC's control.
Barriers to entry
High in aggregates and cement, but low in ready-mixed concrete.
23-
Customer power
Limited in aggregates and ready-mixed concrete, but some degree of customer power is exercisable in relation to larger customers taking cement production in bulk particularly as demand is weak.
Substitute products
Limited, although new cement technologies are being pursued.
43-
Source: Bloomberg
Rivalry
Competition is very local in aggregates and ready-mixed concrete, and can be highly competitive. In cement more oligopolistic behaviour is normally seen but pricing competition is increasing.
Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse
HeidelbergCement | Strategic and Competitive Overview | 6 August 2010
88
Equity | Construction & Materials | Switzerland
6 August 2010
Holcim
Buy
Target price
Our emerging market choice

In our view, Holcim benefits from a more robust balance sheet and greater emerging-market exposure (Asia and LatAm) than its peers in our coverage, as well as opportunities for earnings accretion through minority buyouts over the coming years. We retain our Buy rating but lower the target price 5% to SFr79.0.
Key forecasts
FY08A Revenue (SFrm) 25,157 5,333 1,782 1,913 6.72 2.25 3.18 10.50 7.99 1.28 -1.23 FY09A 21,132 4,630 1,471 1,594 4.87 1.50 2.12 14.50 8.90 1.14 -2.25 FY10F 23,565 5,168 FY11F 25,093 FY12F 26,781
SFr79.00 (from SFr83.00)

Price
SFr70.70
n/a
Sector view
Neutral
Price performance
(1M) Price (SFr) Absolute (%) Rel market (%) Rel sector (%)
Aug 07 140 120 100 80 60 40 20 HOLN.VX Eur Construct & Materials Aug 08
EBITDA (SFrm)
(3M) 77.25 -8.5 -12.3 -5.6
Aug 09
5,657 & 6,261
(12M) 63.45 11.4 -2.6 2.4
Reported net profit (SFrm) Normalised net profit (SFrm) Normalised EPS (SFr) Dividend per share (SFr) Dividend yield (%) Normalised PE (x) EV/EBITDA (x) EV/invested capital (x) ROIC - WACC (%)
1,313 & 1,734 & 1,986 1,618 & 1,857 & 2,109 4.95 & 1.48 & 2.09 14.30 7.97 1.13 -2.18 5.68 & 1.70 & 2.40 12.50 7.07 1.11 -1.47 6.45 1.93 2.73 11.00 6.23 1.08 -0.67
69.60 1.6 -8.1 -5.6
We view Holcim as better placed geographically Holcim has 72%, or 131.5mt, of its equity-owned cement capacity in emerging markets with particular strengths in India and Latin America vs 28% in mature markets: 14.5% in Western Europe, 11.3% in North America and 2.2% in Australia. We view Holcims greater bias to emerging markets than the two other European cement stocks we cover as a critical strength in driving its earnings recovery amid the weaker economic rebound in developed markets. and better placed financially than its peers in our coverage We also consider Holcim as holding the strongest financial position of the three cement names. We forecast its net debt to EBITDA at 2.4x for FY10 and 1.8x for FY11, vs Lafarge at 3.9x and 3.4x and HeidelbergCement at 3.4x and 2.9x, respectively. Rating remains Buy, target price trimmed 5% to SFr79.0 from SFr83.0 Holcim is trading on EV/EBITDA multiples of 8.0x for FY10F and 7.1x for FY11F, with normalised pre-intangible amortisation earnings multiples of 14.3x for FY10F and 12.5x for FY11F. Our lowered earnings forecasts drive our 5% target price reduction to SFr79.0. The long-term cement play, in our view
SFr23.20bn (16.85bn)
SFr100.82m (69.15m)
Market: FTSE Eurotop 300 Index RIC: HOLN.VX, HOLN VX Priced SFr70.70 at close 5 Aug 2010. Source: Bloomberg
Analysts
John Messenger
William Jones
We believe the premium P/E rating at which Holcim trades relative to Heidelberg and Lafarge is more than justified by: 1) the groups materially stronger balance sheet; 2) the fact that it has no financial need to make asset disposals into a buyers market, which would carry a risk of EBITDA or earnings dilution; and, 3) its potential to grow emerging market cement earnings through low-risk purchases of minority positions over the coming years. Holcim has influence over, but not full ownership of, 86mt of emerging market capacity. Holcim knows the assets and the markets and can, as a result, in our view, pursue a lower-risk acquisitive approach to further growth. Important disclosures can be found in the Disclosures Appendix.
89
Target price reduced to SFr79.0 from SFr83.0

We lower our target price for Holcim 4.8% from SFr83.0 to SFr79.0, reflecting primarily:
!
A reduction in FY11F normalised pre-intangible amortisation EPS to SFr5.66 from SFr6.38 previously; A re-weighting of our target price calculation to solely the cross-cycle average P/E and crosscycle average EV/sales, given our concern that earnings recovery risk is increasing; and, A re-weighting within our normalised 2014F-based valuations to 12.5% and 15.0% discount rates from 10.0% previously, given our maintained view that, with earnings recovery risk increasing, investors will look to price in higher return demands to reflect this higher risk to forecasts.
Our target price calculation is detailed in the table below. Table 1 : Holcim target price (SFr)
Base case 2011F EPS (SFr) P/E - cross cycle average (12.6x) P/E - cross cycle low (10.0x) P/E - cross cycle high (19.0x) Sales multiple - cross cycle average (1.87x) Sales multiple - cross cycle low (1.35x) Sales multiple - cross cycle high (2.05x) DCF Normalised 2014F based on 15.0% discount rate Normalised 2014F based on 12.5% discount rate Normalised 2014F based on 10.0% discount rate Normalised 2014F based on 7.5% discount rate Insurance based valuation Suggested share price (SFr) Target price weighting Target price (SFr) Potential upside/ (downside to target price) Current share price (SFr)
Weighting 2011F
5.66 71.3 56.6 107.6 94.1 54.2 107.9 84.0 65.8 71.8 78.5 86.1 64.9 79.0 100% 79.0 11.7% 70.7 20% 0% 0% 20% 0% 0% 30% 15% 15% 0% 0% 0% 100%
Target price risks

