- We maintain our HOLD rating on Lafarge Malaysia with an unchanged fair value of RM8.90/share (target PE: 22x). We leave our earnings unchanged following a company visit, as the positive impact from a decline in coal and electricity costs is negated by negative movements in the RM/USD exchange and a muted export market.

- During our recent company visit, Lafarge’s management remains optimistic on the domestic cement outlook ahead of the 11th Malaysia Plan 2016-2020.

- Despite 1Q being traditionally weaker, the 1Q15 reporting period was particularly strong on what appears to be a pre-GST rush to place orders by its clients. Encouragingly, local cement demand continued to hold up pretty well over the last two months.

- On the other hand, average power cost had come off following the Malaysian government’s move to reduce electricity tariffs by ~5.8% in Peninsular Malaysia (-2.52sen//kWh).This resulted in Lafarge enjoying a onemonth impact in lower electricity rates in March; this trend is expected to continue in 2Q15.

- However, where electricity rates would end up in 2H15 remains uncertain as there could be a fresh review by the government within the next two months amid a rise in oil price. On balance, we have pencilled in a ~4% reduction in electricity cost for FY15F. Combined, energy cost accounts for close to half of Lafarge’s operating cost.

- We have also lowered our average coal assumptions as international coal prices have dipped below US$60/tonne vs ~US$72/tonne for the whole of 2014. These gains are however, offset by the RM’s continued weakness against the greenback. Accordingly, we have raised our RM/USD assumptions for FY15F-17F to 3.65, 3.65 and 3.60 respectively (vs. 3.50, 3.50 and 3.40 previously).

- Lafarge continues to advocate its quest to become an integrated solutions provider from just being a commodity producer. But, the actual impact on the group’s bottomline remains relatively muted for now, we believe.

- Lafarge’s share price has pulled back by some 8% since our downgrade back in January. We will only turn more constructive on the stock when there are signs of a more sustained uptrend in cement prices. Until then, volatile cement prices and incoming new capacity over the next two years remain our key concerns. Dividend yields are decent at ~4%-5% (net: 5%-6%).

Source: AmeSecurities Research - 17 Jun 2015