While  Lafarge  may  deliver  better  numbers  this  year,  we  believe  nearterm  results  could  be  bumpy  as  West  Malaysia  pipeline  cement capacities  may  prolong  price  competition  and  dent  its  profit  margins.Maintain  NEUTRAL  and  MYR9.85  TP  (3%  downside).  Nevertheless, investors  may  hold  on  to  the  stock,  given  that  it  is  the  best  proxy  to government infrastructure spending as well as its generous dividends.

Post results briefing and weak 4Q14. We attended Lafarge Malaysia’s (Lafarge)  post  4Q14  results  briefing  yesterday,  which  was  chaired  by CEO  Bradley  Mulroney  and  CFO/ED  Michael  Lim.  Lim  attributed Lafarge’s  poor MYR49.9m 4Q14 net profit (down  8.9% QoQ and 61.5% YoY)  to:  i)  extended  price  competition  following  the  introduction  of additional  volume  by  peer  Cement  Industries  of  Malaysia  (CIMA), ii) production difficulties  at certain plants due to a technical setback, and iii)  increased  operating  costs  as  a  result  of  higher  electricity  tariff, transportation and maintenance costs.   

A  better  tomorrow?  Meanwhile,  Mulroney  was  of  the same  view  withus, ie that cement demand may continue to grow but at a possibly slowerpace  than  in  recent  years.  Lafarge’s  capacity  in  Langkawi  is  rather competitive in  the  export market. This is given  its strategic location  and port facility, which offers the flexibility to channel extra volume for export . Thus, Mulroney said he was  not overly concerned  over  ongoing pipeline capacities  in  the  industry.  Lafarge’s  production  costs  were  also stabilising  now  as  all  plants  were  back  to  normal  operational  levels. Management,  however,  is  unsure  if  the  2.25  sen/kilowatt -hour  (kWh) power  tariff  reduction  from  1  Mar-30  Jun  may  benefit  the  company,pending official response  from Tenaga  Nasional (TNB)  (TNB MK, BUY, TP: MYR16.70).  Mulroney  also witnessed  a  pick-up in cement sales as contractors rushed to complete ongoing projects ahead of  the goods and services tax  (GST)  implementation, which  may  result  in  a  slowdown  in 2Q sales.  

Reiterate  NEUTRAL.  We  think  that  the  board’s  proposal  for  a  total payout of 113%  in FY14  reflects  Lafarge’s  confidence  on  its prospectsmoving forward. However, we prefer to keep our NEUTRAL call and  TP at MYR9.85,  as our valuation  –  using 21.6x FY15F  P/E  –  is  already at +2SD from its 5-year historical trading range.

Source: RHB