Highlights

• As part of its parent LafargeHolcim Ltd’s plan to consolidate the businesses of cement, ready-mixed concrete and other related building materials in Malaysia, Lafarge Malaysia proposed to acquire Holcim (Malaysia) Sdn Bhd (HMSB) for RM330m.

• HMSB is one of the leading building materials providers in Johor and the Southern Peninsular of Malaysia, which currently operates cement manufacturing plant in Pasir Gudang, Johor (with annual cement grinding capacity of 1.19m tonnes) and 10 ready-mixed concrete plants in Johor).

• The proposed acquisition, once completed, will increase Lafarge Malaysia’s total annual grinding capacity by 9.4% to 14.14m tonnes, and proposed acquisition is expected to be completed by 4Q 2015.

Pros/Cons

• Minimal positive impact to earnings. While there is synergistic impact arising from the above proposed acquisition, we believe the proposed acquisition will have minimal impact to Lafarge Malaysia’s earnings, given its large earnings base relative to HMSB. In 2013, HMSB registered a net profit of RM17m, while Lafarge Malaysia registered a net profit of RM349m.

• Impact on balance sheet. Lafarge has no issue in funding the acquisition, given its net cash of RM367.9m (or 43.3 sen per share) as at end-June 2015. Earnings

Forecasts

• Maintained for now, pending completion of the acquisition.

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.

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

Maintain TP of RM9.59 based on 22.5x P/E (one standard deviation above its 3-year average forward P/E) 2016 EPS of 42.6 sen. Maintain HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 21 Sep 2015