On the downside
!
Holcims emerging market exposure in Asia is dominated by India, which we view as a longterm positive. There are, however, short-term pressures on cement prices reflecting additional capacity and seasonal monsoon impacts. More marked price weakness in India or poor pricing dynamics post the monsoon season could impact earnings forecasts and the Holcim share price. Holcims margin and return on invested capital performance from vertical integration into aggregates, asphalt, ready mixed concrete and construction services have proved poor, both before and after the financial crisis. In addition, any disappointment on the performance of the groups latest acquisition of Cemexs Australian operations could impact the groups credibility on acquisition integration and capability in downstream operations with a detrimental impact on the Holcim share price. Holcim is the most focused on emerging markets among the cement plays we cover, with a significant position in the Indian cement market. However, its Indian listed cement operations ACC (of which Holcim owns 46.2%) and Ambuja Cement (of which Holcim owns 45.7%)
90 2
Holcim | Investment View | 6 August 2010
are trading on prospective P/E multiples of 11.5x and 12.8x respectively for FY10 and 11.5x and 12.4x respectively for FY11, based on Bloomberg consensus. As a result, those in a position to invest directly in emerging markets (to avoid risks around mature market recovery prospects) could choose to invest directly in ACC and/or Ambuja Cement rather than in Holcim.
!
Holcims segmental disclosure, while improving, is less transparent than that of both Lafarge and HeidelbergCement. In our view, this increases forecasting risks in respect of both the impact of pricing and the operational gearing Holcim should be capable of delivering into recovery.
On the upside
!
Holcim has significant exposure to Latin America, where trading prospects appear to be improving, which could drive upgrades to forecasts for 2011 and 2012. Holcim has the most robust balance sheet within our cement sector coverage, both supporting the existing operations and potentially allowing accretive acquisition spending. Holcim has numerous opportunities to adopt what we would view as a low-risk creeping acquisition strategy in respect of minority interest positions, notably in its Indian subsidiaries, for which current Indian stock market valuations appear relatively attractive. Incorporating Holcims FY09 disclosed fixed asset insurance cover as a proxy for replacement cost into the groups balance sheet suggests a replacement cost per share of SFr64.9. With the groups share price just 8.9% above replacement cost, we see the current share price as firmly underpinned, with the equity market currently placing little value on the groups strategic positions, opportunities for future growth and cyclical profit recovery.
Holcim | Investment View | 6 August 2010
91 3
Income statement
SFrm Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Other post-tax items Reported net profit Tot normalised items Normalised EBITDA Normalised PTP Normalised net profit
FY08A 25157 -14116 -5708 5333 -1842 3491 -131.0 3360 -719.0 n/a 248.0 2889 -663.0 -444.0 0.00 1782 -131.0 5333 3020 1913
FY09A 21132 -12072 -4430 4630 -1726 2904 -123.0 2781 -708.0 n/a 508.0 2581 -623.0 -487.0 0.00 1471 -123.0 4630 2704 1594
FY10F 23565 -11516 -6881 5168 -1806 3362 -123.0 3239 -725.7 n/a 304.8 2818 -971.2 -533.3 0.00 1313 -305.0 5168 2941 1618
FY11F 25093 -12134 -7302 5657 -1867 3790 -123.0 3667 -706.0 n/a 317.5 3279 -957.9 -586.6 0.00 1734 -123.0 5657 3402 1857
FY12F 26781 -12754 -7766 6261 -2026 4235 -123.0 4112 -673.0 n/a 317.7 3756 -1128 -642.3 0.00 1986 -123.0 6261 3879 2109
year to Dec
Balance sheet
SFrm Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (incl gw) Oth non-curr assets Total assets Short term debt (2) Trade & oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab & sh equity Net debt
FY08A 3610 6384 23262 9306 2631 45193 5863 4902 12789 3665 27219 17974 45193 15042
FY09A 4507 6290 25493 9983 2933 49206 4453 4827 13854 4028 27162 22044 49206 13800
FY10F 6329 6590 24800 10160 3435 51314 4453 4927 14633 4112 28125 23190 51314 12757
FY11F 7099 7040 24164 10037 3790 52130 4453 5077 13633 4172 27335 24795 52130 10987
FY12F 7827 7565 23718 9914 4136 53160 4453 5252 12633 4207 26545 26615 53160 9259
year ended Dec
Cash flow statement

