News  According to Wall Street Journal, Switzerland’s Holcim Ltd has rejected the terms of a proposed GBP42.0b (USD44.3b) merger with France’s Lafarge. Note that France’s Lafarge is the largest shareholder of LAFMSIA with 51.0% stake.

 Wiling to renegotiate exchange ratio. France’s Lafarge mentioned that it is willing to renegotiate the deal’s one-forone share exchange ratio and “governance issue” which we believe is referring to the management of the combined company. However, other terms will not be renegotiated.

 The news or the earlier merger news was not reflected in the Bursa announcement and thus, we still need to reconfirm the above news with management.

Comments  Assuming that the news hold water, we are neutral on this news as: (i) we have not factored in the earnings impact from the possible merger, pending details from official announcement, and (ii) while we prefer the merger to go through for size, which will result in improved economies of scale. However, ultimately, it depends on whether the merger terms imply fair pricing for expansion. We believe that the merger will not be able to be finalised in 1H15, as the merger decision can span across an one-year horizon.  Recall, we have previously highlighted the news in our report dated 7th April 2014, titled Merger Talks between Lafarge & Holcim that should the merger materialise, the Holcim plant will contribute an additional 8.5% production capacity to 15.35m MT annually post-2015.

Outlook  If the merger is renegotiated and confirmed, this will be positive news to LAFMSIA as the additional 8.5% production capacity can help to meet construction growth in south Johor region.

 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 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.

Forecast  Maintain our FY15E-FY16E CNP at RM347.5m- RM368.8m, respectively, with unchanged net ASP estimate at RM314/MT-RM331/MT. No earnings changes are made as we did not impute the merger impact previously.

Rating Maintain UNDERPERFORM

Valuation  We maintain our TP at RM8.20 based on unchanged FY15E PER of 20.0x. Our TP implies a -0.5SD discount on 5-year historical PER.

 We think that LAFMSIA is overvalued at this juncture (with a fwd PER of 24.0x), given that the group is still facing earnings risks after seeing rounds of disappointment, given that the industry still face intense competition. As such, we maintain LAFMSIA at UNDERPERFORM.

Risks to Our Call  Higher-than-expected cement prices

 Lower-than-expected raw material and energy costs

 Stronger-than-expected cement demand 

Source: Kenanga