Highlights

Price volatility in the domestic cement industry reduces. Domestic cement price appeared to have stabilized in 2Q from the previous quarter (albeit prices were still lower on yoy basis). Over the slightly longer term, management does not appear to be concerned about the Government’s recent fiscal policy shift, as it believes the MRT project (consisting of Line 1, 2 and 3, which will proceed as planned) will bring positive spillover effect to economic activities (including building activities) within its close vicinity.

Expansion plan to complete by 2015. The expansion plan (which involves capacity expansion at the Kanthan and Rawang plants, and increasing Lafarge’s total cement grinding capacity by 1.2m t/year to 14.1m t/year by 2015) is aimed at retaining its market position in the growing market and at the same time enhance its efficiency in servicing customers in the Peninsular region (as Lafarge is currently servicing the Peninsular Malaysia’s market with significant supplies from Langkawi plants).

… And will not affect dividend payout. While management remains tight-lipped on the potential capex involved in its expansion plan, it stressed that the plan would not affect its dividend payout, as its strong balance sheet (net cash and net cash/share of RM372m and 43.8 sen/share as at 30 Jun 13) and cash generation ability (average of RM409m operating cash flow in 2010-12) will unlikely change its capital structure significantly.

No big impact on RM depreciation; uncertain on recent hike in diesel price. The recent RM depreciation will not have material impact to its earnings, given that higher raw material cost will be offset by higher export revenue. It also highlighted that it is difficult to “ascertain” the impact of higher fuel cost (arising from the recent diesel price hike) and any potential reduction in subsidy (which may result in higher electricity tariff) at this juncture.

Forecasts

Maintained.

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; and (3) Strong balance sheet.

Negatives – (1) Pricey valuation; and (2) Illiquid share trading volume.

Valuation

TP maintained at RM8.33 based on unchanged 19.5x 2014 EPS of 42.7 sen. Maintain Hold recommendation

Source: Hong Leong Investment Bank Research - 10 Sep 2013