News  Lafarge Malaysia (LAFMSIA) announced that Lafarge Cement Sdn. Bhd. executed the Form of Agreement and Conditions of Contract with PETRONAS Refinery and Petrochemical Corporation Sdn. Bhd. to supply concrete for the Proposed Refinery and Petrochemicals Integrated Development (RAPID) Project and other PETRONAS Related Projects at Pengerang, Johor - Package 21D at an estimated value of RM254m for a duration of 5 years.

 LAFMSIA also announced the acquisition of a Cement Mill and ancillaries from Lafarge Ciment (Romania) S.A. (“Lafarge Romania”) for EUR10.7m (RM46.0m).

Comments  We are positive on the RAPID contract win, which should improve earnings visibility and smoothen margins in LAFMSIA’s concrete segment for the next 5 years.

 However, we think that the additional earnings contribution averaging RM50.8m per year to LAFMSIA is relatively small as it makes up about 1% of estimated revenue from FY15E onwards.

 The mill acquisition from Lafarge Romania is within expectations as we believe this is part of the ongoing mill expansion program at LAFMSIA’s Kanthan and Rawang cement plant. Once completed, LAFMSIA should see increased capacity by 1.2m metric tons (MT) to 14.2m MT/yr by mid-2016.

 As LAFMSIA is purchasing only the cement mill equipment from Lafarge Romania, there is no directly comparable transaction as a basis for fair value. Note that the acquisition is a related party transaction (RPT) between a sister company of LAFMSIA’s mother company, Lafarge S.A. and will be funded internally.

Outlook  The news is positive to LAFMSIA’s long-term growth, but we think the impact to share price should be limited due to the relatively small effect on earnings from the RAPID contract, while for the mill acquisition, we believe the earnings growth on LAFMSIA’s expansion has already been priced in.

 Despite our expectation of robust domestic construction growth, the sector-wide capacity expansion is likely to intensify competition and result in depressed cement prices in the near-term.

Forecast  We expect minimal earnings impact in the near-term for LAFMSIA. Hence, we maintain FY14E-FY15E Core Net Profit (CNP) of RM324m-RM425m.

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  Maintain our TP of RM10.00 based on 20x PER on FY15E EPS of 50.1 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 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