Highlights

• We attended Lafarge?s analyst briefing and walked away feeling neutral. Key highlights as below:
• Demand and pricing: We understand that cement demand will remain weak before mega infrastructure projects kick in. As a result, the weak cement pricing is not expected to recover soon. We think that most of the infrastructure projects will be implemented progressively starting from 2HFY17 and the cement pricing pressures should ease off correspondingly.
• Affordable Housing: Going forward, we understand that the company is banking on the incoming supply of affordable housing to stimulate the demand of cement and Lafarge FASTBUILD building system.
• Recovery of property sector: The management is optimistic about the property sector, which in their opinion, is bottoming in the near term. The recovery is most likely going to be led by the transit-oriented development such as Bandar Malaysia and Tun Razak Exchange given potential demand for both residential and commercial properties.
• Supply: Domestic cement capacity has expanded about 14% in FY16. Going forward, we understand that all major expansion on cement capacity has been completed and the industry capacity is expected to remain stable for the next few years which is conducive for cement prices.
• Integration and other one-off items: Moving into FY17, we expect that one-off costs are significantly lower than that of previous year as most of the company restructuring costs had been expensed in FY16.
• Lower effective tax rate: We expect a lower effective tax rate for the company in FY17 as it still has about RM30m in unutilized tax credit.

Risks

• Stronger demand for cement consumption due to stronger property market and pickup of mega infrastructure projects
• Reduced price competition
• Further decline in coal prices

Forecasts

• Our FY17-18 earnings forecasts are raised by 14% and 5.4% respectively after factoring in higher contribution from concrete segment and higher expectation of cement prices

Rating

SELL ↔, TP: RM5.50 ↑

• Although Lafarge is a proxy to ride on the construction upcycle, its short term prospects appears to be plagued by industry overcapacity resulting to downward price pressures and softening demand associated with the timing gap on project rollouts. Current infrastructure boom may not be sufficient to make up for the demand gap caused by weakening of property market.

Valuation

• Maintain SELL with TP increased from RM5.22 to RM5.50 reflecting the better than expected contribution from concrete segment and higher expectation of cement prices. Our TP is pegged to P/E multiple of 20x of FY18 EPS.

Source: Hong Leong Investment Bank Research - 24 Feb 2017