We  continue  to  like  LMC’s  exposure  to  the  oligopolistic  local  cement market.  However,  the  additional  cement  capacity  may  outpace  its demand  in  the  mid-term,  as  demand  growth  is  gradual.  Also,  its  rich valuation prompts  us to  keep our NEUTRAL rating. That said,  we  raise our  FV  to  MYR10.00  (from  MYR8.78),  after  incorporating  higher  peer valuations and its scarcity premium.

• A  break  before  peak  season.  We  feel  that  the  Ramadhan  and  Hari Raya  festivities  may  have  cooled  LMC’s  3Q13 numbers,  before construction  activities  pick  up  again  in  4Q13.  The  cement  market  has shown  signs  of  stabilising  since  2Q13,  with  lesser  price  volatility potentially translating  into lower bulk discounts and higher prices   going forward. This  should help  production planning  and boost  efficiency and margins.  Therefore,  we  are  keeping  our  projections  as  we  expect  3Q results to be flat q-o-q.
• Rising  capacity.  We  continue  to  like  cement  stocks  due  to  the oligopolistic nature  of the market.  Hume Cement’s  late-2012 debut  has led  to  stiffer  competition  since  4Q12  –  although  that  is  easing  now. Meanwhile,  YTL Cement and Cement Industries of Malaysia (CIMA)  are in  the  midst  of  adding  1.6m  tonnes  per  annum  (tpa)  of  capacity  each, which  should  be  ready  in  the  next  two  years.  In  order  to  maintain  its market  leadership,  LMC  plans  to  expand  its  grinding  capacity  to  a combined  1.2m  tpa  by  2015.  The  total  new  capacity  of  YTL  Cement, CIMA, Hume Cement and LMC  will comprise  >20%  of  West Malaysia’s existing capacity - this indicates stiffer competition in the near term.
• NEUTRAL.  Budget  2014  did  not  contain  any  cancellation  of  mega projects.  The  Government,  on  the  contrary,  pledged  to  help  develop affordable  homes.  However,  we  think  cement  demand  –  particularly  in West Malaysia – may not catch up with the new capacity as its growth is expected  to  be  gradual.  While  justified  by  its  scarcity  premium,  LMC’s valuation  is  still  too  rich  vs  that  of  its  regional  peers.  We  are  still NEUTRAL on the stock,  but raise  our FV to MYR10.00 after revising  up our target FY14 P/E to 22.8x  (from 20x),  as  the  recovery in  the region’s equity markets  pushed  up its peers’  valuations.  LMC’  valuation  is 1SD above its five-year historical trading range.

Rich Valuation
Expensive  relative  to  regional  peers.  A  quick comparison  of  cement  companies’ valuations  within the fast-developing South-East Asia (SEA) region  shows that  LMC is  a tad rich, especially  as  its  current share price implies  an above-peer P/E,  despite having an ROE that is about half of most of its regional peers’ P/Es  in Indonesia and Thailand. Meanwhile, the stock is trading at 27.7x FY13 and 23x FY14 P/Es vs peers’ 18x FY13 and 15.5x FY14 EPS.

Reiterate NEUTRAL,  with  higher  MYR10.00  FV.  We  believe  Lafarge remains the best proxy to  the  growing construction and  affordable  property development in West Malaysia, as it is the largest cement producer in the country and the only liquid West 
Malaysia-based  cement stock  on  Bursa  Malaysia  following  the  privatisation  of  YTL Cement. Accounting for the scarcity premium,  we  revise  up our target FY14 P/E to 22.8x,  which  is  1SD above its five-year  historical trading range. Our  new MYR10.00 FV  implies  no  upside  while  our  new  valuation is  at  a  47%  premium  to  its  regional peers.  We  advise  investors  to  accumulate  only  when:  i)  regional  peers’  valuations rebound  higher,  (ii)  the  group’s  earnings  significantly  outperform  our  or  market estimates. Maintain NEUTRAL.

Financial Exhibits

• 2H13 results may improve in tandem with the construction of mega projects
• Strong cash generation with minimal capex enabled Lafarge to pay out 90% of its net profit
• Solid balance sheet with a net cash position
• Healthy growth is expected to resume from FY14 onwards

SWOT Analysis

Company Profile
Lafarge Malayan Cement (LMC) is the leading  cement manufacturer in the country,  with manufacturing facilities across the Peninsular Malaysia.

Recommendation Chart

Source: RHB