SFrm EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex & disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)
FY08A 5333 -603.0 -577.0 -877.0 221.0 3497 -4518 -957.0 n/a -5475 0.00 4119 -1105 n/a -147.0 2867 -629.0 260.0 -1021
FY09A 4630 159.0 -581.0 -639.0 225.0 3794 -2507 -2083 n/a -4590 2040 -203.2 -192.0 n/a 24.0 1669 -4.00 869.0 1287
FY10F 5168 -200.0 -725.7 -789.2 -5.00 3448 -1250 210.0 n/a -1040 0.00 -1000 -700.9 n/a 36.0 -1665 1079 1822 2198
FY11F 5657 -300.0 -706.0 -957.9 -20.0 3673 -1450 250.0 n/a -1200 0.00 -1000 -715.3 n/a 12.0 -1703 0.00 770.1 2223
FY12F 6261 -350.0 -673.0 -1128 -35.0 4075 -1750 200.0 n/a -1550 0.00 -1000 -808.7 n/a 12.0 -1797 0.00 728.0 2325
year to Dec
Holcim | Key Financial Data | 6 August 2010
92
Standard ratios
Performance Sales growth (%) EBITDA growth (%) EBIT growth (%) Normalised EPS growth (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Return on avg assets (%) Return on avg equity (%) ROIC (%) ROIC - WACC (%) Valuation EV/sales (x) EV/EBITDA (x) EV/EBITDA @ tgt price (x) EV/EBIT (x) EV/invested capital (x) Price/book value (x) Equity FCF yield (%) Normalised PE (x) Norm PE @ tgt price (x) Dividend yield (%) Per share data Tot adj dil sh, ave (m) Reported EPS (CHF) Normalised EPS (CHF) Dividend per share (CHF) Equity FCF per share (CHF) Book value per sh (CHF)
Holcim FY08A FY09A FY10F FY11F FY12F -7.01 -23.0 -32.7 -33.1 21.2 13.9 7.60 5.82 11.2 7.63 -1.23 -16.0 -13.2 -16.8 -27.5 21.9 13.7 7.54 4.73 9.27 6.61 -2.25 11.5 11.6 15.8 1.51 21.9 14.3 6.87 4.88 8.32 6.68 -2.18 6.49 9.47 12.8 14.8 22.5 15.1 7.40 5.26 9.07 7.39 -1.47 6.73 10.7 11.7 13.6 23.4 15.8 7.88 5.70 9.67 8.19 -0.67
HeidelbergCement FY10F FY11F FY12F 2.57 10.8 15.6 -14.6 20.4 13.4 5.31 4.73 5.69 5.49 0.00 6.99 12.0 17.4 40.9 21.4 14.7 6.99 5.43 7.62 6.47 0.00 7.38 10.6 14.4 24.1 22.0 15.6 8.08 5.91 8.87 7.37 0.00 FY10F 0.61 0.69 -0.36 -4.27 22.5 15.6 6.11 5.06 6.75 6.48 -2.07
Lafarge FY11F 6.29 10.6 17.1 22.5 23.5 17.2 7.04 5.89 7.83 7.64 -0.91 FY12F n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
year to Dec
year to Dec
year to Dec
1.69 7.99 8.51 12.7 1.28 1.32 -5.08 10.5 11.7 3.18
1.95 8.90 9.49 14.8 1.14 1.21 5.57 14.5 16.2 2.12
1.75 7.97 8.50 12.7 1.13 1.16 9.50 14.3 16.0 2.09
1.59 7.07 7.55 10.9 1.11 1.10 9.61 12.5 13.9 2.40
1.46 6.23 6.66 9.48 1.08 1.03 10.1 11.0 12.3 2.73
1.64 8.01 9.46 12.3 0.89 0.69 6.65 12.4 18.0 0.37
1.47 6.88 8.17 10.0 0.86 0.65 10.5 8.81 12.8 1.87
1.29 5.87 7.03 8.27 0.82 0.61 14.6 7.10 10.3 2.50
1.74 7.71 7.84 11.5 0.93 0.77 10.5 11.7 12.2 2.37
1.62 6.89 7.01 9.65 0.91 0.73 11.7 9.58 9.97 2.37
year to Dec
year to Dec
year to Dec
FY08A FY09A FY10F FY11F FY12F 284.5 327.1 327.1 327.1 327.1 6.26 4.50 4.01 5.30 6.07 6.72 4.87 4.95 5.68 6.45 2.25 1.50 1.48 1.70 1.93 -3.59 3.94 6.72 6.80 7.11 53.4 58.2 60.7 64.5 68.9
year to Dec
year to Dec
Priced as follows: HOLN.VX - SFr70.70; HEIG.DE - 39.61; LAFP.PA - 41.10 Source: Company data, RBS forecasts
Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Minorities Less: Net Debt / Leases (as at 05 Aug 2010) Equity Value No. Shares (millions) Per Share Equity Value Current Share Price Sensitivity Table 6.0% WACC 7.0% 8.0% 9.0% 10.0% Performance Summary 2009 Invested Capital Growth (%) Operating Margin (%) Capital Turnover (x)
SFrm 44389.5 -1886.0 526.5 626.4 43656.4 3884.0 6087.5 13832.9 27620.0 328.1 84 70.70
% 102 -4 1 1 100 9 14 32 63
12% 10% 8%
SFrm 7330.3 12281.0 15493.1 8565.4 43669.7
% 17 28 35 20 100 1.8 1.1
3000 2500 2000 1500 1000 500 0 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
No of Years in Fade Period 15 157.54 124.44 100.25 81.90 67.56 18 159.33 125.48 100.86 82.25 67.76 20 160.41 126.10 101.22 82.46 67.89 23 161.88 126.93 101.69 82.74 68.05 25 162.77 127.42 101.97 82.90 68.16
6% 4% 2% 0%
Phase 2 Avg 2010 1.2 14.1 0.6 2011 0.0 14.9 0.6 (2013 - 2018) 1.6 16.6 0.8 7.0 13.5 0.6
Holcim | Performance and Valuation | 6 August 2010
93
Company description
Buy

