Selling prices remain under pressure Key takeaways from our meeting with Lafarge are: 1) new capacity coming on stream in 2015 and 2016; 2) 2015 coal cost negotiated at marginally lower prices; and 3) demand growth in 4Q14 due to seasonality coupled with infrastructure projects in 2015. Maintain REDUCE on increased pressure on average net selling prices from new capacity coming on stream in next two years. We lower our target price to RM8.20 (based on 3-year average PER of 19x). Weak selling prices likely to continue Recall that Lafarge cut selling prices in the last two quarters to regain its market share. With new supply coming on stream, from CIMA (+8% capacity) in 1H14, and future capacity from Lafarge and YTL Cement, we expect ASPs to continue to remain under pressure and subdued. As such, we cut our ASP assumptions to RM285/MT for 2014-16E. Coal prices have been renegotiated Average coal prices have fallen by 6.5% qoq and 11.8% yoy to US$68MT in 3Q14. Lafarge locks in the bulk of its 12-month forward coal requirements around the October-November period. We understand that Lafarge has renegotiated the coal contract at a lower price and at larger quantities. Hence, any positive impact from the lower coal price should be more apparent in 2015. Demand may improve going forward We expect earnings to rebound in 4Q14, as 4Q has seasonally been a stronger quarter historically. Demand growth will likely improve in 2015, from infrastructure projects booked in the pipeline coupled with aggressive contractors locking in cement prices before the implementation of GST in 1Q15 but the oversupply situation remains a concern. Maintain REDUCE with lower target price of RM8.20 We cut 2014-16E earnings forecasts by 21-24% from rising pressures of soft domestic selling prices. We lower our target price to RM8.20 (from RM9.50) still based on the past-3-year average PER of 19x. Lafarge is currently trading at 23x 2015E PE. We maintain our REDUCE rating on expectations that new capacity (from Lafarge and YTL Cement) will come on stream over the next two years and further pressure average net selling prices for cement. Earnings & Valuation Summary FYE 31 Dec 2012 2013 2014E 2015E 2016E Revenue (RMm) 2,740.1 2,853.4 2,873.2 2,998.1 3,065.2 EBITDA (RMm) 611.7 655.1 510.6 623.8 601.8 Pretax profit (RMm) 469.8 514.9 379.2 487.2 470.3 Net profit (RMm) 349.0 385.7 284.1 365.0 352.3 EPS (sen) 41.1 45.4 33.4 43.0 41.5 PER (x) 24.3 22.0 29.9 23.3 24.1 Core net profit (RMm) 349.0 385.7 284.1 365.0 352.3 Core EPS (sen) 41.1 45.4 33.4 43.0 41.5 Core EPS growth (%) 9.8 10.5-26.4 28.5-3.5 Core PER (x) 24.3 22.0 29.9 23.3 24.1 Net DPS (sen) 37.0 41.0 38.0 42.0 42.0 Dividend Yield (%) 3.7 4.1 3.8 4.2 4.2 EV/EBITDA (x) 13.5 12.7 16.3 13.4 13.8 Chg in EPS (%) (24) (16) (21) Affin/Consensus (x) 0.8 0.9 0.9 Source: Company, Affin Hwang estimates, Bloomberg Company Update Lafarge Malaysia LMC MK Sector: Building Materials RM9.80@ 26 Nov 2014 REDUCE (maintain) Downside 16% Price Target: RM8.20 Previous Target: RM9.50 (RM) 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Nov-12 May-13 Nov-13 May-14 Nov-14 Price Performance 1M 3M 12M Absolute -2.4% -5.6% -0.5% Rel to KLCI -3.6% -4.6% -2.9% Stock Data Issued shares (m) 849.7 Mkt cap (RMm)/(US$m) 8,615.9/2,565.4 Avg daily vol - 6mth (m) 0.6 52-wk range (RM) 7.82-10.68 Est free float 23% BV per share (RM) 3.71 P/BV (x) 2.74 Net cash/ (debt) (RMm) (3Q14) 233.418 ROE (2015F) 12.6% Derivatives Shariah Compliant Key Shareholders Nil Yes Lafarge Cement UK 51.0% EPF 9.6% Lafarge Intl Hldgs Source: Affin, Bloomberg 8.4% Kevin Low (603) 2143 2235 kevin.low@affinhwang.com Page 1 of 7
New capacity to come on stream in 2015 Lafarge s 1.2MT capacity expansion in Rawang plant began construction in June 14 and is on track for completion. The group has allocated RM250-300m for the expansion. This new capacity is expected to come in end of next year and the spare capacity from Lafarge s Kanthan, Ipoh plant will come in in 2Q16. Weak selling prices likely to continue Despite higher inputs costs this year, there have not been any hikes in selling prices since, Aug12 (Table 1). Lafarge has continued to lower selling prices despite higher input costs in the last two quarters, in an attempt to partially regain its position in market share. With new supply coming on stream, from CIMA (+8% capacity) in 1H14, and future capacity from Lafarge and YTL Cement in