News

• Lafarge Malaysia has announced yesterday that on 18 December 2014 Lafarge was awarded a contract to supply concrete for the RAPID Project and other PETRONAS Related Projects at Pengerang, Johor - Package 21D, for the total estimated prov isional contract value of RM254m for five years .

• On a separate announcement, Lafarge Malaysia announce yesterday on Bursa Malaysia for the acquisition of cement mill and ancillaries from Lafarge Ciment (Romania) S.A. for the total cash consideration of €10.7m (equivalent to approximate RM45.96m) pursuant to the sale and purchase agreement dated December 23, 2014.

• Lafarge Ciment (Romania) shall supply to Lafarge Malaysia the assets including the main machine, auxiliaries, electrical, instrumentation, automation parts inclusive of commissioning spare parts and shall be in the unused state and condition as first recei ved by Lafarge Ciment (Romania).

• The acquisition will be satisfied by cash in 2 tranches, the first tranche of €1m shall be paid up front with the second tranche shall be paid within 30 days upon receive the assets.

Comments

• In regards to the contract award by RAPID, we view the contract award as positive news and in line with our positive outlook on the company.

• We reckon that the above acquisition by Lafarge Malaysia is beneficial as acquiring a relatively new cement mill and equipment from the related party would generate cost savings compared to buying a new mill by a different party.

• Furthermore, we feel that the acquisition impact on the cash level is minimal as the total consideration is only 10.6% of total net cash (Lafarge net cash is RM434.1m as at 3QFY14).

Forecasts

• Maintained as the impact from the acquisition is immaterial and the contract that was awarded are in line with our view.

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

• We reiterate a BUY call with the TP of RM10.72 based on 22.5x 2016 EPS of 47.7 sen.

Source: Hong Leong Investment Bank Research - 24 Dec 2014