Lafarge’s share price surged yesterday to hit limit-up at RM2.60 (+30%) by mid day, before subsequently easing to close at RM2.35 (+17.5%). This may be due to investor’s speculation related to Lafarge’s parent company activity in the region recently which divested its business Indonesia and Philippines. In addition, the announcement of ECRL’s possible revival may have also assisted the share price run. With nothing concrete to justify yesterday’s share price performance, we feel that investor’s should take this opportunity to sell into strength. Downgrade to SELL (from Hold) with unchanged TP of RM1.81.

NEWSBREAK

Yesterday, share price of Lafarge Malaysia (“Lafarge”) hit limit up to a high of RM2.60 (+30%) by mid-day, before subsequently easing to close at RM2.35 (+17.5%).

HLIB’s VIEW

Parent company latest activity. We note that Lafarge’s parent-co, Lafarge Holcim Ltd was involved in corporate exercises in South East Asia recently, involving PT Lafarge Holcim Indonesia and Holcim Philippine Inc. The former (80% stake) was sold to PT Semen Indonesia at USD917m (P/B: 2.4x) while the latter is said to be in final stages of negotiation, with its assets valued at around USD2.5bn (current P/B: 2.9x). Based on these latest corporate exercises, this may have led investors to speculate that the Malaysia outfit could be next in line for sale by its parent-co. When stacked against its sister companies in Indonesia and Philippines, Lafarge does look like an attractive takeover target given its current P/B multiple of 0.78x. However, on the flipside, given the huge P/B valuation gap between the Malaysia unit against Indonesia and Philippines, we reckon it is unlikely that the parent-co will be willing to sell cheap.

Pricing based on replacement cost. One possible way of assessing the price tag for Lafarge is via the replacement cost method. Based on Lafarge’s clinker capacity of 8.8m MT p.a. and a replacement cost of USD100/MT (USD-MYR: 4.0), its firm value would be RM3.52bn. After subtracting its net debt of RM753m, this derives an equity value of RM2.77bn or RM3.26/share. Given the huge gap to current price, this may be a stumbling block for the deal (if any at all) to materialise. Put simply, while Lafarge’s current share price makes it attractive for potential acquirers, this may too low for its parent-co to sell considering the much higher P/B multiples that it got in Indonesia and Philippines.

Kicker from ECRL revival? While divestment by its parent-co is a possible explanation for yesterday’s strong share price performance, we note that other cement players also saw strong share price runs, i.e. Hume (+6%) and Tasek (+10%). This leads to another possibility that the run could be sectorial rather than firm specific. Yesterday, the Finance Minister mentioned that the ECRL could be concluded and revived at a lower price tag, echoing the Prime Minister’s comments earlier this week. This may have stirred up some positive sentiment amongst cement players. However, we reckon that the ECRL alone will be insufficient to spur demand to overcome industry overcapacity. To recap, Lafarge won a RM270m cement supply contract for the ECRL back in (March-18). Based on the contract period of 2 years, this translates to RM135m p.a., which only forms 6.4% of FY18 revenue.

Downgrade to SELL. With nothing concrete to justify yesterday’s share price run, we feel that investors should take this opportunity to sell into strength as Lafarge is projected to remain in the red for the next 2 years. Our unchanged forecast and TP of RM1.81 is based on 0.67x FY19 P/B (-1SD from long term mean).

Source: Hong Leong Investment Bank Research - 8 Mar 2019