News

• Lafarge Cement Sdn Bhd, Lafarge Malaysia Berhad’s wholly owned subsidiary, has on 19 March 2018 executed the Cement Supply Agreement with China Communications Construction (ECRL) Sdn Bhd for the supply of cement which includes all 8 packages of work for the proposed East Coast Rail Link project, up to an estimated provisional contract value of RM270m.

• The duration of the Contract will be from now until 31 December 2019 with the option for parties to renew for another 2 years subject to mutually agreed renewal terms and conditions.

Comment

• The positive impact has been included in our forecast as we had assumed the volume growth going forward with the upcoming infrastructure projects.

• We expect the recovery of cement sales volume (underpinned by implementation of infrastructure projects going forward) as indicated by the announcement. We also believe cement prices have bottomed out given expectations of volume growth and no new incoming supply.

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

• BUY , TP: RM5.65

• Lafarge is a proxy to ride on the construction upcycle. The improvement in cement price coupled with picking up of mega infrastructure projects signifies that earnings may have bottomed and is poised for a recovery.

• Given the 15.4% share price decline since 28 February 2018, we feel there is now sufficient buffer to warrant an upgrade in our rating from HOLD to BUY.

Valuation

• Upgrade to a BUY call with an unchanged TP of RM5.65 based on unchanged P/B multiple of 1.7x on FY18 BVPS which is 1SD below Lafarge’s 2-year historical mean.

Source: Hong Leong Investment Bank Research - 20 Mar 2018