the next two years, we expect ASPs to continue to remain under pressure and subdued. As such, we cut our ASP assumptions to RM285/MT for 2014-16E, vs. an estimated net selling price of RM290-RM300 currently. Table 1: Increase in catalogue average prices for cement Year Gross selling price Average coal price Comment RM/tonne US$/tonne 2006 198 49 The ceiling price for Ordinary Portland Cement 2007 218 67 ASP - first 10% hike in 10 years in Dec-07 2008 247 129 Ceiling price abolished in June - ASP raised by another 14% 2009 275 72 Another 11% hike 2010 305 99 11% hike effective May 2010 2011 325 129 6% hike effective April 2011 2012 345 130 Price was raised by RM20 per tonne (+7%) in August 2012 2013 345 84 No hike was imposed Source: Affin Hwang, Lafarge Input costs on an uptrend Input costs rose in 9M14, due to higher electricity tariff and the reduction in fuel subsidies. As a result, energy and fuel costs now consist of c.50% of total costs of production. Management guided that they will mitigate upcoming input costs by improving efficiency and are looking into alternative fuel systems. There will be potential savings in fuel cost in 2015, on the back of cheaper locked-in (forward) coal prices. Page 2 of 7
Lower coal prices locked in for 2015 Average coal prices have fallen by 6.5% qoq and 11.8% yoy to US$68MT in 3Q14 (Fig 1), vs. YTD average price of US$71MT (-18% yoy). Lafarge locks in the bulk of its 12-month coal requirement in the October- November period. We understand that the company renegotiated the coal contract at a lower price and at larger quantities. Hence, the positive impact from the lower coal price should be more apparent in 2015. We have factored in a rise in 2016. Figure 2: Coal price trend (US$/MT) Source: Bloomberg GST may spur demand in the short term We expect to see demand for cement to improve in 2015, from infrastructure projects. Growth is also expected to come in 1Q15, from contractors taking the opportunity to lock in the prices of cement before the implementation of GST in Apr15. Management has guided a steady growth rate around 3-5% of sales volume growth and we believe earnings will rebound in 4Q14, as it is usually a seasonally stronger quarter. Quick recap on 9M14 results Lafarge s 9M14 core net profit fell 19.5% yoy to RM206m. The deviation in estimates was mainly due to lower than expected EBITDA margins from lower selling prices as a result of increased competition. This was coupled with higher operating costs from electricity tariff and the reduction of fuel subsidy. We believe that higher rebates for cement were given to customers to maintain Lafarge s market share. The group declared a dividend of 8sen (3QFY13:8sen). Dividend payout of 90-95% maintained Management has maintained a dividend payout ratio of 90-95%. We expect a net DPS of 32sen for 2014, which translates to a dividend yield of 3.2% for 2014. Risk to recommendation Risk to our recommendation includes a potential hike in domestic net selling prices and further declines in coal prices. Page 3 of 7
Lafarge Malaysia FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) 2012 2013 2014E 2015E 2016E FYE 31 Dec (RMm) 2012 2013 2014E 2015E 2016E Revenue 2740.1 2853.4 2873.2 2998.1 3065.2 Grow th Operating expenses (2128.4) (2198.3) (2362.5) (2374.2) (2463.4) Revenue (%) 7.3 4.1 0.7 4.3 2.2 EBITDA 611.7 655.1 510.6 623.8 601.8 EBITDA (%) 7.6 7.1 (22.1) 22.2 (3.5) Depreciation (145.0) (149.1) (151.3) (160.3) (154.8) Core net profit (%) 9.8 10.5 (26.4) 28.5 (3.5) EBIT 466.7 506.0 359.3 463.5 447.0 Net int income/(expense) (6.1) (2.1) (2.7) (2.7) (2.7) Profitability Associates' contribution 2.8 3.0 1.5 0.8 0.4 EBITDA margin (%) 22.3 23.0 17.8 20.8 19.6 Pretax profit 469.8 514.9 379.2 487.2 470.3 PBT margin (%) 17.1 18.0 13.2 16.3 15.3 Tax (120.3) (128.7) (94.8) (121.8) (117.6) Net profit margin (%) 12.7 13.5 9.9 12.2 11.5 Minority interest (0.5) (0.5) (0.4) (0.5) (0.4) Effective tax rate (%) 25.6 25.0 25.0 25.0 25.0 Net profit 349.0 385.7 284.1 365.0 352.3 ROA (%) 8.7 9.5 7.1 8.8 8.3 Core ROE (%) 11.1 12.0 8.8 11.1 10.5 Balance Sheet Statement ROCE (%) 14.6 15.8 11.1 14.0 13.1 FYE 31 Dec (RMm) 2012 2013 2014E 2015E 2016E Dividend payout ratio (%) 90.1 90.3 113.7 97.8 101.3 Fixed assets 1,589.4 1,508.4 1,507.1 1,596.8 1,542.0 Other long term assets 1,349.2 1,343.8 1,343.8 1,343.8 1,343.8 Liquidity Total non-cur assets 2,938.6 2,852.2 2,850.9 2,940.5 