Highlights

Domestic cement demand to sustain into 2014. Management remains confident that domestic cement demand will continue to grow in 2014 (albeit at slightly slower pace compared to 2013), on continued progress from the implementation of infrastructure and property development projects.

… But higher cost may squeeze margins in the near term. Although demand prospects remain favourable, Lafarge may face a slight margin squeeze in FY14, as we believe the relatively intense price competition may not allow cement players (including Lafarge) to fully pass on the higher electricity and transportation costs to customers in the near term. Nevertheless, we believe Lafarge will be able to alleviate the cost pressure in the longer term, given the increasing sales of its value-added products (which are typically more profitable than conventional cement products).

Capex plan translates to clearer dividend visibility. Lafarge will incur an average additional capex of RM100- 150m p.a. for the next two years to: (1) Expand its grinding capacity in Kanthan and Rawang; (2) Upgrade IT system; (3) invest into a new quarry and ready mix concrete plant. The capex plan reaffirms our view that the expansion plan will not impair its ability to pay dividends, given Lafarge’s strong balance sheet (net cash of RM450.4m or 53 sen/share) and strong cash generation ability (average operating cash flow of RM450m p.a. in 2012-2013). In our forecasts, we are projecting a GDPS of 40 sen and 45 sen in FY14-15, translating to a gross yield of 4.5-5% per annum.

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

BUY

Positives – (1) Positive cement demand outlook; (2) Largest cement player; (3) Strong balance sheet; and (4) Generous dividend payout.

Negatives –Illiquid share trading volume.

Valuation

Maintain TP of RM9.74 (based on unchanged 19.5x FY15 EPS of 49.9 sen). At current share price, we believe Lafarge’s valuation remains attractive, given its relatively defensive earnings quality and strong balance sheet (which in turn indicates the ability to maintain its generous dividend payout).

Source: Hong Leong Investment Bank Research - 7 Mar 2014