Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM3.55 for Lafarge Malaysia (LM) following an analyst briefing last Friday. Our FV is based on 24x FY18F EPS, which is at a 20% discount to its 5-year historical average PE.

• LM has outlined various strategic initiatives to boost its performance from 2HFY17 and beyond, after suffering two consecutive quarterly losses in 1Q and 2Q FY17.

• Firstly, cost optimisation with the key focus of ensuring cement is produced near its consumption/offtake points to help bring down the transportation cost. From now, its plants in Rawang, Kanthan and Pasir Gudang will cater to the northern, central and southern regions respectively, while Langkawi is designated for the export market. Prior to its upgrading in recent years, the plant in Kanthan was unable to meet the demand in the central region. As a result, LM had to ship certain tonnage of cement from its plant in Langkawi to the central region by sea (via Westport in Klang) which was not cost effective. Also, LM is negotiating with its freight service providers and suppliers of bags & pallets for lower prices.

• Secondly, it is optimising its assets by disposing of noncore and low-yielding ones which we believe would be mainly high-cost quarries and unused land. Already, it has disposed of land in Lumut and Rawang, as well as a quarry in Ipoh. Nevertheless, LM has invested in a new dry mix plant in Pasir Gudang to cater for the increasing demand from the southern region.

• Lastly, LM is widening its reach to the high-margin retail segment (currently we believe is just a fraction of total sales), comprising small contractors, renovators and home owners, via: (1) additional flagship stores across the country (to date 33 stores, target 50 by end-2017), which showcase Lafarge ProSolutions products and educate end users on the product application; (2) two Pro-Builder Centre (PBC) stores by end-2017 which carry comprehensive range of building materials; and (3) ecommerce channels (such as Lazada) with attractive offers.

• We maintain our sales volume growth assumptions of -3%, 1% and 3%, and our ASP/tonne assumptions of RM245/tonne, RM255/tonne and RM265/tonne in FY17- 19F. Based on our FY18F forecasts, every 5% change in sales volume growth rate or RM10 change in ASP/tone will alter our earnings by 35% and 34% respectively.

• We like LM because: 1) it is the dominant player in the cement sector in Peninsular Malaysia with a 40% market share, making it a good proxy for public infrastructure spending; and 2) it practises strong environmental, social and governance (ESG) standards. However, while the demand for cement will pick up over the near term thanks to the rollout of key mega infrastructure projects, it may not immediately absorb the expanded industry capacity stemming from aggressive capex by key players in recent years. We believe LM needs to show better earnings to support higher valuations.

Source: AmInvest Research - 11 Sept 2017