Lafarge : Maintain HOLD at RM7.97 with revised FV RM7.50

Lafarge boosted by price hikes

Lafarge Malayan Cement Bhd
(Nov 30, RM7.52)
Maintain hold at RM7.97 with revised fair value RM7.50 (from RM6.85): We are maintaining our “hold” rating on Lafarge Malayan Cement Bhd with fair value raised from RM6.85 to RM7.50. This pegs the stock at a higher target PER of 14 times, along with an expected improvement in domestic cement demand in FY11F.

Lafarge posted a 9MFY10 net profit of RM215 million on the back of RM1.7 billion in sales. Its results were below expectations, coming in at only 67% of our full-year estimate and 61% of consensus.

While we had expected a stronger 3QFY10 (+20% quarter-on-quarter) on account of a full-quarter impact from the 9% domestic price hikes in May, the quantum of growth was still below our expectations.

Lafarge’s 9MFY10 revenue slipped 8% year-on-year (y-o-y) to RM1.7 billion. This was largely due to muted domestic demand, exacerbated by weak US dollar-denominated export sales.

Its bottom line fell by a steeper 27% y-o-y due to a lumpy one-off plant/repair cost incurred in 1QFY10 and escalating input cost (coal). Its Singapore-based ready-mixed associates incurred losses of RM5.3 million in the period (3QFY10: RM1.8 million). Not surprisingly, group earnings before interest and taxes (Ebit) margin shrank to 19% from 21.3% a year earlier.

We have tweaked downwards our FY10 net profit forecast by 0.8%, as we lower our domestic demand growth assumption from 3% to 2%.

On the flip side, we expect domestic cement demand to pick up in FY11 as the rollout of domestic infrastructure projects starts to gain traction. Amid narrowing rebates, we have raised our FY11F/12F net profit by 2% and 3.3% respectively.

We are inclined to maintain our “hold” rating on Lafarge. We believe the stock has already priced in most (year-to-date: +26%) of the positive news flow at current forward FY10F/11F PERs of 15  to 21 times.

For exposure to the building materials play, we prefer the steel and aluminium companies for their more compelling earnings growth trajectory and cheaper valuations. Our top picks within this space are Ann Joo Resources Bhd, Lion Industries Bhd and Press Metal Bhd.

Lafarge remains attractive from a dividend standpoint. The group paid a third single-tier interim dividend per share (DPS) of eight sen during the quarter — or 24 sen per share for 9MFY10 (9MFY09: 15 sen). Our current DPS forecast implies yields of 4% to 5% over the next three years. — AmResearch, Nov 30