This article first appeared in The Edge Financial Daily, on March 10, 2016.

Lafarge Malaysia Bhd
(March 9, RM9.09)
Maintain hold with a target price (TP) of RM8.60: After the successful merger with Holcim Malaysia Sdn Bhd in 2015, Lafarge Malaysia Bhd will now focus on a seamless integration with Holcim, as well as its ongoing plant expansion, which is on track to be complete by this year. With a slew of new capacity in the market, we hold the view that selling price will likely remain under pressure. This, however, will partially be mitigated by low coal prices.

While domestic demand improved year-on-year in 2015, export demand softened given the challenging regional economic outlook. Despite the cheaper cost of coal, the group’s margin is relatively flat, as we expect pricing pressure on the back of oversupply.

After the successful merger with Holcim in 2015, Lafarge will now focus on the integration of the merger as well as its current expansion plan, which is on track for completion this year. A slew of supply may potentially create a short-term oversupply and subsequently exert pressure on selling prices, as manufacturers will likely raise price rebates to garner, if not to maintain, market share. In addition, we do not expect export demand to pick up significantly.

Our forecasts have been slightly adjusted after taking into account the financial year 2015 financial statements. Maintain “hold” with an unchanged TP of RM8.60, based on 23 times calendar year 2016 price-earnings ratio.

The stock is supported by a decent yield of 3.9% (based on a 90% payout ratio).

Risks to our recommendation include further decline/reversal in coal prices; worse-than-anticipated price competition; stronger-than-expected demand, which may in turn sustain selling prices; and lower-than-expected dividend payout ratio. — Affin Hwang Capital, March 9