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Lafarge Malaysia Bhd
(Sept 21, RM9.11)
Maintain neutral with a higher target price (TP) of RM10.15 from RM10.12 previously:
Lafarge entered into a conditional agreement to acquire the entire equity interest in Holcim (M) Sdn Bhd (HSB) from PT Holcim Indonesia Tbk for RM330 million.

The acquisition of HSB will be positive towards operational efficiency, cost reduction, capital expenditure and expansion of production capacity.

Our earnings forecasts remain optimistic due to expansion of its product portfolio, wider production capabilities, and improved margins through higher production volume.

The 100% acquisition of HSB will be funded by internally-generated funds. The acquisition manifests a regional integration of Lafarge’s global merger with HSB, which was completed on July 10, thus creating LafargeHolcim Ltd.

We reckon that the acquisition will be pivotal to its local and regional production capabilities due to additional production output through the strengthening of its value chain in distribution channels and raw materials from an existing quarry in Johor, hence improving its operational efficiency.

Furthermore, there is a reaction to pricing and product competition by increasing output from 13 million tonnes to 14.14 million tonnes through lower product costs by higher production volume.

There is also an increase to its distribution channel in Malaysia and potentially Indonesia, and this will facilitate better margin profile in total product sales. This is especially so with its close proximity to LafargeHolcim’s five distribution hubs and three integrated silos in Indonesia.

We put our earnings forecasts under review at this point, pending the completion of the conditional agreement.

We maintain our “neutral” stance with an adjusted TP of RM10.15 by rolling over to financial year 2016 earnings per share of 42.3 sen on price-earnings ratio multiples of 24 times, reflecting its five-year historical average. — MIDF Research, Sept 21

Lafarge_fd_220915

This article first appeared in The Edge Financial Daily, on September 22, 2015.

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