Lafarge Malaysia Bhd
(Nov 19, RM9.70)
Maintain “neutral” with unchanged target price (TP) of RM9.82: Earnings for the first nine months of financial year 2014 (9MFY14) were below our and consensus expectations. Earnings accounted for only 64% of our and 53% of consensus FY14 estimates. Sales volumes for all its product lines were marginally lower than our projection, with  9MFY14 revenue accounting for 70% of our estimate.

The decline in third quarter (3Q) revenue was attributed to lower domestic average selling price (ASP) for its cement as a result of strong price competition and lower sales of its ready-mixed concrete. We expect overcapacity of cement production in Peninsular Malaysia, with a total current installed capacity of 29.8 million tonnes per year against an average annual production of 21.5 million tonnes, to continue to impact cement’s ASP. Adding to the cement supply glut, cumulative profit after tax and minority interests (Patami) was impacted by higher operating expenses with Patami margin shrinking to 10% for 9MFY14 from 12% in the corresponding period last year.

We expect Lafarge’s top line to grow 3.3% in FY15 supported by progressive completion of its projects on hand. Also, we anticipate that its sales volume growth will continue to be backed by impending implementation of highways and rail line infrastructure projects next year and ongoing property development. We expect the demand for its innovative products to grow as it will provide cost savings with the expectation of higher construction costs ahead due to the implementation of the goods and services tax (GST). Lafarge’s profit margin is likely to improve as we understand these innovative products will fetch higher margins than the conventional products.

Management has declared a third interim single-tier dividend of eight sen per share in 3QFY14, to be paid to shareholders on Jan 14, 2015. Cumulatively up until 9M,  management has declared interim dividends of 26 sen. We expect an eight sen final dividend to be declared in the next quarter.

At this juncture, we maintain our earnings forecast as we have already adjusted our net profit estimate downwards in 2Q. Moving forward, we expect a pick-up in the sales volume of its cement and innovative concrete product. This would help to moderate the current shortfall in its earnings.

Hence, we reaffirm our “neutral” recommendation with an unchanged TP of RM9.82. We peg our valuation to a FY15 price-earnings ratio of 19 times based on its five-year quarterly historical average. We view Lafarge as a good dividend stock due to its generous dividend payout of more than 90% which, at current price levels, translates to a dividend yield of 4% to 5%. — MIDF Research, Nov 19

This article first appeared in The Edge Financial Daily, on November 20, 2014.