HLIB Research upgrades Lafarge Malaysia to Buy, raises target price to RM10.72

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KUALA LUMPUR (Nov 24): Hong Leong IB Research (HLIB) has upgraded Lafarge Malaysia Bhd to a Buy (from Hold) with a higher target price of RM10.72 and said Lafarge’s 3QFY14 net profit declined due to higher input cost and pricing pressure from the market arising from Lafarge’s stance to regain and reposition itself as the market leader.

In a note Monday, the research house said energy and fuel costs now consist of 50% of total cost and the only strategy to mitigate the rising price of electricity and fuel is by being more efficient.

HLIB said the company recently finalised the terms for the supply of coal for next year and has hinted that the prices for next year is marginally lower compared to FY14.

The research house said price volatility was expected to continue and industry cement demand will continue to sustain into next year, with a projected mid-single digit demand growth of 3-5% in 2015, similar pace for 2014.

“We slashed FY14 by 6.1% to impute the weak 9MFY14 results. However, we have revised upwards our FY15-FY16 earnings by 7.4% and 11.6% due to (1) lower coal price; and (2) higher domestic net selling prices.

“Despite the disappointing 3QFY14, our TP is raised to RM10.72 based on 22.5x 2016 EPS of 47.7 sen. We have raised our P/E on the stock to 22.5x, one standard deviation above its 1-year forward average P/E of the last 3 years.  We upgrade our rating from Hold to Buy,” it said.