Highlights

• Pricing competition to stay… While industry demand for cement will likely hold up well for 2016 (underpinned by the implementation of several large-scale infrastructure projects), we believe pricing competition for cement will likely remain intense for 2016, as it takes time for the market to absorb additional capacity from YTL Cement (since end-2015) and Hume Industries (expected by 2H-2016).

• Production cost will be contained… On a brighter note, we believe coal cost (which accounts for about one-third of Lafarge’s production cost) will likely remain low, taking cue from the recently concluded annual coal price settlement (at US$61.6/mt, 9.1% lower than previous year) between Japanbased electricity generator Tohoku Electric Power and Australian coal miner Glencore. Historically, the annual contract price settlement between the Japanese utilities and Australian coal miners set the tone for coal price movement, as Japanese utilities have traditionally purchased more than half of Australian thermal coal.

• Still capable of paying decent dividend. Despite the pricing competition (which caps Lafarge’s near-term profitability), we continue to hold our view that dividend payout will likely remain generous, given its strong balance sheet (with net debt of only RM3.5m as at end-FY15), strong operating cash flow (RM356.6m in FY15) and the absence of lumpy capex going forward. Earnings

Forecasts

• FY16-17 net profit forecasts lowered by 16.7% and 1% to RM245m to RM320m, mainly to account for lower cement selling price 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.

Rating

Post earnings forecasts adjustments, our TP on Lafarge was lowered by 1% (from RM8.54) to RM8.46, based on 22.5x FY17 EPS of 37.6 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 further upside to its share price is capped by its rich valuations and the absence of near-term re-rating catalyst. Maintain HOLD recommendation on the stock

Source: Hong Leong Investment Bank Research - 19 Apr 2016