Highlights

Domestic cement demand to sustain into 2014. Pricing competition eased further in 3Q13 (in line with its guidance in the previous quarter) on continued progress from the implementation of infrastructure and property development projects. Management feels that industry cement demand will continue to sustain into next year, with a projected domestic cement demand growth of 5-6% in 2013 and a slightly lower growth rate in 2014.

Expansion plan. We gather that Lafarge’s expansion plan at the Kanthan and Rawang plants (which will boost its total grinding capacity by 1.2m t/year to 14.1m t/year) will take place in two phases (with construction of phase 1 complete in 12 months upon construction). Although management has yet to reveal the budgeted capex on its expansion plan, we believe this expansion plan will unlikely impair its ability to pay dividends, as capex arising from the expansion plan will not be significant enough to change its capital structure (as management mentioned that the expansion costs RM100- 300m, which is still less than its latest net cash of RM363.7m after deducting dividend payable), and it has strong cash generation ability (average operating cash flow of RM409m p.a. in 2010-2012).

Negligible impact on recent fuel price hike. Lafarge saw very marginal impact from fuel price hike (effective 3 Sep 13) and believes the impact will remain insignificant, as coal accounts for bulk of the energy costs.

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 raised from RM8.33 to RM9.40 as we roll forward our valuation base year to 2015 (based on unchanged 19.5x 2015 EPS of 48.2 sen). While we continue to like Lafarge for its positive cement demand outlook and strong balance sheet, we believe further potential capital appreciation will likely be capped by its pricey valuations (at 2014 P/E of 23.1x). Maintain Hold recommendation.

Source: Hong Leong Investment Bank Research- 26 Nov 2013