Lafarge Malayan Cement - Dividends surprise on the upside Buy

- Maintain BUY on Lafarge Malayan Cement with a lower fair value of RM10.01/share (previously: RM10.45/share) on an unchanged PE of 20x as we trim FY13F-14F earnings by 4%-5% in view of a potential widening in price discounts in the near term due to new supply coming on stream.

- Lafarge reported a10% QoQ growth in 4QFY12 net profit at RM106mil despite a marginal 3% decline in revenue on pricing headwinds with the entry of Hume’s 1.5 mil tonne capacity. This was however offset by lower operating costs in the absence of any significant plant maintenance.

- Full-year net profit of RM349mil was in-line at a -1% to -3% variance against both consensus and our estimate. Moving ahead, we project Lafarge’s FY13F net profit to expand 20% YoY on a cement demand growth of 5%. Domestic infrastructure spending is likely to accelerate post the 13^th General Election (GE). 

- Hence, we believe incremental cement consumption should sufficiently offset new supply coming from Hume – leading to a moderation in price rebates from 2H13 onwards. 

- We remain comfortable with our FY13F coal cost forecast of US$110/tonne despite a QoQ rebound in international prices for the past three consecutive months. The benchmark Newcastle price stood at US$91/tonne in January 2013 (2012: US$94/tonne or -21% YoY). 

- Lafarge paid a fourth interim tax-exempt DPS of 13 sen, taking FY12 DPS to 37 sen (net yield: 4%) – beating our forecast of 34 sen/share.

- As the group has turned virtually debt free since September 2012, we see more scope for dividend surprises. Our projected DPS of 42 sen to 48 sen for FY13F-15F is based on a payout of 85%-87% vs. 88% for the past five FYs (FY12: 90%). 

- Lafarge’s share price has corrected by some 5% ytd  in tandem with weaker market sentiments as the GE draws nearer. 

- Hence, we view Lafarge’s recent share price weakness as a good opportunity for investors to accumulate a liquid, large cap proxy (the largest in our building material universe at RM7.8bil) at reasonably attractive levels.

- Valuations are undemanding. The stock is currently trading at tad below its trend average at FY13F-15F PEs of 16x-19x, with more room for dividend surprises.     

Source: AmeSecurities