Investment Highlights

• We maintain our forecasts, HOLD call and FV for Lafarge Malaysia (LM) of RM4.68 based on 24x FY18F EPS, which is at a 20% discount to its 5-year historical average PE.

• During an analyst briefing yesterday – after announcing the first quarterly loss in 12 years the day before on reduced sales volume and ASP, but increased operating cost – LM revealed the following initiatives to boost the company’s performance:

1. Cost and asset optimisation – LM plans to reduce the operating cost as well increase its assets efficiency via: 1) cost reduction of transport and logistics by focusing production in Kanthan, Perak and Rawang, Selangor to fulfil domestic demand in the northern and central region, Pasir Gudang for southern region and Langkawi solely for export demand (Langkawi previously also supplied to the domestic market via Westport in Port Klang which was not cost efficient); 2) variable cost optimisation through operational efficiency, sourcing and fuel optimisation; and 3) fixed cost reduction by partial mothballing of one of the kiln in the Langkawi plant and headcount reduction.
2. Differentiating product offering – Ongoing engagement with the Public Works Department (JKR) and Road Engineering Association of Malaysia (REAM) to offer road integrated solution through building concrete roads in the rural zone. In addition, LM designed a complete range of product portfolio called Lafarge PROSOLUTIONS, which offers the right products at every stage in the wall construction from brick laying to skim coating. Eleven flagship retail outlets have been set up across the country to showcase Lafarge PROSOLUTIONS to the retail segment.
3. Sustainability – In order to continue with its sustainability goal via the Sustainability Development Plan that was launched on 25 January 2017, LM is currently installing a new bag filter in the Rawang cement plant to reduce dust emission level, expected to be completed in September 2017.

• We like Lafarge Malaysia because: 1) as the country’s largest cement player, it controls 40% of Peninsular Malaysia cement market share, which makes it a good proxy for infrastructure spending; 2) the cement industry overcapacity which resulted in the softening ASP and low demand in 2016 has bottomed out with incoming infrastructure projects expected to pick up in 2HFY17 and FY18; and 3) its strong corporate governance which signals a high ESG score for the company. However, we believe it needs to show better earnings to support higher valuations.

Source: AmInvest Research - 26 May 2017