140 130 120 110 100 90 80 70 Aug Nov Mar 07 07 08
Holcim is a leading global building materials company (sales: SFr27.05bn in FY07) supplying principally cement and aggregates, but also concrete, asphalt and related construction services, to a variety of end customers. The group operates in more than 70 countries. While the US and the UK represent two of its key exposures, recent expansion in India has led to a significant increase in the group's emerging markets presence, which in 2007 accounted for c65% of operating profit. The group's strategy continues to focus on Cement in emerging markets and Aggregates within mature markets, with EBITDA margins of 33.0%, 27.0% and 8.0% targeted in Cement, Aggregates, and Other Construction Materials & Services, respectively, by 2010.
Jun 08
Oct 08
Feb 09
Jun 09
Sep Dec 09 09
Apr 10
Aug 10
4 4
2010F sales
36% 5% 15% Europe Latin America Asia Pacific 30% 14% North America Africa Middle East
Strong market positions (usually top three) in selected geographies, with 70% of FY09 operating EBITDA generated in emerging markets, and an enviable presence in the high-growth Indian market. Solid track record and robust management team.
Weaknesses
The group still has much to prove in delivering acceptable returns in its non-cement related activities of Aggregates and Other construction materials as well as delivering acceptable returns on specific investments made in India, the UK and the US with the Aggregate Industries acquisition.
Opportunities
Strong balance sheet position provides opportunity to plug geographic/product gaps. Can continue to develop emerging market footprint in coming years.
Market data
Headquarters Zurcherstrasse 156, CH-8645, Jona, Switzerland Website www.holcim.com Shares in issue 328.1m Freefloat 80% Majority shareholders Thomas Schmidheiny (18%), Filaret Galchev (7%), Capital Group (5%)
Threats
Slower global GDP growth is an obvious threat, together with energy costs pressures and limited price growth at present. Competitive actions of smaller players in slower market conditions is likely to prove the most significant threat over the coming 12-24 months.


105 100 95 90 85 80 75 70 Aug Nov Mar Jun 07 07 08 08
Oct 08
Apr 10
Jul 10
44-
16 14 12 10 8 6 4 2 0 Buy Hold Sell
The industry is currently subject to the same energy cost pressures as other manufacturers, although other raw material inputs (crushed rock, clay, etc) are often owned or controlled.
Barriers to entry
4+
High - barriers are considerable given the prohibitive cost associated with plant construction and increasing regulatory pressures pertaining to the environment.
Customer power
3-
Most cement producers are ever more vertically integrated through concrete and other raw materials, although some pushback may build in the near term as merchants and contractors feel the squeeze.
Substitute products
Low, as there are few substitutes for heavy building materials in their current form.
43-
Source: Bloomberg
Rivalry
Moderate, given that consolidation has lessened extreme competitive practices in several markets, but this is now being tested in very weak western European and US markets.
Holcim | Strategic and Competitive Overview | 6 August 2010
94
Equity | Construction & Materials | France
6 August 2010
Lafarge
Sell
Target price
Between a rock and

In our view, a probable credit rating downgrade, disappointing 1H10 performance from the Middle East and Africa region and one-off impacts on the groups debt burden leave Lafarge under significant pressure operationally and financially looking to 2H10 and beyond. We maintain Sell with a lower 36.9 TP (from 44).
Key forecasts
FY08A Revenue (m) 19,033 4,618 1,598 1,680 7.53 1.74 4.23 5.46 7.22 1.03 5.76 FY09A 15,884 3,600 829.0 922.0 3.47 2.00 4.87 11.80 8.27 0.94 -1.38 FY10F 16,542 3,683 FY11F 17,741 FY12F 19,102
36.90 (from 44.00)

Price
41.10
n/a
Sector view
Neutral
Price performance
(1M) Price () Absolute (%) Rel market (%) Rel sector (%)
Aug 07 140 120 100 80 60 40 20 LAFP.PA Eur Construct & Materials Aug 08
EBITDA (m)
(3M) 50.32 -18.3 -21.2 -13.0
Aug 09
3,895 & 4,266
(12M) 51.47 -20.1 -29.9 -25.8
Reported net profit (m) Normalised net profit (m) Normalised EPS () Dividend per share () Dividend yield (%) Normalised PE (x) EV/EBITDA (x) EV/invested capital (x) ROIC - WACC (%)
804.8 & 1,078 & 1,315 897.8 & 1,171 & 1,408 3.13 & 1.00 2.43 13.10 7.98 0.83 -1.50 4.09 & 1.00 2.43 10.10 7.39 0.81 -1.77 4.91 1.00 2.43 8.37 6.60 0.79 -0.99
40.51 1.5 -8.1 -5.4
Financing challenges leave equity valuation at risk Lafarge looks set, in our view, to lose its investment-grade status in the coming months. Net debt at end-July 2010 of 15,160m has since been affected by the gypsum fine of 338m and FY09 dividends (pre scrip take-up) of 577m. We now forecast net debt at end-FY10F of 14,191m, with net debt to EBITDA at FY10F of 3.9x compared with 3.8x at FY09, with FY10F EBITDA of 3,683m. We believe Lafarge needs a fundamental recapitalisation of its balance sheet to restore confidence and avoid value-destructive asset-disposal demands. 3,600m, or 1.0x net debt to EBITDA an extreme challenge We believe Lafarge needs to de-gear significantly, with a 1.0x net debt to EBITDA adjustment requiring 3,600 of additional equity, or 29.5% of the groups current equity valuation. A recapitalisation of 29.5% by itself does not appear too challenging, but uncertainty remains given that 35% of Lafarges share base is held by two investors, NNS Holding Sarl (13.9%) and GBL (21.1%). Their ability and desire to either follow their existing equity investments or hold out for trading recovery and an extended period of noninvestmentgrade status adds uncertainty about how Lafarge can re-engineer its balance sheet and the degree to which debt investors are able to extract future recovery value relative to equity holders.
11.77bn
69.61m
Market: FTSE Eurotop 300 Index RIC: LAFP.PA, LG FP Priced 41.10 at close 5 Aug 2010. Source: Bloomberg
Analysts
John Messenger
Rating remains Sell; we lower our price target 16.1%, to 36.9 from 44.0 Lafarge is trading on EV/EBITDA multiples for FY10F and FY11F of 8.0x and 7.4x, respectively, with normalised pre-intangible amortisation earnings multiples of 13.1x for FY10F and 10.1x for FY11F. Our adjustments to forecasts and a 25% weighted inclusion of our estimated replacement cost for Lafarge of 33.7 per share drive our 16.1% price target adjustment to 36.9. We maintain our Sell rating given earnings and equity dilution risk.
William Jones
Important disclosures can be found in the Disclosures Appendix.
95
Price target revised to 36.9 from 44.0

