Highlights

• 1QFY15 results recap. The 47.6% qoq aurged in 1QFY15 net profit was due to several reasons including: (1) Lower production cost arising from lower power tari ff; (2) Lower transportation cost arising from lower crude oil price; (3) Unusually strong cement demand in Feb-15 (and this could be boosted by buying ahead of the implementation of GS T effective 1 Apr); and (4) Stable cement pricing environment.

• Demand growth to su stain, but… Management remains optimistic that the commendable cement demand will sustain into 2016, underpinned by the implementation of infrastructure and property (in particularly affordable homes) projects. Despite the commendable demand outlook, management is cautioned that new capacities coming on stream over the next 2 years may still disrupt cement price stability.

• Slowly becoming a solution s provider… In an attempt to alleviate itself from the competitive pricing envi ronment as well as maintaining is leading position, Lafarge is slowly moving up the value chain (from a pure cement and concrete manufacturer) to become a solutions provider, which will expand the usage of cement and concrete in some of the untapped segments with good demand potential, such as the country’s road network. Road net work aside, Lafarge is also eyeing a bigger pie in the affordable housing project segment via the introduction of new buildi ng system called “Fastbuild”, which is able to address the country’s affordable housing challenge, as well as reducing construction time and cost.

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

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 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). We continue to like Lafarge for the sustained cement demand and strong cash flow generation ability. Besides, we note that dividend yield (4.8%) has become attractive follow the recent share price adjustment. Maintain BUY recommendation.

Source: Hong Leong Investment Bank Research - 11 Jun 2015