Highlights

Recap on 1QFY14 performance. 1QFY14 net profit expanded by 36.1% to RM73.9m, mainly on the back of higher domestic consumption of cement and aggregates, better overall plant efficiency, as well as higher interest income.

3-5% domestic consumption growth in 2014. Management expects 2014 domestic cement demand to grow by 3- 5%(albeit at slightly slower pace compared to 2013), on continued progress from the implementation of infrastructure and property development projects.

Higher list price to mitigate higher cost pressure, but… While the domestic list price was recently raised by RM30/tonne (or 9%) to mitigate higher production cost pressure (arising from higher electricity and transportation cost), we believe it may be too early to conclude if cement players are able to fully pass on the higher cost to consumers, given the additional cement capacity coming on stream. 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.

Potential merger with Holcim does not affect its expansion plan. Management highlighted that it may be too early to speculate on the impact of the potential merger between Lafarge Group (the parent) and Holcim, and the company is going ahead in expanding its grinding capacity in Kanthan and Rawang (by 1.2m tonnes).

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; (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). We are downgrading our recommendation on the stock from Buy to HOLD, as we believe further upside is capped by its rich valuations (FY14 P/E of 21.3x) after the recent share price run-up.

Source: Hong Leong Investment Bank Research - 28 May 2014