- Maintain BUY on Lafarge Malaysia with fair value largely intact at RM10.05/share despite our earnings downgrade, as we roll-forward our valuation base to FY14F on an unchanged target PE of 20x.

- Lafarge’s 1HFY13 results was below expectations, accounting for 35% of our full-year forecast and 34% of consensus. Accordingly, we have trimmed our FY13F earnings by 17% (FY14F-15F: 4% to 5) on more conservative pricing assumptions.

- While there was a recovery in 2QFY13 earnings (+50%QoQ), 1H net profit fell 8% on weaker domestic cement selling prices.

- We believe this is due to cement rebates that remain high – as the pace of domestic infrastructure spending remains muted in the near term after the 13th General Election.

- Despite our lower forecast, we still envisage a stronger 2H with Lafarge’s bottomline expanding c.30% vs 1H – as both the existing projects and new infrastructure spending start to pick up.

- Also, the positive impact from lower coal prices should start filtering through by 3Q13 or 4Q13. Monthly Newcastle coal prices have fallen to a year-low of ~US$77/tonne currently.

- For the first seven months of 2013, coal prices have fallen c.15% as growth prospects within China moderates. Lafarge’s manufacturing EBIT margins improved from 11.9% in 1Q13 to 15.8% in 2Q13.

- Lafarge paid a third interim tax-exempt DPS of 8 sen. We maintain our FY13F DPS forecast of 42 sen or a net yield of 4.6%.

- The group is scheduled to finalise its expansion plans during a board meeting later this month. We believe this strategic move is to address some bottleneck issues to ensure it is not caught short when incremental demand picks up in Malaysia.

- Furthermore, it is moving ahead to set up a construction development lab in Petaling Jaya to provide better building solutions and product mix – leveraging on parent Lafarge SA’s expertise and research facilities.

- Lafarge’s share price has corrected by ~11% over the past one month – in line with weaker sentiments pervading the broader market. We view the current weakness as a buying opportunity ahead of an expected earnings turnaround in FY14F (+35% YoY).

Source: AmeSecurities