Period  1Q14

Actual vs. Expectations Lafarge Malaysia (Lafarge)’s 1Q14 core net profit (CNP)* of RM74.9m makes up 19% of both our full-year forecast and consensus estimates of RM402.9m and RM399.6m, respectively. In the past three years, 1Q CNP made up 15% to 18% of full-year CNP due to seasonally lower construction activity in the quarter.

Dividends  A first interim single-tier dividend of 9 sen was announced, which is within our expectations. For the full year, we expect a total net dividend of 46 sen which translates into a yield of 4.9%.

Key Results Highlights YoY, CNP increased 36% as overall group EBIT margin improved from 11% to 13%. The higher margin is due to better margin enjoyed by cement division (EBIT margin 11% against 1Q13 13%) resulting from lower coal prices.

 QoQ, 1Q14 CNP declined 41% due to the aforementioned seasonal factor, in addition to planned plant maintenance activities taking place during the festive season.

Outlook  With the recent better-than-expected GDP growth indicating that domestic demand remains solid, Lafarge seems to be on track to meet our expected FY14E CNP growth estimate of 9.3%, which is well within our forecasted construction sector growth of 11.5%.

 However, potential upside may be limited due to higher production costs and coal prices levelling out, which may result in capped margins.

Change to Forecasts Maintain FY14E-FY15E CNP of RM400m-RM445m.

Rating Maintain MARKET PERFORM

We maintain our neutral outlook on Lafarge since any positives from improved market demand may be somewhat negated by the expanding production capacity in the domestic cement industry.

Valuation  Maintain our TP of RM9.50 based on unchanged Fwd. PE of 20x FY14E EPS of 47.4 sen. We apply a +0.5SD valuation premium to reflect Lafarge’s leading market position, strong balance sheet and position as a direct beneficiary to the construction sector growth.

Risks to our call Higher-than-expected volatility in cement prices.

 Higher-than-expected increase in manufacturing costs.

Source: Kenanga