Lafarge Malaysia Bhd
(July 14, RM8.99)
Maintain hold with an unchanged fair value of RM8.90: We maintain our “hold” rating on Lafarge Malaysia with an unchanged fair value of RM8.90 per share on a target price-earnings ratio of 22  times. Lafarge disclosed that Lafarge SA, its ultimate holding company, has become a subsidiary of LafargeHolcim Ltd with effect from July 10 this year.

This follows the completion of a merger between Lafarge SA and Holcim Ltd. Following this, LafargeHolcim shall have a deemed interest in Lafarge via its indirect interest in Lafarge SA and an indirect interest in Societe Financiere Immobiliere et Mobiliere, Financiere Lafarge SA, Lafarge Building Materials Ltd, Lafarge Finance Ltd, Lafarge International Holdings Ltd, Blue Circle International Holdings BV and Associated International Cement Ltd. 

Nevertheless, the enlarged LafargeHolcim group will retain a controlling 51% stake in Lafarge. 

Following this, attention will likely gravitate towards its Malaysian operations that are represented by Lafarge Malaysia and Holcim Malaysia Sdn Bhd. To be specific, we believe there are synergies to be reaped as both have plants in Johor. 

Holcim operates a cement plant in Pasir Gudang, Johor through Holcim Malaysia Sdn Bhd. The latter has an annual production of 1.2 million tonnes along with 10 ready-mix concrete plants in the state. 

On the other hand, Lafarge also owns a plant in Pasir Gudang with a capacity of 770,000 tonnes. We estimate any combined integration with Holcim’s Malaysian operations to result in a circa 9% increase in Lafarge’s cement capacity (14 million tonnes per annum) This, by extension, will solidify Lafarge’s pole position in terms of cement market share in Malaysia. We retain our earnings forecast pending more clarity on how the LafargeHolcim group restructures its operations in Malaysia, and its associated implications on Lafarge. 

In the near term, the stock’s upside is likely to be capped by gyrations in domestic cement prices and pressure from new incoming capacity. Forward valuations of 22 times to 23 times are still at the upper end of its historical trading band despite the stock being on a downtrend since early this year. 

Our “hold” call is largely premised on Lafarge Malaysia’s decent yields of 4% to 5% despite its own capacity expansion programmes in Rawang and Kanthan (total: 1.2 million tonnes), which are expected to come online in batches next year. — AmResearch, July 14

This article first appeared in The Edge Financial Daily, on July 15, 2015.