CIMB ‘neutral’ on Lafarge despite stronger 3Q results

by **Cals** Wed 20 Nov 2013, 18:43

Business & Markets 2013

Written by Jeffrey Tan of theedgemalaysia.com

Wednesday, 20 November 2013 11:52

KUALA LUMPUR (Nov 20): CIMB Investment Bank Research has maintained its ‘neutral’ call on Lafarge Malaysia Bhd at RM9.85, as competition and cost risks are likely to continue to overwhelm the better prospects over the medium term.

In a note today, the research house said further margin compression is likely since the outlook for next year is expected to be equally as competitive, especially when projects regain momentum.

CIMB IB research analyst Sharizan Rosely said: “We maintain target price of RM10.48 that is still based on 2.93 times price to book ratio, or an unchanged 10% premium over its one-year mean."

“We advocate a switch to contractors that are the prime beneficiaries of job rollouts.”

He said there are upside risks to energy costs (diesel and electricity), led by the government’s subsidy rationalisation move.

“The full impact of higher diesel costs could be seen from 4Q13 onwards,” said Sharizan, while adding, “The likelihood of a hike in electricity tariffs presents further upside risks to production cost.”

“Higher selling prices may not be sufficient to fully absorb the higher costs of production, if competition and rising industry capacity continue to weigh on the selling prices of cement.”

Additionally, he said Lafarge’s stronger 3Q13 demand kicked in to partially offset competitive pricing pressures. He noted annualised 9M13 core net profit made up 94% of his full-year forecast and 99% of consensus.

“We deem the results in line as we expect a slight uptick in margins in 4Q due to seasonal factors,” said Sharizan.