Highlights

• We attended Lafarge’s analyst briefing and walked away feeling neutral. Key highlights are as below:
• Demand: After a 6% drop in cement industry sales volume last year, we understand that the decline in 2017 is expected to be more severe, percentage wise. This is caused by continued slowdown of the property sector albeit slightly offset by a pick-up in infrastructure projects. We reckon that cement sales volume has bottomed this year and is poised for a recovery going forward as infrastructure projects regain momentum. However, we opine that the magnitude of recovery will be limited by persistent weak property market.
• Pricing: We understand that several attempts to raise cement price by industry players in order to pass through the increased input costs have not been successful. This was mainly due to shrinking of industrywide cement volume and overcapacity.
• Rawang incident: Capacity from other plants has been deployed to make up for the shortfall caused by Rawang plant after the explosion incident. We understand that operation of Rawang plant has since normalized.
• Outlook: Although we a expect recovery of cement sales volume driven by infrastructure projects going forward, the industry prospects remain challenging in the near term due to subdued property market (major driver of cement demand) and depressed cement prices caused by overcapacity.

Risks

• Delays in the implementation of large-scale infrastructure projects, resulting in lower than expected demand for cement consumption.
• Increased price competition.
• Further increase in coal prices.

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM5.82 ↔

• Lafarge is a proxy to ride on the construction upcycle. The bottoming of cement sales volume due to picking up of mega infrastructure projects signified that earnings had bottomed and poised for recovery. However, we deem the expected earnings recovery has largely reflected after recent run-up of share price.

Valuation

• Maintain HOLD with unchanged TP of RM5.82 at an unchanged P/B multiple of 1.7x on FY18 BVPS.

Source: Hong Leong Investment Bank Research - 07 Dec 2017