Highlights

• 2Q16 results recap. Rising competition (arising from delay in infrastructure project implementation and industry capacity expansion), one-off integration cost and high effective tax rate were the main culprits to the sharp qoq earnings decline.

• Integration cost to remain… Moving into 2H, management guided that the integration cost (which is related to employee separation scheme) will remain for the remainder of 2016 as the exercise is still ongoing.

• … but effective tax rate to normalize. On a positive note, management guided that effective tax rate will normalize on the utilization of reinvestment allowance.

• Competition remains intense. Management expected cement demand to decline by 3-5% for FY16 as demand from infrastructure projects that will drive cement growth is only expected to kick in in FY17. However, we remain convinced that any initial demand pick up from implementation of mega infrastructure projects will be offset by the additional cement capacity built since 2015. We also believe growth for cement in FY17-FY18 is dependent on the upcoming Budget on 21 Oct. On a more positive note, management does not expect the industry capacity to expand further, given the investment cost involved.

• Differentiation strategy. Lafarge has introduced its first flagship store in Muar which we believe will enhance Lafarge’s visibility while allowing users to better understand its products. The company now offers a concrete pumping service and has recently completed a mass pour of over 3,000 cubic metres of concrete for the RAPID project. RUMAH, a limestone cement product, was also introduced as the management believes there is demand for it in the northern region of Malaysia.

Risks

• Lower demand for cement consumption due to delays in the implementation of mega infrastructure projects;

• Price war intensifies; and

• Steep rise in energy prices, particularly coal and electricity

Forecasts

• Maintained.

Rating

HOLD, TP: RM7.14

• Positives – (1) Largest cement player; and (2) Positive cement demand outlook in the long term

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

Valuation

Maintain HOLD with TP of RM7.14. Our TP is pegged to P/E multiple or 22.5x of FY18 EPS as we expect earnings to begin normalizing once infrastructure projects are implemented.

Source: Hong Leong Investment Bank Research - 5 Sep 2016