Highlights

• Weak 4Q results partly due to production issues. To recap, Lafarge’s 4QFY14 net profit declined by 61.5% yoy and 8.9% qoq to RM49.9m. Apart from higher operating cost (in particularly, electricity and transportation costs) and pricing competition, management highlighted that the weak 4Q results was also due to production issues at some of the production plants (which has in turn led to lower sales volume).

• Demand growth to sustain into 2015. Management expects the 3-5% demand growth experienced in 2014 will be sustained into 2015, underpinned by continued development expenditure (which in turn ensures cement consumption). We note that Lafarge has secured contracts for Rapid and Langat 2 projects, collectively valued at RM310-320m over 3-5 years. Demand aside, management guided for flattish production cost for 2015, as weaker RM will be offset by lower coal prices, and potentially lower electricity tariff (TNB has yet to confirm if Lafarge is entitled to the tariff cut announced last month).

• Briefing aside, we also had the opportunity to visit Lafarge’s state-of-the-art ready mix concrete plant, which is built to produce highly technical and customised concrete products that have already gained strong foothold in the country. We believe these products (including Agilia, Artevia, Hydromedia, which normally carry higher margins and cater for Rapid and Langat 2 projects) will give Lafarge a competitive edge in handling the more technically specialised projects.

Forecasts

• Maintained, as we believe the pricing competition will likely be short-lived, underpinned by the sustained development expenditure. The current competition via selling prices will likely be temporary as we believe the extra supply will be swiftly absorbed by escalating local demand.

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 BUY and TP of RM10.72. (based on unchanged 22.5x FY16 EPS of 47.7 sen (1 standard deviation above its 3-year average forward P/E).

Source: Hong Leong Investment Bank Research - 4 Mar 2015