Yesterday, we attended LAFMSIA’s briefing, which included a small tour of their Construction Development Lab (CDL) in Petaling Jaya where the management showcased its Fastbuild, Smartbuild and Smart infra construction solutions. We came away feeling NEUTRAL as we expect earnings impact from this new development to be minimal in the near-term. Post briefing, we maintain our UNDERPERFORM recommendation with revised TP of RM8.68 (from RM8.20). Revised TP is premised after rolling forward valuation benchmark to FY16E with unchanged target PER of 20.0x, implying a -0.5SD discount on 5-year historical PER.

1Q15 results recap. Management recap that 1Q15 performed better than 4Q14 due to: (i) better sales from cement and concrete, which was believed to be driven by pre-GST rush, and strong domestic sales, and (ii) improved cost of production, due to better cost efficiency via increased petcoke usage and renegotiation of contract for transportation cost in view of declining global oil prices. Note that fuel cost (inclusive of coal) and transportation costs consist of 12% and 20% of total revenue, respectively.

Fastbuild as the next construction solution. We visited CDL’s showcased projects and came away feeling reassured by the group’s continuous efforts in maintaining its market-leading status by providing value-added solutions to its customers. The projects showcased were Fastbuild, one of the new industrial building system and Smart Build, a showcased house built via conventional construction solution.

One-floor structure to complete in four days! Fastbuild has consistent quality and the entire structure of one-floor can reduce construction time and cost by 84% and 36%, respectively. This means the one-floor structure can be completed within just four days as compared to that of conventional method’s 25 days. Buildings built under Fastbuild eliminate brick work and plastering process, which reduces construction time significantly.

To tap into affordable housing market. We gather that management is currently still in discussion stage with government to adopt Fastbuild solution to affordable housing market and is planning to commercialise Fastbuild by this year. If this is materialized, LAFMSIA could benefit from 11MP, i.e. 606k affordable houses will be built under 11MP. Nonetheless, this may not take place in near term as the discussion with government is still at preliminary stage.

Earnings impact is immaterial. Given that there is no disclosure on pricing of these solution products, we are unable to ascertain the earnings impact once all of these products solution are fully commercialized. The ordinary cement products still contribute to the bulk of its earnings.

Maintain UNDERPERFORM with revised TP of RM8.68. While we like the effort of the group innovating construction solutions to its customer on top of its ordinary cement supply, we however maintain our UNDERPERFORM rating on LAFMSIA as we remain concerned on the sector’s fundamentals following persistent price competition amongst cement players. The price competition is partly due to the expected additional 14.0% capacity increase in Peninsular Malaysia until FY16. We have also revised our TP to RM8.68 from RM8.20 previously after rolling over our valuation benchmark to FY16E. Our target price is based on unchanged target fwd-PER of 20.0x, implying a - 0.5SD discount on 5-year historical PER.

Source: Kenanga Research - 11 Jun 2015