LAFMSIA (3794) - Lafarge Malaysia Bhd - Still tougher than concrete
Target RM10.06 (Stock Rating: HOLD)
The main positive from Lafarge's post-4Q14 results briefing was the increased likelihood of securing more exclusive contracts for domestic large-scale projects. This should mitigate the sustained higher costs and competitive environment amidst lower single-digit cement demand growth in 2015. A slight negative was that it remains unclear if cement players will benefit from the 5.8% power tariff rebate until Oct 2015. We cut our FY15-17 EPS forecasts as our assumptions were too aggressive. We expect a more palatable 5-6% EPS growth p.a. backed by better margins from exclusive contracts. Our target price declines but is still based on Lafarge's 1-year P/BV average of 2.58x. Maintain Hold. Switch to contractors for a direct play on job roll-out.
What Happened
Lafarge's post-4Q14 results briefing was hosted by CEO Bradley Mulroney and CFO Michael Lim for about 30 sell-side analysts. Key takeaways: 1) 4Q14's operating parameters were lower sales volume, higher costs and competitive pricing. 2) There is better visibility of more higher-margin exclusive contracts even after securing jobs in Rapid and Langat 2 WTP. 3) Cement demand is likely to be in the lower single-digits in 2015, in view of the post-GST effect and timing of jobs, and 4) The group is adding nine additional ready-mix plants in FY15.
What We Think
We conclude that competitive risks as a result of the industry's oversupply situation would be sustained in 2015. Pricing volatility is unlikely to subside, going by the trend in 4Q14. Balancing these challenges is Lafarge's dominance in the technically specialised segment, which we roughly estimate to be over 70% in market share and it commands better margins. We believe the group is vying for more exclusive agreements in Petronas' Rapid project and see the KL 118 tower as a lucrative opportunity. It has recently secured a RM254m contract from Rapid and a RM60m job from the Langat 2 water treatment plant (WTP). In the next 1-2 quarters, we expect pricing volatility and cost pressures to persist due to the pre-GST/post-GST demand effect and higher electricity cost (c.50% of operating cost). Our revised revenue growth forecasts (low-base effect in FY15, c.4% in FY16-17) are roughly in line with the expected demand growth while our EBITDA margin assumptions are cut from 20-22% to a more reasonable c.16%.
What You Should Do
Switch to contractors which are the earlier beneficiaries of job roll-outs.
Source: CIMB Daybreak - 04 March 2015
Target RM10.06 (Stock Rating: HOLD)
The main positive from Lafarge's post-4Q14 results briefing was the increased likelihood of securing more exclusive contracts for domestic large-scale projects. This should mitigate the sustained higher costs and competitive environment amidst lower single-digit cement demand growth in 2015. A slight negative was that it remains unclear if cement players will benefit from the 5.8% power tariff rebate until Oct 2015. We cut our FY15-17 EPS forecasts as our assumptions were too aggressive. We expect a more palatable 5-6% EPS growth p.a. backed by better margins from exclusive contracts. Our target price declines but is still based on Lafarge's 1-year P/BV average of 2.58x. Maintain Hold. Switch to contractors for a direct play on job roll-out.
What Happened
Lafarge's post-4Q14 results briefing was hosted by CEO Bradley Mulroney and CFO Michael Lim for about 30 sell-side analysts. Key takeaways: 1) 4Q14's operating parameters were lower sales volume, higher costs and competitive pricing. 2) There is better visibility of more higher-margin exclusive contracts even after securing jobs in Rapid and Langat 2 WTP. 3) Cement demand is likely to be in the lower single-digits in 2015, in view of the post-GST effect and timing of jobs, and 4) The group is adding nine additional ready-mix plants in FY15.
What We Think
We conclude that competitive risks as a result of the industry's oversupply situation would be sustained in 2015. Pricing volatility is unlikely to subside, going by the trend in 4Q14. Balancing these challenges is Lafarge's dominance in the technically specialised segment, which we roughly estimate to be over 70% in market share and it commands better margins. We believe the group is vying for more exclusive agreements in Petronas' Rapid project and see the KL 118 tower as a lucrative opportunity. It has recently secured a RM254m contract from Rapid and a RM60m job from the Langat 2 water treatment plant (WTP). In the next 1-2 quarters, we expect pricing volatility and cost pressures to persist due to the pre-GST/post-GST demand effect and higher electricity cost (c.50% of operating cost). Our revised revenue growth forecasts (low-base effect in FY15, c.4% in FY16-17) are roughly in line with the expected demand growth while our EBITDA margin assumptions are cut from 20-22% to a more reasonable c.16%.
What You Should Do
Switch to contractors which are the earlier beneficiaries of job roll-outs.
Source: CIMB Daybreak - 04 March 2015
