LAFMSIA (3794) - Lafarge Malaysia Bhd - Cracking under pressure
Target RM10.23 (Stock Rating: HOLD)
Lafarge's FY14 core net profit made up 72% of our full-year forecast and 78% of consensus. The results were below expectations as price competition in 4Q14 was more intense than anticipated, coupled with the full brunt of higher power tariffs. The weakness in 4Q was also attributed to the completion of specialised jobs that typically benefitted the ready mix segment. In spite of the underperformance, our FY15-17 EPS forecasts are intact as the margin impact should be mitigated by a recovery of infra jobs and stronger non-residential sales volume that offer higher margins. Our target price remains pegged to Lafarge's 1-year historical P/BV average of 2.58x. We maintain our Hold rating and recommend a switch to contractors.
FY14 below expectations
FY14’s core net profit made up 72% of our full-year forecast and 78% of consensus. The main deviation came from a lower-than-expected EBITDA margin, which fell almost 5% pts yoy to 18%. The good news is that the cement and ready mix segments remained profitable, suggesting very healthy domestic sales volumes, but capped by more intense pricing in 4Q14. The margin decline was also the result of the full-year impact of the increase in electricity tariff. Overall, core net profit dropped 28% yoy. Although the numbers were below expectations, we stick to our assumptions as the sluggish operating margins should be partially mitigated by stronger sales volumes for the higher-margin product mix from non-residential jobs. The recent 5.8% average reduction (rebates) in electricity tariff till Oct 15 serves as a temporary reprieve for cement manufacturers. The 34 sen full-year DPS was in line.
Price competition pre-GST likely
Medium-term earnings risks from sustained price competition and higher costs could cap its share price performance. We expect a slight dip in demand in 2Q15 before normalising in 2H15 for an expected full-year growth of 3-5% for domestic cement demand vs. the 4-5% estimated for 2014.
Pricing volatility a lesser challenge for Lafarge
One positive is the company’s market share dominance, which is likely to stay relatively intact over time, and better to insulate the group from volatility in cement net selling prices. The group increased its list prices by c.9% last year, and could do the same in 2015, though the impact should be rather muted.
Source: CIMB Daybreak - 27 February 2015
Target RM10.23 (Stock Rating: HOLD)
Lafarge's FY14 core net profit made up 72% of our full-year forecast and 78% of consensus. The results were below expectations as price competition in 4Q14 was more intense than anticipated, coupled with the full brunt of higher power tariffs. The weakness in 4Q was also attributed to the completion of specialised jobs that typically benefitted the ready mix segment. In spite of the underperformance, our FY15-17 EPS forecasts are intact as the margin impact should be mitigated by a recovery of infra jobs and stronger non-residential sales volume that offer higher margins. Our target price remains pegged to Lafarge's 1-year historical P/BV average of 2.58x. We maintain our Hold rating and recommend a switch to contractors.
FY14 below expectations
FY14’s core net profit made up 72% of our full-year forecast and 78% of consensus. The main deviation came from a lower-than-expected EBITDA margin, which fell almost 5% pts yoy to 18%. The good news is that the cement and ready mix segments remained profitable, suggesting very healthy domestic sales volumes, but capped by more intense pricing in 4Q14. The margin decline was also the result of the full-year impact of the increase in electricity tariff. Overall, core net profit dropped 28% yoy. Although the numbers were below expectations, we stick to our assumptions as the sluggish operating margins should be partially mitigated by stronger sales volumes for the higher-margin product mix from non-residential jobs. The recent 5.8% average reduction (rebates) in electricity tariff till Oct 15 serves as a temporary reprieve for cement manufacturers. The 34 sen full-year DPS was in line.
Price competition pre-GST likely
Medium-term earnings risks from sustained price competition and higher costs could cap its share price performance. We expect a slight dip in demand in 2Q15 before normalising in 2H15 for an expected full-year growth of 3-5% for domestic cement demand vs. the 4-5% estimated for 2014.
Pricing volatility a lesser challenge for Lafarge
One positive is the company’s market share dominance, which is likely to stay relatively intact over time, and better to insulate the group from volatility in cement net selling prices. The group increased its list prices by c.9% last year, and could do the same in 2015, though the impact should be rather muted.
Source: CIMB Daybreak - 27 February 2015
