LMC’s  3Q profit surged  47.6%  q-o-q  in a typically quiet  season,  thanks to  improved  plant efficiency,  lower coal costs  and higher contributions from the aggregate and concrete divisions.  We think investors will now focus on its near-term profitability  and decent yield.  Given  its  scarcity premium, we keep our valuation at 22.4x FY14 P/E, with our FV raised to MYR12.12 (from MYR10.00) after earnings revision. Upgrade to BUY.

• Robust results despite quiet  season.  While Lafarge Malayan Cement (LMC)’ 3Q13 sales were flat due to  Ramadhan and Hari Raya festivities, earnings  surged  47.6%  q-o-q and  24.7% y-o-y  to MYR120.2m, beating our  and  street  expectations.  9M13  numbers  comprised  82.5/74.6%  of our/consensus  projections.  During  the  quarter,  the  cement  market showed  signs  of  further  stabilisation,  which  translated  into  lower  bulk discounts  and  better  3Q  margins.  Earnings  were  boosted by  improved plant efficiency, lower  coal  costs  (-10.3% q-o-q)  and higher contributions from the aggregate and concrete divisions.    
• All eyes  on near-term catalysts. While  we  continue to  be mindful of its peers’ capacity  expansion,  the  additional volume from  Hume Cement’s late-2012 debut  had  been swiftly  absorbed by escalating local demand,judging  by  LMC’s  sequential  profit  surge.  Meanwhile,  YTL  Cement, Cement Industries of Malaysia (CIMA) and LMC plan to expand capacity on a  staggered basis over  the  next  two years.  As  the  market may  now focus on LMC’s impressive q-o-q results, we raise our estimated ex-gate local  cement  price by  MYR5/tonne for the  next two years, and  trim  the coal price by USD15/tonne. We  expect local sales to tick up  1%/3%  in FY13/14. All in, we lift our FY13/14 estimates by 25.6/21%.
• NEUTRAL.  The  Budget  2014  did  not  state  any  cancellation  of  mega projects.  Instead,  the  Government  has  pledged  to  help  develop affordable homes. LMC’s  solid cash flow generation and  minimal capex spending  will  allow  it  to  pay  generous  dividends  that  will  translate  into decent  yields  of  4.2/4.9% for FY13/14. As  the group  may also  continue to  enjoy  scarcity  premium,  we  maintain  our  FY14  P/E  at  22.8x  (+1SD from  its  historical  trading  range)  and  derive  a  higher  FV  of  MYR12.12 (from MYR10.00),  following the increase in our  earnings  estimates.  We upgrade LMC to BUY from Neutral.

Financial Exhibits

• 4Q13 results may improve further in tan 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 Malaysia,  with manufacturing facilities across the Peninsular Malaysia.

Recommendation Chart

Source: RHB