Highlights

• 4Q15 results recap. While management remained tightlipped on the amount of one-off acquisition expense incurred in 4Q15, we believe the amount is likely be around RM4-5m (as management mentioned that operating profit in 4Q15 would have been slightly higher on yoy basis if not because of the one-off expense).

• Integration synergy to kick in gradually. While inclusion of Holcim into Lafarge’s earnings is insignificant (given Lafarge’s much larger earnings base), we understand that synergistic benefits from the merger will kick in from FY16, and these include: (1) administration cost savings (particularly, its operations in Johor); and (2) improved efficiency in logistics and operations.

• Cement demand growth in 2016 will be driven by infrastructure spending, and Lafarge is well positioned to capture the growing infrastructure spending, given its proven track record and enhanced facilities (post capacity expansion). Lafarge continues to see good demand potential for concrete road network (and this has started drawing interests), given its longer life span and lower maintenance cost (vis-à-vis the conventional asphalt road).

• Pricing competition to stay, but unlikely to worsen. While pricing competition will likely remain intense in 2016 (arising from completion of new cement capacity), management believes it is unlikely for pricing competition to intensify further.

Forecasts

• Maintain FY16-17 earnings forecasts, but lower FY16-17 DPS forecast by 16-22% to 35 sen and 38 sen respectively.

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

Maintain HOLD recommendation, with target price unchanged at RM8.54 (based on 22.5x FY17 EPS of 38 sen. 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 upside to its share price is capped by its rich valuations and the absence of near-term rerating catalyst.

Source: Hong Leong Investment Bank Research - 3 Mar 2016