Highlights

• 1Q16 results recap. Management has guided that the oneoff Holcim integration cost was circa RM10m, contributing to the lower core net profit of RM25.68m and net profit of RM30.65m (-58% yoy and -29% qoq). After this one-off cost, we can expect any future cost arising from integration to be less bulky. Management also indicated that the merger is going according to plan, cost savings can be expected from the synergy.

• Further CAPEX. Lafarge plans to further inject circa RM250m for its Rawang and Kanthan plants (on top of the previous year’s capex of a similar amount). This will increase its borrowings in which we can expect higher finance cost going forward.

• Cement demand growth so far has not been favourable (came in lower in 1Q16). However, we still expect it to improve alongside with robust infrastructure spending, especially after Lafarge’s recent merger and expansion. Lafarge is still optimistic on the demand potential for concrete road network due to its longevity and lower maintenance cost (compared to the normal asphalt road).

• Pricing competition. We expect pricing competition among cement players to worsen affected by the growing cement capacity expansion of circa 14% domestically.

• Back to net cash position in FY18/19 Management has indicated that debt will be pared down gradually going back to net cash position later on in FY18/19. This will affect dividend payout as seen in 1Q16. Historically, Lafarge has been known to give out generous dividend payouts. The 3 sen interim dividend declared is disappointing (compared to previous quarter’s 7 sen). However, this is still at a generous 122% of 1Q16 EPS.

Risks

• Lower demand for cement consumption due to delays in the implementation of projects under ETP

• Price competition worsened by cement capacity expansion

• Steep rise in energy prices, particularly coal and electricity

Forecasts

• Both FY16 and FY17 earnings forecasts are reduced by 6.4% and 15.1% respectively after incorporating higher finance cost, more prudent cement demand growth and lower ASP due to pricing competition.

Rating

HOLD, TP: RM7.19

• Positives – (1) Largest cement player; and (2) Positive cement demand outlook

• Negatives – (1) Illiquid share trading volume; (2) Weakening balance sheet; and (3) Pricey valuations.

Valuation

Maintain HOLD with TP reduced from RM8.46 to RM7.19 reflecting the downward revision in earnings. Our TP is pegged to P/E multiple or 22.5x of FY17 EPS.

Source: Hong Leong Investment Bank Research - 31 May 2016