AmWatch - Lafarge Malaysia : Jottings from the field HOLD, 17 Jun 2015

STOCK FOCUS OF THE DAY

Lafarge Malaysia : Jottings from the field              HOLD

We maintain HOLD on Lafarge Malaysia with an unchanged fair value of RM8.90/share (target PE: 22x). We leave our earnings unchanged following a company visit, as the positive impact from a decline in coal and electricity costs is negated by negative movements in the RM/USD exchange and a muted export market. Lafarge’s management remains optimistic on the domestic cement outlook ahead of the 11th Malaysia Plan 2016-2020. Despite 1Q being traditionally weaker, the 1Q15 reporting period was particularly strong on what appears to be a pre-GST rush to place orders by its clients. Encouragingly, local cement demand continued to hold up pretty well over the last two months. 

Average power cost had come off following the government’s move to reduce electricity tariffs by ~5.8% in Peninsular Malaysia (-2.52sen//kWh).This resulted in Lafarge enjoying a one-month impact in lower electricity rates in March; this trend is expected to continue in 2Q15. However, where electricity rates would end up in 2H15 remains uncertain as there could be a fresh review by the government within the next two months. On balance, we have pencilled in a ~4% reduction in electricity cost for FY15F. Combined, energy cost accounts for close to half of Lafarge’s operating cost.  

We have also lowered our average coal assumptions as international coal prices have dipped below US$60/tonne vs. ~US$72/tonne in 2014. These gains are however, offset by the RM’s continued weakness against the greenback. Accordingly, we have raised our RM/USD assumptions for FY15F-17F to 3.65, 3.65 and 3.60 respectively (vs. 3.50, 3.50 and 3.40 previously). Lafarge’s share price has pulled back by some 8% since our downgrade back in January. We will only turn more constructive on the stock when there are signs of a more sustained uptrend in cement prices. Until then, volatile cement prices and incoming new capacity over the next two years remain our key concerns.

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