Lafarge’s 1HFY14  core  profit of MYR151.3m  represented  35.2/38.4% of our/street’s  full  year  estimates.  However,  we  make  no  change  to  our projection  as  we  expect  2H  to  be  a  stronger  period,  as  the  official increase  in  cement  prices  may  translate  to  a  higher  ex-gate  price  –which could  boost  earnings.  We are keeping  our  BUY  rating, with ourMYR11.27 FV premised on 21.6x FY15 EPS (+2SD). 

1H14 could  have  been  better.  Lafarge Malaysia’s (Lafarge)  1H14 net profit of MYR151.3m fell slightly short of expectations, at 35.2%/38.4% of our/consensus  full-year estimates.  Meanwhile, 2Q14 revenue rose  6.0% q-o-q  as  cement  demand  picked  up  post  Lunar  New  Year.  However,poor aggregate and concrete sales led to group topline declining 1.6% yo-y  –  and  which resulted in the division’s  operating loss of MYR0.9m in 1H14 (vs a profit of MYR9.3m in 1H13), which management attributed to major projects being completed. Thus,  its  2Q14  EBITDA margin slid to 19.5% vs 19.7% in 1Q14 despite the 9% increase in the cement list price from May 2014.

Expecting  a better  2H14?  As its  list price increased  in May, we expect Lafarge to realize  higher selling prices moving into 2H14.  We think that cement demand, boosted by government  infrastructure projects  and the implementation  of  affordable  housing  projects,  may  be  timely  in absorbing  the  additional  supply  that  has  entered  the  market  on  a staggered basis. YTL Cement is expected to commission its brownfield capacity  only  in late 2014  –  the extra volume in the coming years  also may be less disruptive compared with newcomer Hume Cement’s offer of big discounts in order to boost its distribution network. 

Reiterate  BUY.  We make  no  changes  to  our  projection  as  results  are likely  to  pick  up  further  in  2H14.  Separately,  Lafarge’s  own  brownfield expansion  is  expected  to  be  ready  only  in  2015,  which  may  further enhance its efficiency. Its share price  rose to its  peak –  at +2SD from its 5-year historical trading range  –  when it last revised its cement prices in Aug 2012. W e continue to apply a similar valuation for now  to derive our FV  of  MYR11.27  (21.6x  P/E).  We  believe  the  robust  cash  generation also allows  the company to keep  its generous dividend payout policy  of >90%  -  which  translates  to  a  decent  yield  of  4.5%/4.6%  for  FY14/15.Maintain BUY.    

Source: RHB