Period  2Q14/1H14

Actual vs. Expectations Lafarge Malaysia (LAFMSIA)’s 1H14 Core Net Profit (CNP*) came within expectations at RM152m. Although it makes-up 38% of our fullyear forecast and consensus expectations, it is in line with historical trends where LAFMSIA experienced a weaker 1H which normally contributed 37-42% of full year net profit in the last 3 years. This is attributable to scheduled plant maintenance and seasonal construction slowdown in 1Q.

Dividends  A second interim single-tier dividend of 9 sen was announced which is within our expectations. Year to date, the Company has paid out 17 sen dividend in total. For the full year, we expect a total net dividend of 46 sen which translates into a dividend yield of 4.5%.

Key Results Highlights YoY, 1H14 CNP increased 11% to RM152m on higher cement average selling prices (ASPs) and lower production costs. Cement segment profit increased 15% to RM197m. Historically, the cement segment profit contributed >90% of LAFMSIA earnings.

 QoQ, 2Q14 CNP improved 2% to RM77m on better cement prices and higher construction activity. Note that cement segment profit is up 3% to RM100m.

Outlook  Construction activity in Malaysia remained robust in 2Q14, recording 9.9% GDP growth in 2Q14. Our 9.3% CNP growth expectation for LAFMSIA remains in line with our in-house 11.1% GDP growth forecast for the construction sector.

 However, we are expecting approximately 14% capacity expansion for the cement industry in Peninsular Malaysia until FY16, which could limit ASP expansion and increase competition within the industry going forward.

Change to Forecasts Maintain FY14E-FY15E CNP of RM403m-RM445m.

Rating Maintain MARKET PERFORM

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

Valuation  We raise our TP to RM10.50 (from RM9.50 previously) as we roll forward our base year to FY15E. Maintain valuation of 20x PER on FY15E EPS of 58 sen. Our TP implies a +0.5SD premium on 3-year historical PER, justified by LAFMSIA’s leading market share and strong balance sheet with net cash position of RM517m or RM0.61 per share.

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

 Higher-than-expected increase in manufacturing costs.

Source: Kenanga