PP 7767/09/2010(025354)

14 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
14 June 2010
MARKET DATELINE

Lafarge M Cement Share Price

Fair Value
:
:
RM6.58
RM6.83
Better Times Ahead Recom : Market perform
(Maintained)

Table 1 : Investment Statistics (LMCEMENT; Code: 3794) Bloomberg: LMC MK

Net Core Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009a 2,483.1 412.2 48.5 48.5 12.0 14.5 - 1.8 Net Cash 12.9 5.8
2010f 2,955.2 361.1 42.5 42.5 -12.4 15.5 47.3 1.7 Net Cash 10.3 9.1
2011f 3,040.7 418.2 48.8 48.8 15.8 13.4 50.4 1.7 Net Cash 11.4 6.1
2012f 3,042.2 430.0 50.6 50.6 2.8 13.0 - 1.8 Net Cash 11.7 4.6
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Better demand ahead. While demand growth in 1HFY12/10 is likely to be Issued Capital (m shares) 849.7
flattish on yoy basis, we sense that Lafarge is positive on domestic cement Market Cap(RMm) 5591.0
consumption from 2HFY12/10, on the back of the rollout/ resumption of Daily Trading Vol (m shs) 0.905
several large-scale projects. While a pick-up in property development 52wk Price Range (RM) 5.70 7.01
launches since last year will only boost cement consumption in the central Major Shareholders: (%)
Lafarge SA 62.2
region (as most property launches were concentrated in the Klang Valley
EPF 6.8
and Penang), we believe Lafarge will likely be the major beneficiary, given
its strong position in the central region.
FYE Dec FY10 FY11 FY12
Rise in demand and selling prices to be partly offset by higher EPS chg (%) 18.7 - -
energy costs. Nevertheless, we do expect the rise in net selling prices Var to C.EPS (%) -10.1 -3.2 -
and cement consumption to be partly offset by higher energy costs, in
particularly, thermal coal. We also note that the Government has recently PE Band Chart

proposed to raise electricity tariffs gradually in order to reduce budget PER = 20x
PER = 16x
deficit, and this would result in higher production cost (and hence lowering PER = 12x
PER = 8x
its margins) should the proposal materialise.

No commitment on dividend policy, but higher dividend a

possibility. We note that Lafarge declared a gross dividend per share
(GDPS) of 8 sen in 1QFY12/10 for the first time in history and Lafarge did
not rule out the possibility of declaring dividends on a quarterly basis.
However, it did not provide a firm commitment as to the quantum of GDPS
for the full year. In our view, Lafarge has the ability to declare higher Relative Performance To FBM KLCI
dividend from FY12/10, given: 1) its healthy net cash position of
RM160.2m as at 31 Mar 10; 2) Relatively high free cash flow going Lafarge (M) Cement

forward; and 3) better demand visibility ahead. Based on our estimates,

Lafarge can raise gross dividend per share (GDPS) from 38 sen in FY12/09
to 60 sen in FY12/10 (translating to a yield of 9.1%). FBM KLCI

Risks. The risks include: (1) Further delays in the implementation of public
infrastructure projects, resulting in lower growth in demand for cement;
and (2) Influx of cheap imports.

Earnings forecast. We are increasing our FY12/10 earnings forecast by

18.7% to incorporate 1) higher net selling prices in view of the recovering
demand in the 2H FY10; and 2) lower finance costs due to its strong cash
position. Chye Wen Fei
(603) 92802172
Investment case. Indicative fair value is RM6.83 based on 14x FY12/11 chye.wen.fei@rhb.com.my
EPS of 48.8 sen. Maintain Market perform.

Please read important disclosures at the end of this report. Page 1 of 4

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 14 June 2010

Company Visit Key Takeaways

Better demand ahead. While demand growth in 1HFY12/10 is likely to be flattish on yoy basis, we sense that
Lafarge is positive on domestic cement consumption from 2HFY12/10, on the back of the rollout/ resumption of
several large-scale projects. While a pick-up in property development launches since last year will only boost
cement consumption in the central region (as most property launches were concentrated in the Klang Valley and
Penang), we believe Lafarge will likely be the major beneficiary, given its strong position in the central region.
Over the longer term, we believe cement consumption is likely to sustain on the back of the recently announced
10MP, which include:

1. A total sum of RM138bn allocated for gross development expenditure on infrastructure projects; and

2. 52 high impact projects worth RM62.7bn that have been identified. And these projects will be implemented
via privatisation or the public-private partnership (PPP). These include: 1) seven toll highways worth
RM19bn; 2) Two coal-fired power plants worth RM7bn; 3) Development of the Malaysia Rubber Boards 3,300
acres of land in Sungai Buloh with a GDV of RM10bn; 4) Five Universiti Teknologi MARA (UiTM) branch
campuses; 5) Revelopment of Angkasapuri into a Media City; 6) Integrated transport terminal in Gombak;
and 7) Privatisation of Penang port.

Given the bright demand prospects, we believe rebates for bulk cement will likely to continue to trend down,
hence resulting in higher selling prices.

