AmResearch

Lafarge Malaysia - Not quite there, yet HOLD

kiasutrader
Publish date: Thu, 21 May 2015, 11:16 AM

- We maintain our HOLD rating on Lafarge Malaysia with an unchanged fair value of RM8.90/share on a target PE of 22x. Lafarge posted 1Q15 earnings of RM74mil, making up ~18% of consensus earnings, but 22% of ours. We deem the results to be in line with ours on expectations of a stronger 2H.

- 1Q15 earnings rebounded by a strong 48% QoQ but remained largely unchanged YoY despite a marginal increase in revenue (+3% YoY). The flattish YoY performance could be reflective of continued pricing pressure on new capacity coming into the domestic market, which offset some improvements in the sales of Lafarge’s cement and concrete products.

- We expect domestic cement pricing trend to remain muted, as the volatile swings in cement rebate persist amid incoming capacity over the next two years.

- Despite Lafarge’s share price shedding ~6% since our downgrade in January, we maintain our HOLD recommendation on the stock.

- Yes, there is renewed hope of fresh infrastructure spending with the unveiling of the 11th Malaysia Plan (11MP) later today. But, the positive impact would likely only be meaningfully felt a year or two down the road, due to time lag in project implementation.

- At the same time, sentiments on capex spending by the private sector could be more controlled for now following the implementation of the Good & Services Tax (GST). Hence, our cement demand growth projection for 2015F is retained for now at 3%.

- Lafarge is trading at rather rich FY15F-16F PEs of 23x-24x – at the upper end of its historical average. Yet, Lafarge remains as a liquid and large-cap proxy to the building materials sector with solid dividend prospects. It is one of five stocks on the reserve list of the FBM KLCI 30 Index, with an upcoming review next month.

- Dividend yields are still decent despite ongoing capacity expansions. For the quarter, Lafarge declared an interim DPS of 8 sen. Our FY15F DPS projection is 36 sen (FY14: 34 sen), implying a net yield of 4% (gross: ~5%).

- Meanwhile, it is still business as usual for Lafarge in Malaysia despite the merger of its parent, Lafarge SA with Holcim. We estimate any combined integration with Holcim’s Malaysian operations to result in a ~9% increase in Lafarge’s cement capacity (14 million tonnes p.a.). This, by extension, will solidify Lafarge’ pole position in terms of cement market share in Malaysia.

Source: AmeSecurities Research - 21 May 2015

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