Highlights

Disappointing 3QFY14 performance. To recap, Lafarge’s 3QFY14 net profit declined by 54% yoy and 29.1% qoq to RM54.8m. We understand that this was due to higher input cost and pricing pressure from the market arising from Lafarge’s stance to regain and reposition itself as the market leader.

Mitigating higher electricity and fuel costs via efficiency. Energy and fuel costs now consist of 50% of total cost and the only strategy to mitigate the rising price of electricity and fuel is by being more efficient.

Coal prices for FY15. The company has recently finalise the terms for the supply of coal for next year and has hinted that the prices for next year is marginally lower compared to FY14. Moreover, it has lock in a larger amount and a higher proportion at the fixed rate compared to FY14.

Outlook for 2015. Price volatility is expected to continue and industry cement demand will continue to sustain i nto next year, with a projected mid-single digit demand growth of 3-5% in 2015, similar pace for 2014.

Forecasts

• We slashed FY14 by 6.1% to impute the weak 9MFY14 results . However, we have revised upwards our FY15-FY16 earnings by 7.4% and 11.6% due to (1) lower coal price; and (2) higher domestic net selling prices. We believe the pricing pressure that Lafarge is currently facing is temporary and should normalized by next year.

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

Despite the disappointing 3QFY14, our TP is raised to RM10.72 based on 22.5x 2016 EPS of 47.7 sen. We have raised our P/E on the stock from 19.5x to 22.5x, one standard deviation above its 1-year forward average P/E of the last 3 years, in line with posit ive outlook for the construction due to the increase in development expenditure for 2015 (nominal construction output growth is 81% correlated to development expenditure) and new mega projects being announced during Budget 2015. Coupled with recent price weakness, we upgrade our rating from Hold to BUY.

Source: Hong Leong Investment Bank Research - 24 Nov 2014