Period  3Q14/9M14

Actual vs. Expectations Lafarge Malaysia (LAFMSIA) 9M14 earnings came in below expectations, making up only 52% and 53% of both our, and consensus, expectations, respectively.

 We believe that the lower-than-expected 3Q14 earnings were caused by lower ASPs. This is likely due to increased competition in the domestic cement industry leading producers to increase rebates to buyers in order to maintain market share.

Dividends  A second interim single-tier dividend of 8 sen was announced which is within our expectations. Year to date, it has paid out 26 sen dividend in total.

 For the full-year, we expect a total net dividend of 37 sen which translates into a dividend yield of 3.6%.

Key Results Highlights YoY, 9M14 CNP declined 18% to RM208.2m due to lower cement ASPs as well as higher operating costs due to reduced fuel subsidies. Historically, the 2H made up 58%-63% of LAFMSIA’s full-year earnings, thus this 3Q14 results were much weaker than expected. The cement segment recorded 19% lower profits at RM264.3m.

 QoQ, 3Q14 CNP fell 26% to RM56.7m due to a construction slowdown over the 3Q14 festive season. Furthermore, coupled with the lower ASPs and decline in sales volume, the company suffered from higher fixed costs as there were less economies of scale. Thus operating margins were compressed from 14% to 10%. Cement segment profit also declined 33% to RM67.2m.

Outlook  Recently released GDP data showed that the construction sector grew 9.6% in 3Q14 vs. 9.9% in 2Q14 despite a high base effect. We believe that domestic cement demand should remain robust in 4Q14, in line with our inhouse FY14 forecast of 12.2% construction GDP growth.

 However, we are expecting approximately 14% capacity expansion for the cement industry in Peninsular Malaysia until FY16. The increased competition is likely to result in depressed cement prices in the near-term.

Change to Forecasts We lower our FY14E-FY15E CNP estimates by 19%-5% to RM324.4m - RM425.3m after reducing our net ASP estimate to RM310/MT – RM320/MT from RM326/MT – RM335/MT previously.

 Our FY15E earnings cut is less severe vs. FY14 as we believe that LAFMSIA will begin to see the effects of declining coal prices. Hence, we adjust our FY15E coal price estimate to USD80/MT which should result in lower production cost.

Rating Maintain MARKET PERFORM

We maintain our neutral outlook on LAFMSIA since any positives from improved market demand may be negated by lower ASPs due to increased competition in the domestic cement industry.

Valuation  We revise our TP to RM10.00 from RM10.50 with an unchanged valuation of 20x PER on lower FY15E EPS of 50.1 sen (52.4 sen previously). 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 RM434m or RM0.51 per share.

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

 Higher-than-expected increase in manufacturing costs.

Source: Kenanga