News

• Lafarge Malaysia Bhd announced that its wholly-owned subsidiary, Lafarge Aggregates Sdn Bhd (LASB) had entered into a Share Sale Agreement with Cabaran Premix Sdn Bhd for the disposal of 500,000 ordinary shares (100%) of RM1.00 each in the capital of Lafarge Aggregates (Ipoh) Sdn Bhd (LAI) for a consideration of RM28m.

• RM0.56m (2%) was paid as earnest deposit on 12 August 2016, balance of deposit payment of RM2.24m (8%) will be paid upon execution and finally the payment of the Purchase Consideration balance will be fulfilled within six (6) months.

Comments

• LAI was acquired by LASB in July 2008 for a consideration of RM34m. Since 2008, the aggregates and concrete segment has contributed an average of circa 17% to total revenue and circa 0.6% to operating profit. However, the aggregates and concrete segment has recorded an operating loss of RM4.9m in FY15 and RM1.2m in 1H16. Hence, the impact of disposal on Lafarge will be minimal.

• The disposal of LAI allows the group to focus its resources on more profitable activities. The disposal will increase its net cash position (as at 30 June 2016) by 15% from RM188m to RM216m.

• While the disposal will slightly improve the group’s operating profit margins, we are neutral on the latest development, as the impact is immaterial.

• On a side note, Lafarge has recently started its works in the KL118 project in which we believe they are the main supplier.

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

• Unchanged pending more information from management.

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 - 18 Oct 2016