2,885.7 Current ratio (x) 2.0 2.2 2.3 2.3 2.6 Cash and equivalents 354.0 450.9 459.7 449.5 583.0 Op. cash flow (RMm) 455.2 454.1 432.8 484.5 478.1 Stocks 282.2 255.3 276.0 275.9 282.8 Free cashflow (RMm) 405.1 400.0 282.8 234.5 378.1 Debtors 344.3 419.3 361.0 376.7 385.1 FCF/share (sen) 47.7 47.1 33.3 27.6 44.5 Other current assets 78.4 89.1 80.3 82.8 84.2 Total current assets 1,058.9 1,214.6 1,177.0 1,185.0 1,335.1 Asset management Creditors 319.1 339.7 312.2 312.1 319.8 Debtors turnover (days) 46 46 46 46 46 Short term borrow ings 1.2 0.5 0.5 0.5 0.5 Stock turnover (days) 48 48 48 48 48 Other current liabilities 206.5 203.7 200.3 200.3 202.7 Creditors turnover (days) 55 55 55 55 55 Total current liab 526.9 543.9 512.9 512.8 523.0 Long term borrow ings 0.5 0.0 0.0 50.0 50.0 Capital structure Other long term liabilities 302.0 287.7 288.1 288.5 289.0 Net gearing (%) (11.1) (9.3) (9.5) (6.5) (8.8) Total long term liabilities 302.5 287.7 288.1 338.6 339.0 Interest cover (x) 100.7 312.1 189 235 227 Shareholders' Funds 3,168.1 3,235.1 3,226.9 3,324.2 3,408.8 Quarterly Profit & Loss Cash Flow Statement FYE 31 Dec (RMm ) 3Q13 4Q13 1Q14 2Q14 3Q14 FYE 31 Dec (RMm) 2012 2013 2014E 2015E 2016E Revenue 728.0 750.6 676.6 717.2 664.6 EBIT 466.7 506.0 359.3 463.5 447.0 Operating expenses (532.4) (541.9) (542.0) (575.9) (554.9) Depn & amortisation 145.0 149.1 151.3 160.3 154.8 EBITDA 195.6 208.6 134.6 141.3 109.7 Working capital changes (11.5) (42.5) 15.5 (18.3) (6.4) Depreciation (37.1) (41.4) (39.7) (40.1) (39.4) Cash tax paid (150.1) (128.7) (94.8) (121.8) (117.6) EBIT 158.5 167.3 94.9 101.3 70.3 Others 5.1 (29.8) 1.5 0.8 0.4 Net int income/(expense) 0.9 1.0 (0.4) 0.5 1.2 Cashflow frm operation 455.2 454.1 432.8 484.5 478.1 Associates' contribution 0.9 1.0 (0.4) 0.5 1.2 Capex (50.1) (54.2) (150.0) (250.0) (100.0) Exceptional Items 0.0 0.0 0.0 0.0 0.0 Disposal/(purchases) - - - - - Pretax profit 161.1 170.1 97.2 103.7 73.9 Others (1.6) 12.2 - - - Tax (41.1) (40.2) (23.4) (26.3) (18.8) Cashflow frm investing (51.7) (42.0) (150.0) (250.0) (100.0) Minority interest (0.1) (0.1) (0.1) (0.1) (0.3) Debt raised/(repaid) (106.2) (1.2) - - - Net profit 119.9 129.7 73.7 77.3 54.8 Equity raised/(repaid) - - - - - Core net profit 119.9 129.7 73.7 77.3 54.8 Net int inc/(exp) (7.3) 5.9 18.4 22.9 22.9 Dividends paid (288.9) (420.6) (293.1) (267.7) (267.7) Margins (%) Others - 98.2 - - - EBIT 21.8 22.3 14.0 14.1 10.6 Cashflow frm financing (402.4) (317.7) (274.7) (244.7) (244.7) PBT 22.1 22.7 14.4 14.5 11.1 Free Cash Flow 405.1 400.0 282.8 234.5 378.1 Net profit 16.5 17.3 10.9 10.8 8.2 Page 4 of 7
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For information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/disclosures.action. Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/disclosures.action. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/disclosures.action. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or Page 6 of 7
advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +15% over a 12-month period TRADING BUY (TR BUY): Total return is expected to exceed +15% over a 3-month period due to short-term positive developments, but fundamentals are not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on greater risk ADD: Total return is expected to be between 0% and +15% over a 12-month period REDUCE: Total return is expected to be between 0% and -15% over a 12-month period TRADING SELL (TR SELL): Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but the fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on greater risk SELL: Total return is expected to be below -15% over a 12-month period NOT RATED: Affin Hwang Investment Bank does not provide research coverage or a rating for this company. The report is provided for information purposes only Sectors: OVERWEIGHT: Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst s coverage universe, is expected to perform in line with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst s coverage universe is expected to underperform the KLCI benchmark over the next 12 months Conflict of Interest Disclosure For information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/disclosures.action. Investment Banking Relationships For Investment Banking Relationship, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/disclosures.action. Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association Page 7 of 7