We welcome the news that Lafarge SA and Holcim Ltd  have  agreed  to merge and create the world’s biggest cement maker. This may lead to merger  with/acquisition  of  Holcim  Malaysia  that  we  deem  synergistic and  will  fortify  Lafarge  Malaysia’s  leading  position in West Malaysia’s cement market. No announcement on this has been made, though. That said, we keep our BUY call and MYR9.61 FV.

• The  merger.  Yesterday,  Lafarge  SA  and  Holcim  Ltd  agreed  merge  to form the world’s biggest cement maker with more that USD40bn in sales. The enlarged entity will also cut overcapacity and energy expenses. The new company will be called LafargeHolcim.
• Prelude  to  Holcim  Malaysia’s  asset  injection?  Lafarge  Malayan Cement (Lafarge Malaysia)  has not made any announcement pertaining to  the  merger.  However,  Holcim  Malaysia  SB  is  currently  operating  a 1.2m tonne per annum (tpa) grinding plant in Pasir Gudang, Johor,  that leads  us  to  believe  a  potential  asset  injection  of  this  unit  into  Lafarge Malaysia  is  possible.  We  do  see  synergy  on  the  possible  merger  or acquisition  of Holcim Malaysia,  as  Lafarge Malaysia is  also operating  a separate 700,000tpa grinding plant  in  the same area to service clients  in the West Malaysia’s Southern Region. The company’s integrated plant in
• Langkawi, Kedah, has been exporting excess clinker at marginal costing. Hence,  the transaction may see Lafarge Malaysia  possibly channelling more clinker to Holcim Malaysia at better margins,  as the  larger quantity may  mean  savings  in  logistics  costs.  Apart  from  that,  the  merger  may also further fortify Lafarge Malaysia’s leading position in  the local cement market, with market share increasing to almost 40% from one-third.  
• Maintain  BUY.  We  also  continue  to  think  that  the  market  may  have overlooked the recent cut in cement rebates, which could be sufficient to cover higher power costs, while,  a  revision of its list price may also be around  the  corner.  Coupled  with  the  potential  synergistic  merger  with Holcim Malaysia, we are keeping our BUY recommendation  on Lafarge Malaysia  with  our  FV  unchanged  at  MYR9.61.  This  is  based  on  20x FY14F P/E, +0.5 STD from its 5-year historical trading range.

Recommendation Chart

Source: RHB