Highlights

Key highlights: (1) Price competition in domestic cement market unlikely to persist; and (2) Expansion plan to finalise by Aug.

Price competition to subside. Management is optimistic that price competition (which intensified since end-2012 by market players in response to new entrant) to subside in the next few months underpinned by the positive demand outlook for domestic cement sector on continued progress from the implementation of key infrastructure projects and ongoing property development projects. Overall, demand prospects aside, the company opine that pricing alone is insufficient to compete over the longer term.

To finalise expansion plan by Aug-13. While the company was tight-lipped on the investment amount and timeline for the potential expansion plan, management highlighted that the expansion plan (which is still pending for finalization) reflects not just the domestic cement demand outlook but also the regional cement outlook (thanks to its marketing network that allows it to export).

We believe Lafarge would still be maintaining its dividend payout even with the expansion plan (if it takes off), given its operating cash flow generation ability and healthy balance sheet of RM373.5m or 44 sen as at 31 Mar 2013. Nevertheless, we note that the expansion plan (depending on the investment amount) may mean less potential for bumper dividend (on top of our projected DPS).

Forecasts

2013-15 net profit forecasts lowered by 13.6-19%, largely to reflect lower net selling price assumptions and a slightly lower cement consumption growth.

Catalysts

• Timely implementation of ETP projects;
• Sustainable demand from property development projects; and
• Higher-than-expected GDPS.

Risks

• Delays in the implementation of projects under the ETP, resulting in lower-than-expected demand for cement consumption;
• Price war intensifies; and
• Steep rise in energy prices, in particular, coal and electricity.

Rating

HOLD

• Positives – (1) Positive cement demand outlook; (2) Largest cement player; (3) Strong balance sheet; and (4) Generous dividend payout
• Negatives – (1) High valuation; and (2) Illiquid share trading volume.

Valuation

• Despite lower earnings forecasts, we are raising our TP from RM9.27 to RM10.09 as we roll forward the valuation base year (from 2013 to 2014) and raised TP P/E on the stock from 16.5x to 19.5x, in line with the regional forward P/E for cement stocks. Maintain Hold, we believe further upside will be capped by its pricey valuations. At RM10.98, the stock is trading at 2014 P/E of 21.2x.

Source: Hong Leong Investment Bank Research - 28 May 2013