Lafarge Malayan Cement - On a solid growth path, plus dividend upside

-  Maintain BUY on Lafarge Malayan Cement Bhd (Lafarge), with a higher fair value of RM10.45/share following our earnings upgrade. 

-  Our fair value is based on a higher target PE multiple of 19x (previously: 17x) on FY13F EPS. This pegs the stock at the mid-point of its historical five-year PE band.

-  Our continued optimism reflects Lafarge’ solid growth platform and prospects of higher dividend payments in the coming quarters.

-  We continue to recommend Lafarge as one of our top picks for leverage to Malaysian building material plays – underpinned by its status as the largest cement producer in Malaysia (capacity: ~12.8 mil tonnes). 

-  We have raised Lafarge’s FY13F-14F net profit forecasts by 4%-6%, mainly on lower coal cost assumptions. Benchmark Newcastle coal prices fell 21% in 2011 and are currently hovering around US$91/tonne.

-  We project Lafarge’s FY13F-14F net profits to rise further to RM433mil and RM475mil, respectively, representing a robust earnings growth of 10%-20% from an estimated RM360mil in FY12F. By extension, we expect EBIT margins for its cement manufacturing operations to trend higher at 25%-26% vs. an estimated 23% last year. 

-  Lafarge’s solid earnings trajectory is backed by our higher cement demand growth assumption of 5% over the next two years – with a greater emphasis on domestic sales. 

-  Poignantly, local cement demand should gain further traction as progress of select jobs (eg. Sg.Buloh-Kajang MRT) goes into full swing – with more jobs likely to be awarded post GE13. This should also likely help absorb new capacity coming from Hume’s new cement plant (~1.5 mil tonnes).

-  Lafarge turned debt-free in September 2012 after repaying the final RM109mil tranche of its debts. With no concrete expansion plans being firmed up in the near term and ample operating cash flows of RM0.52/share-RM0.70/share, we therefore foresee rising prospects of Lafarge returning more cash to its shareholders. 

-  Our current payout ratio of 80% is close to its five-year historical average. Just based on a 100% payout, we estimate Lafarge’s FY13F-14F DPS to rise from RM0.41/RM0.45 to RM0.51/RM0.56 (net yield: from 4.3%-4.7% to 5.3%-5.8%.  

Source: AmeSecurities