Highlights

• We attended Lafarge’s analyst briefing and walked away feeling neutral. Key highlights as below:
• Pricing: We understand that ASP of bag cement has improved in July. However, we opine that it is still too early to conclude that earnings recovery is underway for Lafarge given that bulk cement still makes up a significant portion of total cement demand (65% against 35% in bag cement for Lafarge) and pricing for bulk cement tends to be stickier.
• Cost: Operating costs have been successfully reduced due to cost optimization exercises such the debottlenecking project in Rawang and Kanthan plant and partial mothballing of one of the kilns in Langkawi plant. The improved efficiency in Rawang and Kanthan plant as a result of debottlenecking project allows for more cement supplied from the two plants instead of Langkawi plant which reduce logistic cost.
• Outlook: Although we applaud management for the efforts in cost cutting and investment in new products, the positive impact from cost reduction efforts is still insufficient to offset negative industry trend. Hence, we still expect the industry prospects to remain challenging in the near term due to (i) slow implementation of mega infrastructure projects; (ii) soft property market (major driver of cement demand) and (iii) depressed cement prices caused by overcapacity.

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

• Unchanged.

Rating

SELL ↔ , TP: RM4.02 ↔

• Although Lafarge is a proxy to ride on the construction upcycle, its short term prospect appears to be plagued by industry overcapacity resulting in downward price pressures as well as 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 the soft property market.

Valuation

• Maintain SELL with unchanged TP of RM4.02 as we opine that the near term prospect of the cement industry remains challenging. Our TP is pegged to P/E multiple of 20x of FY18 EPS.

Source: Hong Leong Investment Bank Research - 11 Sep 2017