- We maintain our HOLD rating on Lafarge Malaysia with a lower fair value of RM8.55/share on a downward revision in our earnings estimates following the release of its 2Q15 results, which were lower than expected. This pegs the stock at a target PE of 23x. Operating conditions will likely remain challenging in the 2H.

- 2Q15 net profit fell 14% QoQ, bringing 1H earnings to RM137mil (-9% YoY). The lower QoQ and YoY results were largely due to lower sales of cement products and losses for its associates. 2Q results were also probably impacted by GST.

- We deem the 1H results to be below expectations, coming in at 41% of our previous estimates – and only 35% of consensus. While revenue was flattish YoY, cement manufacturing EBIT margins saw a marginal 0.7ppts decline YoY to 14.5% (down 1.1ppt QoQ to 13.9%).

- The down-trending margins potentially points towards more discounting by industry players in the face of incoming capacity. Likewise, its associate units also contributed to the earnings drag – reporting a loss of RM5mil in 1H15 from a near breakeven position a year ago, as competition intensifies.

- Against the backdrop of a weaker 2Q reporting period and our expectations of continued volatility in cement prices and competition moving into 2H15, we cut our FY15F net profit by 12% to RM294mil (FY16F: 5%; FY17F: 2%).

- Our forecast also assumes revised RM/USD exchange assumptions of 4.00 for FY15F-17F (previous: 3.65, 6.65 and 3.60), given the continued depreciation of the ringgit against the greenback.

- Any gains arising from a decline in coal and electricity costs may be mitigated by the negative RM/USD exchange movements and a muted export market. On our estimates, a further depreciation of 0.10 for the RM against the USD from our current base RM/USD forecast of RM4.00 will results in a 1% dip in Lafarge’s earnings.

- Lafarge has appointed Thierry Marie Robert Legrand as its new president and CEO earlier this month, replacing Bradley Peter Mulroney who resigned. We expect a smooth transition to the management change – thereby ensuring continuity in terms of the group’s direction.

- Lafarge is a safe haven for investors looking for cover amid the current market volatility, given its sturdy cash flow generation (debt free) and gross yields of 5%-6%.

Source: AmeSecurities Research - 1 Sep 2015