News

• Wall Street Journal reported on Friday that both Lafarge SA and Holcim Ltd have agreed on new terms for t heir stalled US$44bn merger.

• Recall, the merger talk between Lafarge SA and Holcim Ltd started in April 2014 and had issues recently as Holcim Ltd was seeking better financial terms and questioning whether Lafarge’s management should be in charge.

• However, on Friday, both companies announced that t he boards of the two companies agreed to make Mr. Lafont non-executive co-chairman of the merged company together with Swiss company Holcim’s chairman Wolfgang Reitzle, while French firm Lafarge’s board will propose a different candidate to be the CEO to lead LafargeHolcim.

• The two cement makers also agreed to change the share exchange ratio to 9 Holcim shares for 10 Lafarge shares, (previously a one-to-one ratio).

Comments

• We believe it is positive news that Lafarge SA and Holcim Ltd merger is back on track as we deem the merger to be synergistic.

• Lafarge Malaysia is operating a 700,000 tonne per annum (tpa) grinding plant in Pasir Gudang, Johor while Holcim Malaysia Sdn Bhd is also currently operating a 1.2m tpa grinding plant in the same area thus fortifying Lafarge and Holcim’s position to cater to the growing demand in the southern region. It should also create synergy through economies of scales and sharing of common resources.

• Moreover, the merger will further cement Lafarge Malaysia as the market leader in the domestic cement industry , assuming that it will eventually acquires Holcim’s estimated 4% market share in the West Malaysia.

Forecasts

• Maintained, pending completion of the merger.

Catalysts

• Timely implementation of ETP projects;

• Higher-than-expected GDPS; and

• Sustainable demand from property development projects.

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

1. 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 - 23 Mar 2015