Lafarge, satisfied with West Malaysia’s stabilising cement market, plans to  retain  its  leading  market  position,  and  meet  local  and  overseas demand  in  the  coming  years.  Thus,  it  is  embarking  on  an  expansion involving  added  grinding  capacity,  two  ready-mix  plants  and  a  quarry. We  continue  to  like  its  oligopoly  business,  but  keep  our  NEUTRAL rating with the MYR8.78 FV intact, due to its rich valuation. 
 
- A better 2H? Lafarge held a briefing yesterday, which was well attended by analysts and fund managers. Although Hume Cement’s entry into the market  in  late  2012  has  resulted  in  stiffer  competition  since  4Q12, management  is  pleased  to  note  that  –  from  2Q13  –  the  market  is showing  signs  of  stabilising,  with  Lafarge  posting  a  50%  q-o-q  profit surge  to  MYR81.4m.  The  lesser  price  volatility  is  also  translating  into lower  bulk  discounts  and  higher  prices,  which  also  eases  production planning as well as improving efficiency and margins. Meanwhile, as we expect  the  Ramadhan  and  Hari  Raya  seasons  may  cool  Lafarge’s  3Q 
numbers  –  before  construction  activities  pick  up  in  4Q  –  we  make  no change to our estimates.    

- On  expansion  mode.  Lafarge  is  expanding  all  its  product  lines  to  help meet  local  and  overseas  demand  in  the  coming  years  and  retain  its market  leadership.  It  will  expand  grinding  capacity  at  its  Rawang, Selangor,  and  Kanthan,  Perak,  cement  plants  to  a  combined  1.2m tonnes per year (tpy). The group also plans to invest in two new ready-mix batching plants at Jalan Chan Sow Lin and Sungai Buloh, both in the Klang  Valley.  It  also  plans  to  open  a  new  quarry  in  Nilai,  Negeri Sembilan, to boost aggregate output and contribution.   

- Reiterate  NEUTRAL  on  rich  valuations.  We  continue  to  like  cement stocks,  as  the  market  is  an  oligopolic  one.  We  also  expect  the Government  to  revive  previously  announced  projects  that, together  with potential  new  projects,  should  strengthen  demand  for  basic  materials. Lafarge’s  expansion plan  also  may  help  it maintain its  dominant market share.  Nonetheless,  the  lower  valuations  of  its  regional  peers  after  the recent selldown prompts us to keep our FY14F P/E at 20.0x (a 45%/16% premium  to  regional/West  Malaysia  peers),  through  which  we  derive  a FV of MYR8.78. Maintain NEUTRAL.  

Source: RHB