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Lafarge Malaysia Remains A Hold At CIMB Research

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KUALA LUMPUR: CIMB Equities Research is maintaining its Hold call on Lafarge Malaysia as it expects the positive sentiment on the stock from better demand expectations in 2018 and stabilising competitive landscape to be mitigated by earnings risks in 2H17.

It said on Monday it had raised its target price to RM6.34 from RM5.50 based on a higher price-to-book value (P/BV) of 1.8 times.

The research house said this was based on a lower 10% discount to its historical five-year P/BV (20% discount previously) due to the better demand prospects.

Upside risks are cement price hikes and volume recovery in 2H17. Downside risk is sustained losses in 2H17.

CIMB Research said it came away from Lafarge’s post-2Q17 results briefing last week with positive expectations of a gradual recovery in domestic cement demand, but it remains cautious on the earnings outlook for 2H17F.

The factors are higher operating cost, sustained competitive pressure and restructuring costs.

Other key highlights from the briefing include 1) stabilisation of cement price rebates with some recovery in bag cement prices vs. bulk cement, and 2) unchanged transport cost optimisation initiatives to counter higher energy/electricity cost.

Average cement selling prices have stabilised somewhat on-quarter at end-2Q17, though price rebates remained high at 20%-30%, based on the research house’s estimates.

“Encouragingly, bag cement prices rebounded in July, though it remains to be seen if this can be sustained in the coming months.

“There were also some noticeable cement volume improvements in May-June but this may taper off in 2H17, in our view, as most of the new larger infra projects would only begin major work in 2018,” it explained as property-led cement demand remained weak.

In view of the still-lethargic cement market, Lafarge will continue to focus on its cost optimisation moves as it rolls out its new capacities at its Rawang and Kanthan plants.

Lafarge has been reducing shipments from its Langkawi plant and re-channeling them to the Kanthan plant should result in further transport cost savings for its central and southern regions.

Its Langkawi plant should benefit when the export market recovers, likely in 2018.

“Although in 2Q17 there have been some small signs of improvement with respect to industry pricing and demand from selected high-rise projects and highways, management continues to foresee a decline in overall cement volume for the full-year.

“The likely 4%-5% total cement volume contraction remains intact for 2017 (vs. 6% decline in 2016). Apart from MRT 2, other projects that could rejuvenate cement demand in 2H17 are LRT 3 and highways. The East Coast Rail Link (ECRL) is also a huge demand driver in 2018.

“Going by the sustained earnings pressure in 2Q17 arising from sluggish industry volume, keen price competition due to oversupply, and c.RM20m full-year restructuring cost and higher operating cost, we cut FY17F EPS forecast by 18.9%.

“We maintain our FY18-19F numbers and our assumption of a 1%-5% cement industry volume growth in those years. While the likelihood of a cement price increase in 2H17F is uncertain, we think it could be triggered by sustained industry cost pressures in the coming months,” said CIMB Research. -THE STAR

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