LVT, an update on this favorite.

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Company Visit

I just spend an hour with one of the original founders of LVT (2.10) and while this person is no longer an insider, he has a very long & deep understanding of this company. I can’t go in here why I think he owes me the straight scope on his insights, except to say that I am very confident the below update is straight forward and not deceiving.  This person owns a large chunk of the stock and has not sold any of late.

Thailand October 3, at 1 PM, Bangkok Time.

Here is a follow up to my previous bullish views based on an early morning get together today:

1)    LVT (2.10) will report a stellar 3 Quarter around Nov. 14, which should raise some eyebrows and demonstrate further that this company is on target in earnings some 160 to 180 mill Baht this year.  This estimate is so higher then my previous mid year projection of 140 mill. Baht. The principal reasons are: strong orders in hand already, a weakening Baht vs US$ of late which will reduce a currency penalty provision the company prudently forecasted at mid year -and better profit margins.  This so I estimate will translate into about a 0.80 Baht earnings per share (EPS) or so a 2008 p/e of only 2.1 based on the current price this morning of around 2.10 per share.  Note that LVT’s latest book value shown at mid year is 2.17 Baht -and its debt to equity ratio is low.

LVT already earned 97 mill Baht for the first 6 months (O.45 EPS) of ’08, and earnings momentum has not slowed. Again, the 3rd quarter will show superb numbers which will be announced by mid November.  On top of strong and diversified global orders from emerging countries,  LVT’s 49% owned Indian associate company continues to perform above expectation.

2)   The current drop in global energy prices (Oil and coal) should not effect LVT’s growth outlook into next year as it’s a “relative margin business”, where before and after the price drop energy is the most important cost component to cement producers anywhere. When cement companies compete for business they are keen on being the low cost producer around, so to undermine the competition, regardless of the relative price of energy which is a given cost input to all producers. Hence there always is a strong drive to lower costs, even if/when energy prices are in on the decline. (Coal follows oil prices and so it does not matter if the cement producer is on coal or oil.)

3)   LVT is a one concept company, not a one product company. Where it can help cement producers all across the production process with engineering advise as well with its “tool kits” designed in reducing energy use, and so cost and indirectly so pollution.  LVT has huge long term potential as cement is a such a large global business, especially in the developing world, still the leader in growth rates for years to come.  Cement is used far more then just housing or offices, factories etc, like infrastructure. Emerging markets are expected to be huge users of cement far into the future.

4)   South America is a key growth market with Brazil at the leading edge for LVT.  Brazil in the 1960-70 build much to much cement capacity which then took years to absorb this excess while nothing new has being built. 35 years later Brazil is in a broad economic long term boom and its cement industry in dire need for upgrades.  LVT has large and realistic high expectations going into next year.  Similar with the Middle East, Russia, India and even slowing China. China is by far the globe’s biggest cement producer but to date not a big LVT customer.  LVT already has secured contracts in Brazil, for example a near 10 mill US$ contract announced in June of 2008 and much more is expected going into next year.

LVT has a solid replacement parts business and many of its services/revenues are engineering consulting, as compared to the razer margin-thin machine selling business.

This all sound extremely bullish at an incredible low stock valuation just now, so do many other SET shares, even while LVT stands out.  So what are the risks here as we can find?

One key risk identified, would be that banks all around the world stop credit lines across the board, making it so difficult for LVT’s customers in these countries to secure letters for credit, a necessity before LVT supplies anything. Such a situation is difficult to imagine even among the currently credit fall out in USA. Can it be thought that the leaders of the developed countries would allow such a world situation to take hold for long completely crippling global trade, I think not.

While many of its customers are established rich families in developing countries, surely a global freeze on credit would dent LVT’s ability to secure new contracts.  One could argue that much of this risk is already priced in at the current stock price? As even if earnings fall in half next year, LVT would still trade at a p/e of 5-6 fully diluted (due to the warrants converting early next year).  Even then so, the current dividend of 0.15 per share could be maintained and so the yield 7% at current market prices. If the dividend amount doubles to 0.30 per share as the earnings this year more then did, then the current yield is almost 15%!

Is the global economies slow down next year cost cutting in cement production may even increase as producers look for more savings. There surely is plenty of room left for that.  Hence its not at all a foregone conclusion that a global slowdown will dent LVT’s fast growth next year and beyond. ***

LVT has 105 million warrants outstanding convertible at 1.25 Baht per share early next year.  Hence one should look at 323 million total shares outstanding for next year, as one assumes all warrants converted next year.  If my guided estimate of 180 million in net profit this year is on the mark, the fully diluted EPS will be 0.55 (starting next year) and so the p/e would increase to 3.8 from the current ridiculously low 2.1.

It must be remembered the company will then so raise (105 mill times 1.25 Baht), or 131 million Baht by the 1 Q. of next year.  Perhaps with this it should announce a share buy back program if the global credit is restricted as I doubt it will be -or more likely use these funds to continue its fast expansion, as it sees fit.  LVT was first traded IPO on the MAI on July 14 2004 at 2 Baht per share.

Lately there has been some relatively small insider selling by a single one of the biggest shareholder. Unlike buying, insider selling can be for many reasons, including needing money due to market fall-outs or wanting to push the market price down for the reason of valuation before a large share private buy back?  I am not disturbed by this and view the sell off currently as just an opportunity for long term investors, along with other growth stocks to so always be diversified.

I remain a fan of LVT at just now 2.10 having dropped just as the SET index of late, thinking the stock is incredibly cheap and yet a great niche company in a huge business with still fantastic future continued growth -it so remains on my select list of with a strong buy view.

Best Regards,

Paul A. Renaud. 

Here my just article of LVT, posted on June 3


Here is the updated article posted in January of ’08, with a link to the original LVT write up of over a year ago.