Investment Highlights

 

- We maintain our HOLD rating on Lafarge Malaysia with an unchanged fair value of RM8.90/share on a target PE of 22x. Lafarge disclosed that Lafarge S.A., its ultimate holding company, has become a subsidiary of LafargeHolcim Ltd with effect from 10 July 2015. 

 

- This follows the completion of a merger between Lafarge S.A. and Holcim Ltd. Following this, Lafarge Holcim shall have:-

(i) a deemed interest in Lafarge via its indirect interest in Lafarge S.A.; and 

(ii) an indirect interest in Societe Financiere Immobiliere et Mobiliere, Financiere Lafarge SA, Lafarge Building Materials Ltd, Lafarge Finance Ltd, Lafarge International Holdings Ltd, Blue Circle International Holdings BV and Associated International Cement Ltd (AIC).

 

- Nevertheless, the enlarged LafargeHolcim group will retain a controlling 51% stake in Lafarge.

 

- Following this, attention will likely gravitate towards its Malaysian operations that are represented by Lafarge and Holcim Malaysia Sdn Bhd. To be specific, we believe there are synergies to be reaped as both have plants in Johor. 

 

- Holcim operates a cement plant in Pasir Gudang, Johor through Holcim Malaysia Sdn Bhd (HMSB). The latter has an annual production of 1.2 mil tonnes along with ten ready-mix concrete plants in the state. On the other hand, Lafarge also owns a plant in Pasir Gudang with a capacity of 770k tonnes.

 

- We estimate any combined integration with Holcim’s Malaysian operations to result in a c.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.

 

- We retain our earnings forecast pending more clarity on how the LafargeHolcim group restructures its operations in Malaysia, and its associated implications on Lafarge. 

- In the near term, the stock’s upside is likely to be capped by gyrations in domestic cement prices and pressure from new incoming capacity. Forward valuations of 22x-23x are still at the upper end of its historical trading band despite the stock being on a downtrend since early this year.

 

- Our HOLD call is largely is premised on Lafarge’s decent yields of 4%-5% despite its own capacity expansion programs in Rawang and Kanthan (total: 1.2 mil tonnes), which are expected to come online in batches next year.