We reduce our price target for Lafarge by 16.1%, from 44.0 to 36.9, primarily reflecting the following:
!
We reduce our FY11F normalised pre intangible amortisation earnings per share to 4.09 from 4.41 previously. We re-weight our price target calculation to solely using the cross-cycle low PE multiple and cross-cycle average EV/sales multiples. We do this because we are concerned that earnings recovery risk is increasing and Lafarges earnings are now at a materially increased risk from a potential credit rating downgrade. Were a downgrade to occur, it would affect debt costs and potentially lead to sizeable asset disposals at earnings-dilutive valuations. We re-weight our normalised 2014F-based valuation to a 15.0% discount rate, from the multiple weightings of 12.5% and 10.0% we previously applied. We apply a higher discount rate to reflect increased earnings recovery risks, but also for Lafarge the material risk to longterm equity value from a potential credit rating downgrade. We include a 25% weighting to our estimate for Lafarges asset replacement cost, which we estimate at 33.7. This valuation incorporates the groups FY09 disclosed fixed asset insurance cover in the 2Q10 balance sheet as a proxy for replacement cost. We include this valuation metric for Lafarge given the increasing likelihood of material asset disposals to restore a more sustainable balance sheet.
Our price target calculation is detailed in the table below. Table 1 : Lafarge target price ()
Base case 2011F EPS () PE 20-year average (13.3x) PE recession low (8.1x) PE recession high (25.4x) Sales multiple 20-year average (1.45x) Sales multiple recession low (0.90x) Sales multiple recession high (2.0x) DCF Normalised 2014F based on 15.0% discount rate Normalised 2014F based on 12.5% discount rate Normalised 2014F based on 10.0% discount rate Normalised 2014F based on 7.5% discount rate Insurance-based valuation Implied fair value () Target price weighting Target price () Potential upside/(downside) to fair value Current share price ()
Source: Company data, RBS forecasts . Prices as of close 5 August 2010
Weighting 2011F
4.09 54.5 33.2 103.9 30.6 -4.4 67.2 45.7 44.7 48.8 53.4 58.5 33.7 36.9 100% 36.9 (11.9%) 42.5 0% 20% 0% 20% 0% 0% 20% 15% 0% 0% 0% 25% 100%
Lafarge | Investment View | 6 August 2010
96 2
Price target risks

On the upside
!
After disappointing trading in the Middle East and Africa region in 1Q-2Q10 with, in particular, self-inflicted market share loss in Egypt in 2Q, any improvement in pricing control and market share recovery could drive positive earnings revisions from this region and affect the groups share price positively. If Lafarge is able to make material divestments up and above the 500m included in our forecasts for FY10, then the group might avoid a credit rating downgrade and see a share price relief bounce. If cement and aggregates pricing dynamics show greater resilience than our forecasts, most notably in the US and Western Europe, then operational gearing dynamics and operating income would potentially move ahead of our forecasts and drive the share price higher. If our view on developed market recovery proves incorrect, then Lafarge would benefit from upward earnings revisions, potentially driving the share price higher.
On the downside
!
The route by which Lafarge seeks to restore a stronger financial base for the group remains, in our view, the most significant downside risk to the current share price, with: 1) accelerated asset sales likely to disappoint in terms of accretion to EV/EBITDA; 2) the appetite and cost for longer-term non investment-grade debt financing for Lafarge uncertain; and 3) the route by which the group might raise equity uncertain given limited information on the financial position and appetite of the 35% shareholding position held by the groups two largest shareholders and the scale of equity injection required. We would argue the gap needs to raise at least a 1.0x net debt to EBITDA turn, or 3,600m.
Lafarge | Investment View | 6 August 2010
97 3
Income statement
m Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Other post-tax items Reported net profit Tot normalised items Normalised EBITDA Normalised PTP Normalised net profit
FY08A 19033 -13729 -686.0 4618 -994.0 3624 -82.0 3542 -941.0 -3.00 -180.0 2418 -479.0 -341.0 0.00 1598 -82.0 4618 2500 1680
FY09A 15884 -11707 -577.0 3600 -1030 2570 -93.0 2477 -926.0 -18.0 -227.0 1306 -260.0 -310.0 93.0 829.0 -93.0 3600 1399 922.0
FY10F 16542 -12302 -556.0 3683 -1072 2611 -93.0 2518 -663.8 -18.0 -245.0 1591 -391.6 -235.0 -160.0 804.8 -93.0 3683 1684 897.8
FY11F 17741 -13221 -625.1 3895 -1038 2857 -93.0 2764 -841.0 -5.14 -100.0 1818 -469.5 -270.3 0.00 1078 -93.0 3895 1911 1171
FY12F 19102 -14135 -700.4 4266 -1024 3242 -93.0 3149 -870.0 0.00 -80.0 2199 -573.0 -310.8 0.00 1315 -93.0 4266 2292 1408
year to Dec
Balance sheet
m Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (incl gw) Oth non-curr assets Total assets Short term debt (2) Trade & oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab & sh equity Net debt
FY08A 1936 5866 16927 13988 1891 40608 4619 4079 14201 3074 25973 14635 40608 16884
FY09A 2287 4396 16699 13881 2234 39497 2325 3475 13757 3140 22697 16800 39497 13795
FY10F 3311 4557 18473 15801 2301 44443 2325 3565 15177 3390 24457 19986 44443 14191
FY11F 3311 4881 18246 15708 2385 44530 2325 3698 14204 3390 23618 20913 44530 13218
FY12F 3311 5262 18172 15615 2479 44838 2325 3867 13159 3390 22741 22097 44838 12173
year ended Dec
Cash flow statement

m EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex & disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)
FY08A 4618 -154.0 -777.0 -575.0 -69.0 3043 -2886 -9933 -74.0 -12893 2602 8607 -1051 n/a -117.0 10041 259.0 450.0 157.0
FY09A 3600 1029 -827.0 -373.0 -133.0 3296 -1645 731.0 -45.0 -959.0 1534 -2828 -536.0 n/a -115.0 -1945 -41.0 351.0 1651
FY10F 3683 -31.5 -763.8 -430.7 -391.0 2066 -1275 486.0 -25.0 -814.0 50.0 1256 -802.0 n/a -85.0 419.1 -647.4 1024 791.4
FY11F 3895 -143.9 -841.0 -516.4 -71.0 2322 -1000 250.0 0.00 -750.0 0.00 -1062 -421.6 n/a -89.3 -1572 0.00 0.00 1322
FY12F 4266 -183.7 -870.0 -601.7 -71.0 2540 -1050 150.0 0.00 -900.0 0.00 -1104 -441.9 n/a -93.7 -1640 0.00 0.00 1490
year to Dec
Lafarge | Key Financial Data | 6 August 2010
98
Standard ratios
Performance Sales growth (%) EBITDA growth (%) EBIT growth (%) Normalised EPS growth (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Return on avg assets (%) Return on avg equity (%) ROIC (%) ROIC - WACC (%) Valuation EV/sales (x) EV/EBITDA (x) EV/EBITDA @ tgt price (x) EV/EBIT (x) EV/invested capital (x) Price/book value (x) Equity FCF yield (%) Normalised PE (x) Norm PE @ tgt price (x) Dividend yield (%) Per share data Tot adj dil sh, ave (m) Reported EPS (EUR) Normalised EPS (EUR) Dividend per share (EUR) Equity FCF per share (EUR) Book value per sh (EUR)
Lafarge FY08A FY09A FY10F FY11F FY12F 8.06 10.4 9.62 -23.2 24.3 19.0 8.83 8.07 14.1 13.6 5.76 -16.5 -22.0 -29.1 -53.9 22.7 16.2 5.80 4.96 6.61 6.45 -1.38 4.14 2.32 1.60 -9.64 22.3 15.8 5.43 3.92 5.45 6.33 -1.50 7.25 5.74 9.42 30.4 22.0 16.1 6.60 4.67 6.38 6.06 -1.77 7.67 9.52 13.5 20.2 22.3 17.0 7.37 5.31 7.31 6.84 -0.99
Holcim FY10F FY11F FY12F 9.40 9.99 13.1 2.21 23.4 15.4 7.65 5.14 9.48 7.03 -2.76 6.53 11.0 15.0 18.1 24.4 16.6 8.48 5.68 10.9 8.33 -1.46 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Europe sector aggregate 2010 1.68 7.60 15.6 n/a 12.8 8.30 3.59 3.96 6.96 6.71 -1.17 2011 4.53 9.82 14.6 n/a 13.4 9.09 4.40 4.63 8.51 7.76 -0.11 2012 5.68 9.48 12.1 n/a 14.2 9.86 5.10 5.05 10.4 8.70 1.34
year to Dec
year to Dec
year to Dec
1.75 7.22 6.96 9.42 1.03 0.71 1.71 5.46 4.90 4.23
1.87 8.27 7.94 12.0 0.94 0.73 15.1 11.8 10.6 4.87
1.78 7.98 7.66 11.7 0.83 0.66 6.72 13.1 11.8 2.43
1.62 7.39 7.08 10.4 0.81 0.63 11.2 10.1 9.03 2.43
1.47 6.60 6.32 8.94 0.79 0.60 12.6 8.37 7.51 2.43
1.66 7.10 7.86 12.0 1.11 1.25 12.5 13.0 15.4 2.56
1.43 5.87 6.56 9.40 1.04 1.16 13.5 11.0 13.0 2.84
1.01 7.93 3.36 12.2 1.12 n/a 8.00 14.8 0.00 2.66
0.95 7.04 2.88 10.4 1.08 n/a 8.32 12.0 0.00 2.96
0.88 6.20 2.71 8.94 1.07 n/a 10.4 9.47 0.00 3.77
year to Dec
year to Dec
year to Dec
year to Dec
year to Dec
Priced as follows: LAFP.PA - 41.10; HOLN.VX - SFr70.30 Source: Company data, RBS forecasts
Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Minorities Less: Net Debt / Leases (as at 05 Aug 2010) Equity Value No. Shares (millions) Per Share Equity Value Current Share Price Sensitivity Table 15 6.0% WACC 7.0% 8.0% 9.0% 10.0% Performance Summary 2009 Invested Capital Growth (%) Operating Margin (%) Capital Turnover (x)
EUR m 37341.8 -2895.9 -3996.8 290.5 30739.6 -510.0 2937.5 14190.9 13101.2 286.5 45.7 41.10
% 121 -9 -13 1 100 -2 10 46 43
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
EUR m 3137.2 11810.1 11688.0 6922.7 33557.9
% 9 35 35 21 100 0.7 0.5
2500 2000 1500 1000 500 0 (500) (1000) (1500) (2000) (2500) 2035 2037
No of Years in Fade Period 18 95.27 64.50 42.03 24.93 11.46 20 94.49 63.75 41.35 24.33 10.95 23 93.38 62.71 40.43 23.54 10.28 25 92.70 62.07 39.88 23.07 9.89 96.54 65.74 43.16 25.93 12.33
Phase 2 Avg 2010 10.7 14.3 0.5 2011 -0.2 15.5 0.5 (2013 - 2021) 0.9 17.4 0.5 -2.5 14.8 0.4
Lafarge | Performance and Valuation | 6 August 2010
99
Company description
Sell

