Highlights

• YTD, Lafarge’s share price underperformed both the KLCI and KLCON by 0.5%-pts and 4.8%-pts respectively (see Figure 1), mainly due to concerns on excess capacity, which has in turn led to intense price competition, hence weaker earnings outlook.

• Pricing competition to ease by 2H16… While the intense pricing competition will persist into 1H16 (due mainly to additional capacity from YTL Cement and Hume Industries), we believe pricing competition will likely ease from 2H onwards. This will be underpinned by the impending roll out of the LRT3 and MRT2, which will drive domestic cement consumption growth. Moreover, the construction of Damansara-Shah Alam Elevated Expressway (Dash) and Sungai Besi-Ulu Klang Elevated Expressway (Suke) will also drive domestic cement consumption (although timing of implementation remains an unknown for the time being).

• Production cost will likely be contained… Demand and pricing outlook aside, we believe production cost will be contained; the price of thermal coal (which accounts for 25- 30% of production cost) will likely remain low (due to excess supply and ongoing global economic uncertainty).

• We continue to hold the view that dividend payout will likely be generous, given its strong balance sheet (with net cash of RM275.2m or 32.4 sen/share as at end-Sep 2015) and ability in generating strong cash flow. Earnings

Forecasts

• FY15-17 core net profit forecasts lowered by 10-19.3%, largely to account for higher cement rebate assumptions.

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) Largest cement player; (2) Strong balance sheet; and (3) Generous dividend payout.

Negatives

• (1) Illiquid share trading volume; (2) Weak nearterm outlook; and (3) Pricey valuations.

Valuation

TP lowered by 9.9% to RM8.64 (based on 22.5x 2017 EPS of 38.4 sen) as we roll forward our valuation base year (from 2016 to 2017) but largely offset by our lowered FY15-17 core net profit forecasts. While we like Lafarge for its strong balance sheet (hence its ability to pay generous dividends) and its favourable longer term demand outlook, we believe further upside to its share price is capped by its rich valuations, as well as the absence of near-term re-rating catalyst. Maintain HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 14 Dec 2015