Results

• 1H15 net profit of RM137m (-9.4%) missed expectations, accounted for only 41.3% and 35.6% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected domestic cement selling prices.

Dividend

• Declared 2nd interim single-tier DPS of 8 sen (entitlement date: 28 Sep 2015; payment date 21 Oct 2015), bringing DPS YTD to 16 sen.

Highlights

• YTD… 1H15 net profit declined by 9.4% to RM137m, mainly on the back of lower domestic cement selling prices (witnessed by a 0.5%-pt decline in operating margin at the cement segment) and associate losses.

• QoQ… 2Q15 net profit declined by 18.1% to RM63.3m. Apart from lower interest income and associate losses, we believe the decline in earnings was also due to weaker demand sentiment post GST implementation, which has in turn resulted in lower domestic cement sales volume.

• Net cash remain high at RM367.9m (or 43.3 sen per share). We continue to hold the view that Lafarge’s balance sheet will remain strong (which will in turn sustain its generous dividend payout), given its ability to generate strong operating cashflow.

Risks

• Delays in the implementation of projects under ETP, resulting in lower-than-expected demand for cement consumption;
• Price war intensifies; and
• Steep rise in energy prices, in particular, coal and electricity.

Forecasts

• 2015-17 net profit forecasts cut by 20.9%, 10.5% and 11% respectively, largely to account for higher cement price rebate assumption (which has in turn resulted in lower net domestic selling price assumption).

Rating

HOLD

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

• TP reduced by 10.5% to RM9.59, based on 22.5x P/E (one standard deviation above its 3-year average forward P/E) revised 2016 EPS of 42.6 sen. Downgrade from Buy to HOLD as valuations have become pricier following our earnings forecasts cut and recent share price run-up.

Source: Hong Leong Investment Bank Research - 28 Aug 2015