140 130 120 110 100 90 80 70 60 50 Aug Nov Mar 07 07 08 Jun 08 Oct 08 Feb 09 Jun 09 Sep Dec 09 09 Apr 10 Aug 10
Lafarge is a diversified global building materials business. It is a leading global cement producer. It also has leading aggregates and concrete positions, notably in Western Europe and North America, and is a large producer of plasterboard. The group has focused in recent years on expanding its emerging market exposure, culminating in the purchase of Orascom Cement in January 2008, for 10.1bn. The group, through aggressive debt financing of the Orascom transaction, exited FY08 overgeared and in April 2009 raised 1.5bn by way of a 6-for-13 rights issue at a subscription price of 16.65. The group is now focussed on cost cutting (400m targeted by 2011), working capital reduction and asset disposals to further reduce financial gearing. Lafarge delivered 15,884m of sales in FY09, and operates in 78 countries with more than 78,000 employees.
2 3
Sales split, FY10F

8% 30% 62% Cement Aggregates & Concrete Gypsum
The group has excellent dominant positions in several long-term attractive cement markets (eg, in emerging markets and in the US). It also has a strong aggregates resource base and is very cash-generative. Capital discipline was improving but reversed with the Orascom acquisition.
Weaknesses
The group is still dogged to an extent by its history, particularly by the Blue Circle and Orascom acquisitions. Margins in aggregates are below average. The group's ultimate weakness, however, remains its debt burden, which we forecast at 14,191m at 31 December 2010.
Source: RBS forecasts
Opportunities
Near-term debt reduction is necessary to deliver future opprtunities for growth and incremental investment in additional cement capacity up and above 20mt, which is scheduled for completion in FY10-FY11.
Market data
Headquarters 61, rue des Belles Feuilles, BP40, 75782 Paris. Cedex 16 Website www.lafarge.com Shares in issue 286.5m Freefloat 65% Majority shareholders GBL (21%), Sawiris Family (13%), Dodge & Cox (5%)
Threats
Short-term Lafarge must secure a more robust balance sheet structure to underpin its strategic position and asset base and limit demands for asset disposals at unattractive exit prices. Future price wars cannot be ruled out in the more fragmented markets, particularly if economic recovery is muted.


105 100 95 90 85 80 75 70 Aug Nov Mar 07 07 08
Jun 08
Oct 08
Apr 10
Jul 10
44-
14 12 10 8 6 4 2 0 Buy Hold Sell
The industry is currently subject to the same energy cost pressures as other manufacturers, although other raw material inputs (crushed rock, clay, etc) are often owned or controlled.
Barriers to entry
4+
High - barriers are considerable given the prohibitive cost associated with plant construction and increasing regulatory pressures pertaining to the environment.
Customer power
3-
Most cement producers are ever more vertically integrated through concrete and other raw materials, although some pushback may build in the near term as merchants and contractors feel the squeeze.
Substitute products
Low, as there are few substitutes for heavy building materials in their current form.
43-
Source: Bloomberg
Rivalry
Moderate, given that consolidation has lessened extreme competitive practices in several markets, but this is now being tested in a serious downturn. Rivalry from imports is the ongoing risk.
Lafarge | Strategic and Competitive Overview | 6 August 2010
100
Recommendation structure
Absolute performance, short term (trading) recommendation: A Trading Buy recommendation implies upside of 5% or more and a Trading Sell indicates downside of 5% or more. The trading recommendation time horizon is 0-60 days. For Australian coverage, a Trading Buy recommendation implies upside of 5% or more from the suggested entry price range, and a Trading Sell recommendation implies downside of 5% or more from the suggested entry price range. The trading recommendation time horizon is 0-60 days. Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and, except as follows, only reflects capital appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. For research produced by Nedbank Capital, a Buy implies upside in excess of 20%, A Sell implies an expected return less than 10%, and a Hold implies a return between 10% and 20%. For UK-based Investment Funds research, the recommendation structure is not based on upside/downside to the target price. Rather it is the subjective view of the analyst based on an assessment of the resources and track record of the fund management company. For research produced by Nedbank Capital and for research on Australian listed property trusts (LPT) or real estate investment trusts (REIT), the recommendation is based upon total return, ie, the estimated total return of capital gain, dividends and distributions received for any particular stock over the investment horizon. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.
Distribution of recommendations
The tables below show the distribution of recommendations (both long term and trading). The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where there is an investment banking relationship. These numbers include recommendations produced by third parties with which RBS has joint ventures or strategic alliances.
Long term recommendations (as at 05 Aug 2010)

Global total (IB%) Buy Add Hold Reduce Sell Total (IB%)
Source: RBS
Trading recommendations (as at 05 Aug 2010)

Global total (IB%) Trading Buy Rec 2 (0) 00 (00) Europe total (IB%) 0 (0) 00 (00)
Europe total (IB%) 259 (0) 0 (0) 158 (0) 0 (0) 22 (0) 439 (0) Trading Sell Total (IB%)
Source: RBS
699 (0) 0 (0) 410 (0) 0 (0) 98 (0) 1207 (0)
0 (0) 2 (0)
0 (0) 0 (0)
Valuation and risks to target price

