We maintain our HOLD rating on Lafarge Malaysia with an unchanged fair value of RM8.90/share, valuing the stock at 22x its FY15F EPS.
Bloomberg reported that last ditched negotiations between Holcim Ltd and Lafarge SA are progressing as both parties seek to salvage a planned merger to create the world’s largest cement maker.
The boards of both companies have reportedly met on Wednesday to discuss the compromises.
Under a proposed revised exchange ratio, Holcim is to give about 0.9 of a share in return for one Lafarge share.
The original ratio is a one-on-one basis.
Also, the companies have reached a preliminary understanding to put Lafarge Chief Executive Officer (CEO) Bruno Lafont as co-chairman of the new entity.
Meanwhile, it was also reported that another Lafarge executive could be chosen as the new CEO of the combined entities.
The merger plans were announced back in April 2014, with an ambitious plan to generate combined sales of US$40bil from operations in 90 countries.
In Malaysia, Holcim has an annual production capacity of 1.2mil tonnes of cement along with ten ready-mixed concrete plants via Holcim Malaysia Sdn Bhd’s (HMSB) Pasir Gudang plant in Johor.
Lafarge also has a plant in Pasir Gudang with a capacity of 770k tonnes.
In our previous reports, we had highlighted that HMCB could potentially boost Lafarge’ total cement production capacity by ~9% to around 14 million tonnes p.a.
Nevertheless, we believe it is business as usual for Lafarge at this juncture as any merger talks are still largely confined at the parent level of both entities.
We maintain our HOLD recommendation on Lafarge as we believe the outlook remains challenging in 2015 amid muted selling prices in the near term as new capacities continue to come in.
The saving grace comes from Lafarge’ decent yields of 3.5%-4.2% (gross: 4.6%-5.5%).
Source: AmeSecurities Research - 20 Mar 2015
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