Rise in demand and selling prices to be partly offset by higher energy costs. Nevertheless, we do expect
the rise in net selling prices and cement consumption to be partly offset by higher energy costs, in particular,
thermal coal (which price has risen to US$98.16/metric tonne from US$68.60/metric tonne a year ago). Thermal
coal prices aside, we also note that the Government has recently proposed to raise electricity tariffs gradually in
order to reduce budget deficit, and this would result in higher production cost (and hence lowering its margins)
should the proposal materialise. We note that Lafarge is equipped to take on the higher costs through certain
measures, such as: 1) active cost-management initiatives; 2) continued efforts in improving plant performance
(which would in turn result in lower production cost on a per tonne basis); and 3) the use of alternative fuel
(which would in turn help reducing its reliance on thermal coal).

No firm decision on grinding capacity expansion yet. We understand that Lafarge is still keeping its initial
plan to invest into a grinding plant. We believe a decision is likely to be made in a few months time (i.e. when it
starts seeing a surge in cement demand). Recall in FY12/08, Lafarge planned to invest into a RM100m new
grinding plant in Peninsular Malaysia to resolve its production bottleneck (due mainly to improved plant
efficiencies and increased usage of fly ash, which in turn resulted in higher capacity utilisation at its grinding
plants), and the plan was subsequently put on hold due to economic downturn.

No commitment on dividend policy, but higher dividend a possibility. We note that Lafarge declared a
gross dividend per share (GDPS) of 8 sen in 1QFY12/10 for the first time in history (in the past, dividends were
only declared on a semi-annual basis, i.e. 2Q and 4Q) and Lafarge did not rule out the possibility of declaring
dividends on a quarterly basis. However, it did not provide a firm commitment as to the quantum of GDPS for the
full year. In our view, Lafarge has the ability to declare higher dividend from FY12/10, given: 1) its healthy net
cash position of RM160.2m as at 31 Mar 10; 2) Relatively high free cash flow going forward; and 3) better
demand visibility ahead. Based on our estimates, Lafarge can raise gross dividend per share (GDPS) from 38 sen
in FY12/09 to 60 sen in FY12/10 (translating to a yield of 9.1%), assuming: 1) net gearing of 0.1x in FY12/10
(that is in line with its historical average net gearing in FY12/06-08); and 2) free cash flow of RM400m in
FY12/10.

Forecasts

Earnings forecast. We are raising our FY12/10 earnings forecast by 18.7% to RM361.1m, largely to reflect: 1)
Higher average selling prices in anticipation of a stronger pick-up in cement consumption from 2HFY12/10; and
2) Higher sales volumes.

Risks

Risks to our view. The risks include: 1) further delays in the implementation of public infrastructure projects,
resulting in lower growth in demand for cement; 2) influx of cheap imported cement, which could potentially
weigh down on domestic cement prices; and 3) escalating energy costs, in particular, thermal coal and electricity.

Page 2 of 4

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 14 June 2010

Valuations And Recommendation

Investment case. Indicative fair value is RM6.83 based on 14x FY12/11 EPS of 48.8 sen. We are positive on
Lafarges earnings outlook, underpinned by an expected pick-up in domestic cement consumption from the
implementation of large scale projects as well as the pick-up in property development activities in the central
region. However, we believe further upside in share price performance is capped by its rich valuation. Maintain
Market Perform.

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

FYE Dec (RMm) FY09a FY10f FY11f FY12f FYE Dec FY10F FY11F FY12F

Turnover 2,483.1 2,955.2 3,040.7 3,042.2 Clinker Capacity (m tonnes p.a.) 7.9 7.9 7.9
Turnover growth (%) -1.9 19.0 2.9 0.1 Griding Capacity (m tonnes p.a.) 13.0 13.0 13.0

EBITDA 611.0 546.8 617.5 617.0 Exchange rate (RM/US$) 3.25 3.20 3.20
EBITDA margin (%) 24.6 18.5 20.3 20.3 Domestic/export ratio (%) 74:26 74:26 74:26

Depreciation -153.6 -145.5 -142.2 -139.2 Average domestic selling price

Net Interest -13.9 -11.0 -11.0 0.0 (RM/tonne) 272 285 285
Associates -1.5 12.0 12.0 12.0 Export price (US$/tonne) 40 40 40

Pretax Profit 441.9 402.4 476.3 489.8

Tax -35.7 -40.2 -57.2 -58.8
Minorities 6.0 -1.0 -1.0 -1.0
Net Profit 412.2 361.1 418.2 430.0
Source: Company data, RHBRI estimates

Chart 1: LMCemnt Technical View Point

LMCemnts share price upward momentum
accelerated, after breaking out from the strong
resistance level of RM4.17 in early Apr 2009.

It charged forward and hit a high of RM6.50 in

early June 2009. But immediately after that, it
began to consolidate its gains and traded sideway
at around the RM6.26 region.

After a nearly 10 months of sideway consolidation,

it launched a surprise rally from RM6.06 low in late-
Mar 2010, and hit an all-time high of RM7.01 in
less than 3 weeks.

It then slipped into another consolidation, before

regaining mild buying support lately. Plus the
double buy momentum signal and a second
positive candle, it is ready to rechallenge the 40-
day SMA near RM6.594 soon.

Technically, a breakout from the SMA will lead to a

further run-up towards RM7.01. Meanwhile, strong
support is sighted at RM6.26.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

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Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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