HeidelbergCement (RIC: HEIG.DE, Rec: Hold, CP: 39.60, TP: 39.60): We value HeidelbergCement using a combination of PE, EV/sales, DCF and our future normalised earnings potential analysis, which looks to FY14F sales, EBITA and balance sheet structure. Downside risks could emerge if interest rates rise sharply, affecting any housing recovery and adding pressure to non-residential weakness. Upside risks to our target price stem from stronger-than-expected US or European construction recovery or disposals which de-leverage HC more rapidly than our forecasts assume. Holcim (RIC: HOLN.VX, Rec: Buy, CP: SFr70.70, TP: SFr79.00): Key risks to our multiple, DCF and normalised 2014F based target price are a deterioration in trading prospects in its key markets (the US, India or the UK) on both volumes and prices as well as any disappointment on the performance of the Cemex Australia assets acquired in September 2009. Lafarge (RIC: LAFP.PA, Rec: Sell, CP: 41.10, TP: 36.90): Upside risks to our multiple, replacment cost and DCF-weighted price target include any sizeable and better-than-forecast asset or business disposals that could materially reduce debt risk. Further cost-cutting initiatives could drive earnings expectations higher. In addition, after poor 1H10 results in the Middle East and Africa region (in part self-inflicted), better trading performance if delivered in 2H10 could boost forecast earnings expectations and the Lafarge share price.
HeidelbergCement coverage data Trading recommendation history (as at 05 Aug 2010)

Date Rec n/a
Source: RBS
Analyst
John Messenger started covering this stock on 25 Jan 10 Source: RBS
84
Holcim coverage data Trading recommendation history (as at 05 Aug 2010)

Date Rec n/a
Source: RBS
Analyst
John Messenger started covering this stock on 18 Apr 08 Source: RBS
Lafarge coverage data Trading recommendation history (as at 05 Aug 2010)

Date Rec n/a
Source: RBS
Analyst
John Messenger started covering this stock on 18 Apr 08 Source: RBS
Regulatory disclosures
None
Building Materials | Disclosures Appendix | 6 August 2010
Global disclaimer
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Equity | Construction & Materials | Europe

Produced by: The Royal Bank of Scotland N.V.

HeidelbergCement Holcim Lafarge

Priced as at 5 August 2010 close Source: Company data, RBS forecasts

250 Bishopsgate, London, EC2M 4AA, United Kingdom http://research.rbsm.com

Important disclosures can be found in the Disclosures Appendix.

Building Materials | Table of Contents | 6 August 2010

Building Materials | Table of Contents | 6 August 2010

Developed market risks increasing

On the macro picture

Holcim remains our preferred play

Building Materials | Executive Summary | 6 August 2010

A slog, not a sprint

Emerging markets appear to be the only beacon of growth

The premise for US volume recovery looks fundamentally at risk

Building Materials | Executive Summary | 6 August 2010

Our forecasts still equate to a Reagan recovery

We believe pricing remains the critical uncertainty

*Volume weighted average price Source: Cemex

In cement, Cemex pricing data indicates that:

In aggregates, Cemex pricing data indicates that:

US pricing was up 1% in 1Q10 vs 4Q09 but held flat in 2Q10 vs 1Q10.

Building Materials | Executive Summary | 6 August 2010

*Volume weighted average price Source: Cemex

In downstream, ready-mix concrete pricing movements have also shown weakness.

Pricing pressure is now the critical dynamic

Downstream pricing will gear impact via vertically integrated operations

Building Materials | Executive Summary | 6 August 2010

Target prices and earnings revisions

Lafarge Sell maintained, target price lowered to 36.9 from 44.0

HeidelbergCement Hold from Buy, TP lowered to 39.6 from 58.0

Building Materials | Executive Summary | 6 August 2010

Holcim Buy maintained, target price reduced to SFr79.0 from SFr83.0

Building Materials | Executive Summary | 6 August 2010

Benchmarking valuations and debt metrics

Deriving enterprise values

Building Materials | Valuation Comment | 6 August 2010

Building Materials | Valuation Comment | 6 August 2010 1010

Table 1 : Cement stocks valuation comparatives deriving enterprise values (FY09-13F)

(3,775) (3,398) (3,567) (3,576) (3,755)

13,833 12,790 11,020

17,835 19,783 19,433 18,958 18,383

36,514 40,498 39,284 38,280 37,017

Building Materials | Valuation Comment | 6 August 2010

Building Materials | Valuation Comment | 6 August 2010 1212

Table 2 : Cement stocks - valuation comparatives (FY09-FY13F)

Building Materials | Valuation Comment | 6 August 2010

Building Materials | Valuation Comment | 6 August 2010 1414

Table 3 : Cement stocks - debt metrics compared (FY09-FY13F)

Long-term normalised potential revisited

Holcim 2007 27,052 2007 5,163 19.1% 12.5% 16.1% 15.1%

Lafarge 2008 19,033 2008 3,624 19.0% 13.5% 16.5% 15.9%

2008 14,187 2008 2,146.7 15.1% 9.5% 12.2% 11.6%

Building Materials | Valuation Comment | 6 August 2010

11.2 10.2 9.2

13.9 13.0 12.1

12.0 11.0 9.9

Normalised potential in 2014F what does it tell us?

Building Materials | Valuation Comment | 6 August 2010

Holcim 70.8 79.0 11.7%

Lafarge 42.5 36.9 (13.2%)

40.2 39.6 (1.5%)

21.5% 18.9% 16.1%