We maintain SELL on Lafarge, with a TP of MYR8.27 (11% downside). The proposed acquisition of HMSB may lift the group’s near-term earnings by only <3%. Separately, weaker construction activities for the remainder of this year may translate into lower cement sales tonnage and ex-gate prices. We also expect the next wave of construction activities to only pick up gradually in 2016.

The acquisition. Lafarge Malaysia (Lafarge) has entered into a conditional share purchase agreement with PT Holcim Indonesia Tbk (Holcim Indonesia) (SMCB IJ, NR) to acquire the entire equity interest in Holcim (Malaysia) SB (HMSB) for MYR330m in cash. HMSB runs a cement grinding plant in Pasir Gudang, Johor with an annual production of 1.19m tonnes. This acquisition – still subject to various approvals that need to be obtained and adjustments that have to be made – is expected to be completed by 4Q15. Lafarge plans to finance the acquisition through internal funds and bank borrowings.

Fairly priced. The MYR330m purchase consideration falls within PricewaterhouseCoopers’ independent valuation of MYR307m-351m. The implied 9.5x EV/EBITDA and 17.9x P/E are marginally below regional and local peers’ past 5-year monthly averages of 10.7x-11.4x and 18.3x-18.6x respectively. HMSB only owns a grinding station. In contrast, its peers operate integrated cement plants. Therefore, HMSB’s EV/tonne of installed capacity of USD88 is significantly lower than its regional peers’ USD246 and local players’ USD186.

No major surprises. While the exercise is fairly priced, the acquisition does not come cheap. Net earnings accretion from the acquisition could be lower than 3% for FY16F-17F, based on our back-of-envelope calculation, as Lafarge’s announcement contained limited details. This could increase its cement plants’ annual installed production capacity to 14.14m tonnes from 12.95m tonnes, but additional synergies may take time to achieve. Assuming that there are no major improvements to HMSB's earnings post-exercise and imputing the potential interest cost that could be incurred from funding the proposed acquisition, HMSB’s net contributions to Lafarge’s near-term earnings may be less than MYR10m pa. We also believe the exercise has been largely anticipated by the market following the recent completion of a merger between Lafarge SA and Holcim Ltd.

Still a SELL. We remain cautious as weaker construction activities for the rest of this year may result in lower cement sales tonnage and ex-gate prices. The next wave of construction activities may only pick up gradually in 2016. We also remain aware of the potentially negative impact of the USD appreciating further against the MYR. As the proposed acquisition may lift Lafarge's earnings by only less than 3%, we maintain our estimates until management gives further details on the acquisition. As Lafarge’s valuations are already rich, we maintain our SELL recommendation. Our TP of MYR8.27 is pegged to 21.6x FY16 P/E, +2SD from its 5-year historical trading range.

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Company Profile

Lafarge Malayan Cement (LMC) is the leading cement manufacturer in Malaysia with manufacturing facilities across the Peninsular Malaysia.

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Source: RHB Research - 21 Sep 2015