Lafarge Malayan Cement - Dividend expectations BUY

- Maintain BUY on Lafarge, with our fair value placed under review pending an analyst briefing next week. Lafarge reported a 9MFY12 net profit of RM243mil that accounted for 67% of our full-year estimate and 65% of the streets’. But, we consider this to be in-line, given expectations of a stronger 4Q.

- 3QFY12 revenue rose 10% QoQ on stronger export sales and partial impact from the 6% price hike (effective 1  August 2012), but partially offset by fewer working days during the Ramadan festive period.

- However, sequential earnings rose by a more robust 49% QoQ to RM96mil on an easing in key input costs, notably coal. To be sure, the benchmark Newcastle coal prices dipped by 8% QoQ (YoY: 29%) to US$85/tonne. From January-October 2012, prices have declined by 22% on average to US$95/tonne.   

- Stacking it up, cement manufacturing margin improved from 14.2% in 2QFY12 to 19.5% in 3QFY12 (9MFY12: 16.9%).  

- Lafarge’s share price has surged 37% ytd. We attribute this to the price hikes in August – and more recently, renewed expectations of a more generous profit distribution policy. 

- While earlier expectations of a concrete decision did not materialise during yesterday’s board meeting, we do not discount the possibility of Lafarge paying higher dividends sometime in the near future given its strong annual free cash flow pile of RM382mil-RM514mil for FY12F-14F. 

- Moreover, Lafarge turned debt free in 3QFY12 with the repayment of the final tranche of its floating rate notes (RM105mil). Lafarge sits on an FY12F net cash pile  of RM325mil (RM0.38/share).       

- In the meantime, Lafarge declared a third tax-exempt interim dividend/share (DPS) of 8 sen – bringing cumulative 9MFY12 DPS to 24 sen. This is largely in-line with our FY12F forecast of 34 sen (yield: 3.5%). 

- We maintain our FY12F net profit forecast of RM363mil for now (+14% YoY), implying a stronger 4QFY12 net profit of RM120mil (+25% QoQ, YoY: +2%). We expect Lafarge to enjoy the full impact from the price hikes in the upcoming quarter amid a pick-up in demand and subdued coal prices.

- We maintain our cement demand growth forecast at 4% for FY12F (FY13F: 5%) as the domestic construction capex cycle remains bright post elections. On the flipside, we  do not discount the possibility of widening rebates when new capacity from Hume’s new plant (circa 1.8mil tonnes) comes on-stream by end-2012.    

Source: AmeSecurities