The 18.8% electricity tariff hike does not bode well for LMC, as power is its  major production cost. We pare  FY14F  earnings  by 9.5%, assuming the local cement selling price remains unchanged. As the hike will likely dent investors’  interest on this power-hungry industry and LMC’s stock is more expensive than its regional peers, we downgrade the counter to NEUTRAL, with a MYR9.61 FV.

• Power  is  a  major  production  cost.  Producing  one  tonne  of  a  highquality  finished  cement  product  will  consume  approximately  100-130 kilowatts  per  hour  (kWh)  of  electricity.  Although  this  is  less  electricity compared  to steel and  other smelting processes, power costs make up almost 17-20% of  production costs, since cement  products are  lower in value.  As  electricity  costs  exceed  5%  of  total  operating  costs  –  which allows companies to enjoy a discounted special industrial tariff (SIT) - the latest  18.8%  increase  is  2%  higher  than  the  normal  increase  in  the industrial  electricity  tariff.  Lafarge  Malayan  Cement  (LMC)  is  the  only West Malaysian cement producer in  our universe that is expected to be negatively impacted from the latest tariff hike.  
• Trimming  FY14  estimates  by  9.5%.  Our  quick  assessment  indicates that  the  tariff  hike  will  result  in  a  9.5%  cut  to  our  FY14  numbers, assuming  the  local  cement selling price  does not increase.  While  it may be argued the higher cost  may be  partially passed  on to cement users, we think it may not be easy  –  since  YTL Cement,  Cement Industries of Malaysia (CIMA)  and LMC plan to expand  their  capacity on a staggered basis over the next two years, which will result in higher  supply  moving forward.  Therefore,  we  prefer  to  assume  there  will  be  no  further  local cement price hikes  other than  the MYR15/tonne increase in FY14 that we had earlier incorporated into our earnings model.
• Downgrade  to  NEUTRAL.  While  we  continue  to like  LMC  for  being  a member  of  an  oligopoly,  we  downgrade  the  stock  to  NEUTRAL  (from Buy) as the latest tariff hike may dampen sentiment toward the counter –seeing as its valuation is already far more expensive than regional peers. Our new FV of MYR9.61  is derived from 20x FY14 P/E or  +0.5SD from +2 SD) of its 5-year historical trading range.

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Source: RHB