Highlights

• We attended Lafarge’s analyst briefing and walked away feeling neutral. Key highlights as below:
• Demand: We understand that qoq cement sales volume improved in 4Q17 and we deemed this positive for the company as we expect the cement sales volume has bottomed in FY17 and is poised for recovery going forward due to picking up of infrastructure projects. However, we opine that magnitude of recovery will be limited by persistent weak property market.
• Pricing: We understand that several attempts to raise cement price by industry players (to pass on the increased in input costs) did not succeed, due to overcapacity (arising from shrinking industry sales volume).
• 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 will result in lower logistics costs, as debottlenecking project will result in higher cement production volume at its Rawang and Kanthan plants instead of Langkawi plant.
• Outlook: Although we expect recovery of cement sales volume (underpinned by implementation of infrastructure projects going forward), near term prospects remain challenging 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: RM5.65 ↔

• 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 is largely reflected.

Valuation

• Maintain HOLD call with unchanged TP of RM5.65 based on unchanged P/B multiple of 1.7x on FY18 BVPS.

Source: Hong Leong Investment Bank Research - 28 Feb 2018