Lafarge Malaysia Bhd
(Nov 24, RM9.90)
Upgrade from “hold” to “buy” with a target price (TP) of RM10.72: To recap, Lafarge Malaysia Bhd’s third quarter of financial year 2014 (3QFY14) net profit declined by 54% year-on-year (y-o-y) and 29.1% quarter-on-quarter (q-o-q) to RM54.8 million.

We understand that this was due to higher input cost and pricing pressures from the market arising from Lafarge’s stance to regain and reposition itself as the market leader.

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. The company has recently finalised the terms for the supply of coal for next year and has hinted that the prices for next year would be marginally lower compared with FY14. Moreover, it has locked in a larger amount and a higher proportion at the fixed rate compared with FY14.

Price volatility is expected to continue and the industry cement demand will continue to sustain into next year, with a projected mid single-digit demand growth of 3% to 5% in 2015, with a similar pace for 2014. We slashed FY14 by 6.1% to impute the weak nine months of FY14 (9MFY14) results. However, we have revised upwards our FY15 to FY16 earnings by 7.4% and 11.6% due to: i) lower coal price; and ii) higher domestic net selling prices.

We believe the pricing pressure that Lafarge is currently facing is temporary and should normalise by next year. The catalysts would be a timely implementation of the Economic Transformation Programme (ETP) projects; sustainable demand from property development projects; and higher-than-expected gross domestic product.

Risks are delays in the implementation of projects under the ETP, resulting in lower-than-expected demand for cement consumption, the price war intensifies; and steep rise in energy prices, in particular, coal and electricity.

Despite the disappointing 3QFY14, our TP is raised to RM10.72 based on 22.5 times 2016 earnings per share of 47.7 sen. We have raised our price-earnings ratio (PER) on the stock from 19.5 times to 22.5 times, one standard deviation above its one-year forward average PER of the last three years, in line with a positive outlook for the construction due to the increase in development expenditure for 2015 (nominal construction output growth is 81% correlated to development expenditure) and new mega projects being announced during Budget 2015. Coupled with the recent price weakness, we upgrade our rating from “hold” to “buy”. — HLIB Research, Nov 24

This article first appeared in The Edge Financial Daily, on November 25, 2014.