Within  expectations.  Lafarge  posted  a  net  profit  of  RM349m  in  FY12,  representing 97.6%/99.2%  of  our/consensus  estimate  respectivelys.  The  9%  q-o-q  improvement  in  its bottomline can be attributed to higher cement prices, coupled with a 2.9% q-o-q reduction in  the  effective  tax  rate.  The  board  has  declared  a  fourth  interim  dividend  of  13  sen, bringing the company's FY12 cumulative dividend to 37 sen a share, 3 sen higher than our estimates.

Poor weather conditions? The heavy rainfall in 4QFY12 may have disrupted construction activities  and  dampened  cement  demand,  resulting  in  Lafarge's  turnover  dropping  by  a marginal  2.6%  q-o-q.  The  Malaysian  Meteorological  Department  confirmed  that  rainfall distribution  was  generally  above  average  in  most  of  Peninsular  Malaysia  during  the quarter,  especially  in  December.  Petaling  Jaya  and  Subang  also  experienced  record monthly rainfall from Nov to Dec 2012. This dampened cement demand, considering that both areas are important catchment areas for infrastructure and property development.  

Cement  price  ambition.  While  the  results  were  generally  in  line,  our  follow-up  calls  to hardware  traders  and  contractors  affirmed  that  cement  prices  were  generally  steady  in 2012. Last July, Lafarge announced price hikes for its cement, raising the price of a 50kg bag from RM16.75 to RM17.75 while the bulk cement price was raised by RM20 to RM340 a  tonne.  However,  we  gather  from  our  sources  that  cement  companies  offered  bigger rebates,  especially  to  big  clients,  as  the  entry  of  Hume  Cement  in  Oct  2012  intensified competition, particularly in the central region. We expect competition from the new player to  ease  post-General  Election  as  construction  activities  gain  momentum  and  drive  up demand for cement.

Fine-tuning  assumptions. In conjunction with the streamlining of  OSK's team coverage, this analyst took a relook at Lafarge's financial model. In the meantime, we hold on to our view  that  the  cement  price  hike,  which  was  supposed  to  take  effect  from  Aug  2012, may only translate into a mild increase of RM5 per tonne in FY13 to RM295. However, we raise FY14  assumption  by  RM10  to  RM305  a  tonne.  We  suspect  the  intensifying  competition from  the  new  kid  on  the  block,  Hume  Cement  -  representing  an  additional  9%  of  clinker capacity in Peninsular Malaysia - is likely to cap the price hike, at least until the conclusion of  the  upcoming  General  Election.  After  that,  construction  projects  may  gain  momentum and  drive  the  demand  for  and  use  of  cement,  as  well  as  progressively  absorb  any additional  supply  by  the  new  player  from  2HFY13  onwards.  We  also  lift  our  coal  price assumption to USD100/USD110 a tonne for FY13/FY14 to match our in-house commodity price assumptions (refer to Figure 1).  

Earnings revisions. Lafarge only exports its excess tonnage to keep its plant at optimum utilisation as  well  as  lower  its average  overhead cost.  As such,  it is  the  least  sensitive  to changes in export prices but very sensitive to any movements in the domestic selling price. This aside, energy is the single largest cost element that may swing its profitability - every 1% hike in the coal price/electricity tariff may trim its profit by -0.9%/-0.8% (refer Figure 2). As we are keeping to our conservative assumption of the cement price but with higher coal costs,  our  revision  results  in  earnings  cuts  of  14.3%/8.7%  for  FY13/FY14.  Given  that  the group is in a net cash position and has limited capex requirement in the foreseeable future, we  do  see  some  room  for  capital  management,  although  the  quantum  may  not  be significant. Meanwhile, we have assumed a payout ratio of 90%, translating to an attractive dividend yield of 14.3%/8.7% for FY13/FY14. 

The  reason  for  a  rich  valuation. A quick comparison of valuations of cement companies within the fast-developing South East Asia (SEA) region found Lafarge a bit rich, especially given  that  the group's current  share  price  implies  a  higher  PE  than  the  regional  average despite having an ROE that is approximately half of most of its regional peers in Indonesia and Thailand. However, the group is more generous in terms of dividend payouts compared to its regional peers and its prospective yield also appears to be  slightly ahead of its local rival  Tasek  Corporation  (Tasek).  However,  we  note  that  Tasek  is  sitting  on  a  relatively larger  cash  pile  which  gives  it  better  prospects  if  it  wants  to  introduce  any  capital management  exercise.  In  terms  of  a  book-based  valuation,  Lafarge  appears  to  be  cheap compared  to  its  regional  peers  but  is  at  a  premium  to  Tasek.  All  said,  Lafarge  is  the country's leading cement manufacturer.

Downgrade  to  NEUTRAL.  We  reckon  Lafarge  remains  the  best  proxy  to  growing construction  and  property  development  in  Peninsular  Malaysia  given  that  it  is  the  largest cement producer in Malaysia and the only liquid cement stock on Bursa Malaysia, following the  recent  privatisation  of  YTL  Cement.  Accounting  for  the  scarcity  premium,  we  apply  a new 20x FY13 EPS valuation to Lafarge, which is at a premium to its regional peers' FY13 PE  of  18.5x  (refer  Figure  3),  deriving  a  new  fair  value  of  RM9.44.  Given  that  the  current share price implies a limited upside potential to our new fair value, coupled with uncertain competition from the new player, we downgrade our recommend to NEUTRAL. We advise investors to accumulate only when the visibility of the supply-demand dynamic for the local cement industry improves, or when it is trading at a lower price.

Source: OSK