Depressed earnings

Depressed earnings. We maintain our FULLY VALUED rating for Lafarge Malaysia (Lafarge) with a revised TP of RM5.10, pegged to replacement costs of USD125/tonne for its cement plant. Earnings are likely to remain underwhelming given heightened competition and pricing pressures in the Malaysian cement sector due to excess capacity. The sector?s profitability has been declining since 2013 despite the benefit of lower coal prices.

Capacity addition in the industry. We believe competitive pressures in Malaysia?s cement industry are unlikely to ease in 2016-2017 given that Lafarge and Hume Cement are adding new production capacity (representing c.12% of industry capacity), while domestic cement demand growth is only expected to grow by 3-5% p.a. at best. As such, pricing pressures will likely persist as cement players offer larger rebates to fill capacity and/or gain market share.

Valuation

With earnings likely to remain underwhelming in the near to medium term, we switch our valuation methodology for Lafarge from PE basis to replacement cost. Our revised RM5.10 TP is pegged to replacement cost of USD125/tonne.

Key Risks to Our View

Rebates getting more aggressive. Competitors seeking to gain market share may offer larger rebates, which would result in lower cement ASP and affect Lafarge?s revenue.

Weaker domestic cement demand. Weaker domestic cement demand as a result of slowing construction activities could force Lafarge to export more of its cement, but export prices are usually lower than prevailing domestic prices.

Source: Alliance Research - 30 Nov 2016