Highlights

• We reiterate our view that Lafarge will continue to enjoy good earnings visibility in the next 2-3 years, backed by:
  1. Healthy demand growth in the next 2-3 years, underpinned by the implementation of construction and infrastructure projects; and
  2. Lower coal price, which has declined by 26.2% YTD. Post revision to our coal price assumption, our sensitivity analysis indicates that every 10% decline in our coal price assumption (from our base case of US$100/tonne) will boost Lafarge’s 2013 earnings by ~7%.
• Given its healthy balance sheet (we expect its net cash to rise from RM244m in 2011 to RM318m by end-12) and the absence of hefty capex requirement in the near future, we believe Lafarge has the capability to declare a much higher dividend. Based on our estimates, Lafarge has the capacity to declare another 37 sen of DPS (3.8% yield) on top of our projected DPS of 36 sen (3.5%) in 2012, bringing the total DPS for 2012 to 73 sen (translating to a yield of 7.4%), if it pays out its entire net cash by year-end.

Forecasts

• 2013-14 net profit forecasts raised by 14.9% and 14.6% respectively, mainly to reflect a downward adjustment to our coal price assumptions (from US$120 to US$100/tonne).

Catalysts

• Timely implementation of ETP projects;
• Sustainable demand from property development projects;
• Higher-than-expected DPS; and
• Coal price declines further.

Risks

• Delays in the implementation of projects under the ETP, resulting in lower-than-expected demand for cement consumption;
• Price war intensifies; and
• Steep rise in energy prices, in particular, coal and electricity.

Rating

HOLD

• Positives – (1) Positive cement demand outlook; (2) Largest cement player; (3) Strong balance sheet; and (4) Generous dividend payout
• Negatives – (1) High valuation; and (2) Illiquid share trading volume.

Valuation

• Post earnings revision, our TP on Lafarge was lifted by 17.6% from RM7.88 to RM9.27 based on unchanged 16.5x 2013 revised EPS of 56.2 sen. However, we believe its fundamentals are already largely reflected in the share price.

Source: Hong Leong Investment Bank Research - 15 Oct 2012