Lafarge Malayan Cement - Operating efficiency is key

Target RM8.90 (Stock Rating: HOLD)

Lafarge's post-4Q13 results briefing held no major surprises, but we were comforted by its strategy this year to further optimise plant efficiency to: 1) counter higher costs, and 2) manage the impact of the sustained competitive environment. Capex outlook is in line with its previously-guided expansion plans, which should not impair its ability to maintain the usual dividend payout ratio of 80-90%. Cement demand outlook in 2014 is rather muted, though there is still growth, supported by property. EPS forecasts are intact as we have factored in the estimated impact of higher costs. Our target price remains pegged to Lafarge's 1-year P/BV average of 2.3x. Good dividends should support the share price. Maintain Hold. Switch to contractors.

What Happened 

4Q13 results briefing. The post-4Q13 results briefing today was attended by over 30 analysts and fund managers. President/CEO Bradley Mulroney and CFO Chen Then Aik talked about the group's FY13 results, which continued to exhibit competitive trends, but offset by operating efficiency, which was the main support to margins. Operating efficiency will be the key focus in 2014 in order to counter the still-competitive selling prices. Capex guidance of RM250m-300m in phases over the next 2-3 years is for its expansion plans. The domestic cement industry demand should remain buoyant this year, but growth is likely to be in the lower single-digits vs. 6-8% in 2013. 

What We Think 

Industry dynamics unchanged. There were no major surprises during the briefing. Management's assessment about the outlook in 2014 is broadly in line with ours in that, industry volume should continue to be positive though at a moderated pace, in view of the completion of major jobs in 2013. Cost risks remain, as cement players absorb the full-year impact of the 19% average increase in electricity tariffs, removal of diesel subsidy, and higher freight transportation costs this year. The likelihood of a an increase in selling prices still holds, in our view, but it appears as a last resort in view of the stiff competition. 

What You Should Do 

Operating efficiency and dominant position still an advantage. There appears to be no change to the industry dynamics, but the good news is that Lafarge's dominant industry position, wider range of differentiated (higher margin) products, and the ability to squeeze optimum plant efficiency should enable the group to balance out the negatives.