- We maintain our HOLD rating on Lafarge Malaysia with an unchanged fair value of RM8.90/share (target PE: 22x). Lafarge reported FY14 results that were below expectations. Net profit fell by a steep 34% YoY largely on lower sales volumes, weaker pricing power, and a ~17% rise in electricity tariffs last January.

- Full-year earnings came in 9% below our expectations. While we had expected a significantly weaker set of earnings for FY14, the negative variance largely came from a weaker-than expected 4Q14 (-9% QoQ) due to the severe floods in Peninsular Malaysia.

- We reiterate our view that the outlook for Lafarge remains challenging in 2015. New incoming supply over the next two years will likely continue to weigh cement prices down.

- As with much of 2014, we expect domestic cement prices to remain volatile with rebates remaining high, as industry players jostle to protect their respective market shares in the face of more incoming competition.

- Taken together, these issues will likely offset any gains that Lafarge may achieve from a more benign environment for its key input costs (e.g. coal).

- While we expect Lafarge’s FY15F net profit to rebound 31% YoY (RM335mil) – albeit from a low base – forward valuations appear pricey at FY15F PE of 26x, which is closer to the higher-end of its ten-year PE band.

- We maintain our 2015F cement demand growth projections of 3% vs. an estimated 2% for 2014.

- While there is renewed hope of fresh infrastructure spending with the unveiling of the 11th Malaysia Plan later this year, any positive impact may not be immediately forthcoming due to the time lag in project implementation.

- Valuations aside, we would only turn constructive on the stock if there is more concrete proof of a stronger uptick in pricing power, or by extension, softening rebates.

- Our HOLD call is largely premised on Lafarge’s status as a liquid, large-cap proxy to the building materials sector.

- Lafarge declared a fourth interim DPS of 8 sen. Total DPS for FY14 was 34 sen or net yield of 3.3% (gross: ~4.6%), with a payout of over 100%. We have projected forward yields of 3.5%-4.2% (gross: 4.6%-5.6%) for FY15F-17F on a projected payout of 91%-96%.

Source: AmeSecurities