LMC’s  management is pleased that  its 3Q13 earnings  were boosted  by higher selling prices  amid  stabilising market conditions  and  improved plant  efficiency.  Its  focus  is  now  on  near-term  profitability  and  cash generation,  which  should  translate  into  decent  yields  of  4.2/4.9%  for FY13/14. This will  lend further support  to  the stock’s  scarcity premium. Maintain 22.4x (+1 SD) FY14 P/E, MYR12.12 FV and BUY call.

• Decent  3Q13  earnings.  At  Lafarge  Malayan  Cement  (LMC)’s  3Q13 results briefing yesterday, management appeared to be satisfied with the group’s sequential earnings improvement, which it attributed to improved plant efficiency and  ramped-up  cement  delivery to  KLIA2, to  which LMC is an exclusive supplier.  Its  3Q13 margin was also  driven  by lower bulk discounts, as the market gradually  stabilises.  While  70-80%  of  its coal supply  is  locked  in  via  12-  to  18-month  forward  contracts,  LMC  is  still exposed  to  spot  coal  prices, which  fell  in  3Q  and  helped  to  bolster  its profitability, albeit marginally.
• Near-term  catalysts.  LMC  is  focusing  on  the  affordable  homes segment, which  the  Government  targeted as one of its  priorities  in the last general election. The housing segment is a major user of cement. As Budget  2014  did  not  cancel  or  defer  any  mega  projects,  we  expect cement demand for infrastructure developments to remain firm. While we continue  to  be  mindful  of  its  peers’  capacity  expansion,  the  additional volume from Hume Cement’s late-2012 debut has been swiftly absorbed by escalating local demand, judging  from  LMC’s sequential profit surge. Meanwhile,  YTL  Cement,  Cement  Industries  of  Malaysia  (CIMA)  and LMC all plan to expand capacity on a staggered basis.
• Reiterate  BUY.  LMC’s  solid  cash  flow  generation  and  minimal  capex spending  were  also  in  the  spotlight  at  the  briefing.  Although  its  board refrained  from  setting  a  fixed  dividend  payout  policy,  LMC  has  been paying  over  90%  of  its  net  profit  as  dividend  for  the  last  three  years. These translate  into  decent yields of 4.2/4.9% for FY13/14, which should further justify  its  scarcity premium.  We keep our FY14 P/E  of  22.8x (+1 SD above its historical trading range) and MYR12.12 FV. Maintain BUY.

Financial Exhibits

• Going forward, we expect results to improve further in tandem with the construction of more affordable houses and mega projects
• 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  Peninsular Malaysia.

Recommendation Chart

Source: RHB