Lafarge Malaysia Bhd
(Feb 24, RM6.80)
Upgrade to hold with a higher target price (TP) of RM6.90: While competition has stabilised for Lafarge Malaysia Bhd, the average selling price (ASP) may only improve meaningfully from the second half of 2017 (2H17) onwards as mega projects accelerate. 

We keep our 2017 earnings per share (EPS) forecasts unchanged but raise our 2018 to 2019 EPS forecasts by 11% to 12% as we raise our ASP assumptions. 

Rolling forward our valuation to 2018, our TP is raised to RM6.90 (from RM4) based on an unchanged 26 times price-earnings ratio (mean). 

We also expect Lafarge to resume its quarterly dividend payout upon the improvement in 2017’s earnings. 

Key takeaways from the recent briefing include firstly, local cement demand is expected to grow 3% in 2017 (2016: -6% year-on-year), underpinned by mega infrastructure projects. On top of the key projects Lafarge secured earlier (such as for the Refinery and Petrochemical Integrated Development, and the Jimah, Port Dickson power plant), it has also recently secured packages for major highways (such as the Sungai Besi-Ulu Kelang Elevated Expressway [SUKE] and Damansara-Shah Alam Elevated Highway [DASH]) and affordable housing projects.

Secondly, the ASP has already stabilised but it is not showing any uptick just yet, and thirdly, overall cost could be slightly higher in 2017 due to higher coal cost, which could be mitigated by internal cost savings. 

We expect cement’s ASP to improve in 2017 given the positive demand outlook. 

Additionally, cement players’ earnings are also at rock bottom and they may want to recoup their investment faster (expanded capacity in 2015 to 2016). 

However, 2H17 should see stronger ASP growth as we expect the mega jobs (mass rapid transit Line 2, SUKE and DASH) to accelerate. 

We maintain our 2017 forecasts but raise our 2018 to 2019 EPS forecasts by 11% to 12% as we raise our ASP assumptions by 2% per annum.

Our model assumes: i) ASP growth of 8%/8%/5% in 2017 to 2019; ii) production growth of 5%/7%/5% in 2017 to 2019; and iii) coal cost of US$65 (RM288.60) per tonne in 2017 to 2019 (2016: US$50 per tonne). 

We now project Lafarge’s earnings before interest, taxes, depreciation and amortisation margin to improve to 15% in 2017 (2016: 12%) and sequentially to 17% to 18% in 2018 to 2019, back to the levels before the heated competition in 2014 to 2015. — Maybank IB Research, Feb 24