Period  4Q14/FY14

Actual vs. Expectations  Lafarge Malaysia (LAFMSIA) FY14 core net profit (CNP) came in below expectations, making up only 79.3% and 81.0% of our and consensus expectations, respectively. (Refer overleaf).

 The negative deviation was due to: (i) lower-than-expected ASPs and (ii) higher-than-expected operating costs incurred from increase in electricity tariff and maintenance costs. We believe the lower ASP was aggravated by current environment of intense competition in the cement industry.

Dividends  Slightly below expectations. The company announced a fourth interim single-tier dividend of 8.0 sen. Cumulatively, it declared 34.0 sen DPS, slightly lower than our forecast of 37.0 sen.

Key Results Highlights  QoQ, despite 4Q14 revenue rising by 3.0% due to slightly better selling cement prices, 4Q14 CNP fell by 12.9% due to higher operating costs following lower sales volume and ASP that led to higher fixed costs due to lower economies of scale. Hence, operating margin was compressed from 10.3% to 9.8%.

 YoY, FY14 revenue declined by 3.8% mainly due to lower sales revenue from both cement (-2.9%) and concrete and aggregates segment (-7.7%). The drop in concrete sales was attributed to the absence of sizeable jobs as KLIA2 project was completed in 1Q14. Furthermore, FY14 CNP declined by 30.1% to RM257.6m, mainly due to lower ASP coupled with higher electricity and maintenance costs.

Outlook  We believe that domestic cement demand should remain resilient in FY15, in line with our in-house construction GDP growth forecast of 9.6%.  Nonetheless, we remain cautious on the cement players’ earnings outlook given that the persistent intense competition which will likely result in a price war. This is due to the expected 14% capacity expansion in Peninsular Malaysia until FY16.

Change to Forecasts  Due to persistent earnings disappointment, we revised lower FY15E CNP by 18.1% after lowering down net ASP estimate to RM314/MT from RM320/MT. We also introduce FY16E CNP at RM369.3m, with net ASP estimate of RM329/MT.

Rating Downgrade to UNDERPERFORM (from MP)

Valuation  Post earnings revision, we are lowering our TP to RM8.20 (from RM10.00 previously) based on unchanged FY15 PER of 20.0x. Our TP implies a -0.5SD discount on 5-year historical PER.

 We think that LFMSIA is overvalued at this juncture (with a fwd PER of 25.4x), given that the group is facing earnings risks after seeing rounds of disappointment. Furthermore, the industry is still faced with intense competition. As such, we downgrade LFMSIA to

UNDERPERFORM.

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

 Lower-than-expected increase in manufacturing costs. 

Source: Kenanga