· We maintain our HOLD call on Lafarge Malaysia with an unchanged fair value of RM8.55/share (target PE: 22x). Lafarge announced its intention to acquire Holcim Malaysia Sdn Bhd (HMCB) for RM330mil cash. The purchase will be funded through internal funds and/or debt. It is expected to be concluded by 4Q15.

- We do not foresee funding to be an issue. Lafarge is debt free with a cash pile of RM368bil as at 31 August. Furthermore, the group has some RM350mil in Islamic debt facilities yet to be utilised.

- The move by Lafarge is not entirely unexpected. It is in line with parent LafargeHolcim Ltd’s plans to consolidate its cement, ready-mixed concrete and other related building materials businesses in Malaysia. Lafarge S.A., Lafarge' ultimate holding company, became a subsidiary of LafargeHolcim on 10 July 2015 following a mega merger between the two cement giants.

- Through HMCB, Holcim’s operations in Malaysia are centred in Johor. HMCB operates a cement plant in Pasir Gudang, Johor. It has an annual production of 1.2mil tonnes along with ten ready-mix concrete plants in the southern state. On the other hand, Lafarge owns a plant in Pasir Gudang with a capacity of 770k tonnes.

- From a capacity standpoint, the inclusion of HCMB's plant will boost Lafarge's annual total cement manufacturing capacity by c.9% or 14mil tonnes. This, in turn, will solidify Lafarge’s pole position in terms of cement market share in Malaysia.

- We believe the merger between both units in Malaysia will provide synergistic benefits in terms of cost, economies of scale, procurement and logistics.

- At RM330mil, the acquisition PE of 18x (based on HMCB’s trailing 12-month net profit of RM18mil up to 31 March 2015) appears to be value-accretive vs. Lafarge’ FY15F PE of 27x and is within the regional average.

- Assuming 50% of the acquisition is debt-funded @ 6% interest cost without any cost synergies, we however expect a marginal 2% increment to Lafarge’s FY16F EPS. This is due to HMCB’s smaller earnings base (~6% of Lafarge’s FY15F net profit of RM294mil).

- We maintain our earnings forecast on Lafarge for now pending regulatory and its shareholders' approvals. Apart from its pricey valuations, near-term prospects are constrained by incoming capacity and volatile cement prices brought about by intense competition.

Source: AmeSecurities Research - 21 Sep 2015