LAFMSIA (3794) : Lafarge Malaysia Bhd - Preventing cracks from volatility
Target RM10.23 (Stock Rating: HOLD)
Protecting its market share and maximising efficiency are the two key takeaways from Lafarge's results briefing. This was expected, considering the trend in the 9M14 results. Net selling prices continue to be volatile as stiff competition largely offset the recent 9% hike in list prices. We now expect 4Q to be weaker due to the fuel subsidy cuts and pre-GST demand that could trigger more price pressures. One positive is its market share dominance which is likely to be relatively intact over time given the group's niche in specialised projects and expansion plans. We cut our FY14-16 EPS forecasts and target price, still based on Lafarge's 2.58x 1-year historical P/BV average. We maintain our Hold rating and recommend a switch to contractors.
What Happened
Lafarge hosted a post-3Q results briefing for over 30 analysts. Management was represented by President/CEO Bradley Mulroney. Key points 1) The group expects 2015 cement demand growth of 3-5%, driven by more residential projects. 2) 3Q14 was a disappointing quarter for sales volume and margins that could impact full-year net profit. 3) Construction Development Lab (CDL), plant expansion and its niche in specialised projects are factors that will mitigate the unfavourable market forces. 4) The impact of its parent company’s merger with Holcim could be clearer in 1H15. There are arguably synergies in terms of strategically located assets.
What We Think
While we are positive about the group's strategy to move up the value chain and focus more on value-added construction design/optimisation through CDL, the outlook for the next few quarters is challenging, as evident from the 9M14 results. The second round of petrol subsidy cuts and higher electricity tariffs are putting sustained pressure on net selling prices, which are unlikely to stabilise. Given the rising pre-GST (Apr 15) demand for building materials, the market is likely to remain very competitive. That said, what is more important for Lafarge is preservation of its market dominance, especially in specialised projects. The group is focused on its secured exclusive supply contracts to major property developers like IGB and Mah Sing in Johor.
What You Should Do
Stay on the sidelines. Though we left the briefing feeling positive about the group's longer-term strategy, medium-term earnings risks from sustained price competition and higher cost could cap its share price performance.
Source: CIMB Daybreak - 24 November 2014
Target RM10.23 (Stock Rating: HOLD)
Protecting its market share and maximising efficiency are the two key takeaways from Lafarge's results briefing. This was expected, considering the trend in the 9M14 results. Net selling prices continue to be volatile as stiff competition largely offset the recent 9% hike in list prices. We now expect 4Q to be weaker due to the fuel subsidy cuts and pre-GST demand that could trigger more price pressures. One positive is its market share dominance which is likely to be relatively intact over time given the group's niche in specialised projects and expansion plans. We cut our FY14-16 EPS forecasts and target price, still based on Lafarge's 2.58x 1-year historical P/BV average. We maintain our Hold rating and recommend a switch to contractors.
What Happened
Lafarge hosted a post-3Q results briefing for over 30 analysts. Management was represented by President/CEO Bradley Mulroney. Key points 1) The group expects 2015 cement demand growth of 3-5%, driven by more residential projects. 2) 3Q14 was a disappointing quarter for sales volume and margins that could impact full-year net profit. 3) Construction Development Lab (CDL), plant expansion and its niche in specialised projects are factors that will mitigate the unfavourable market forces. 4) The impact of its parent company’s merger with Holcim could be clearer in 1H15. There are arguably synergies in terms of strategically located assets.
What We Think
While we are positive about the group's strategy to move up the value chain and focus more on value-added construction design/optimisation through CDL, the outlook for the next few quarters is challenging, as evident from the 9M14 results. The second round of petrol subsidy cuts and higher electricity tariffs are putting sustained pressure on net selling prices, which are unlikely to stabilise. Given the rising pre-GST (Apr 15) demand for building materials, the market is likely to remain very competitive. That said, what is more important for Lafarge is preservation of its market dominance, especially in specialised projects. The group is focused on its secured exclusive supply contracts to major property developers like IGB and Mah Sing in Johor.
What You Should Do
Stay on the sidelines. Though we left the briefing feeling positive about the group's longer-term strategy, medium-term earnings risks from sustained price competition and higher cost could cap its share price performance.
Source: CIMB Daybreak - 24 November 2014
