Maybank IB maintains sell on Lafarge, cuts target to RM6.50

Lafarge is to supply concrete for the proposed Refinery and Petrochemicals Integrated Development (Rapid) project and other Petronas-related projects at Pengerang, Johor under Package 21D.

KUALA LUMPUR: Maybank Investment Bank has maintained a “sell” on Lafarge Malaysia Bhd with a lower target price of RM6.50 as competition stiffens and unattractive valuations.

“We think the present price competition may persist for another six to nine months. While sequential earnings may improve on lower costs, it will still be far from its peaked quarterly earnings. Post our earnings per share cut, Lafarge trades at expensive 27 times 2017 PER and offers dividend yield of only 3.1% for the current year,” it said.

Maybank said competition had stiffened as YTL Cement’s new capacity hit the market in the first quarter 2016. Additionally, construction activity was also slower in the first quarter on the timing mismatch of the infrastructure projects and a softer property  market.

“We think the present competitive environment will persist for another 6-9 months given the industry’s high capacity growth and construction activity may only pick up in second half of 2016,” it said.

However, Maybank said Lafarge’s costs could be sequentially lower as  the Lafarge-Holcim integration cost could be less in second quarter, with most of the integration exercise done, repair and maintenance cost to be seasonally lower and lower coal cost.

“These cost savings should more than offset for the higher depreciation charges ahead with the commencement of Lafarge’s new cement mill (Rawang: 2Q16,  Kanthan: 4Q16; LMC’s cement capacity to increase by 8% to 15mmt per anum.),” it said.

“While we think Lafarge’s earnings could recover gradually from second quarter on the lower costs, it could still fall short of our earlier forecasts. We cut our FY16-18 EPS by 22%/11%/10% on lower average selling prices, integration cost of RM15mil in FY16 and  higher loss at its associate in Singapore, in view of the soft property market in Singapore.

“Our dividend per share is also reduced to 25sen for FY16 (from 31sen; 100% payout), indicating 3.1% yield,” Maybank said.
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