Weak cement demand continues to affect Lafarge Malaysia
KUCHING: Weak cement demand continues to plague Lafarge Malaysia Bhd (Lafarge).
Aaccording to the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital), the domestic cement demand fell another 6 per cent year over year (y-o-y) in 2016 after its 3 per cent y-o-y decline in the previous year.
As a direct result of this, domestic cement production witnessed another fall of 10 per cent y-o-y to 20 million metric tonnes (MT).
“We believe the weak demand is due to ongoing large scale infrastructure projects such as the MRT line 1 being at its tail end; new projects such as the MRT line 1, SUKE and DASH highways still being in their preliminary stage of implementations; and fewer new property launches as the property market remains lethargic,” explained the research arm.
This prolonged weak cement demand has in turn lead to an oversupply of cement and further weak cement prices as competition between cement players intensify as players aim to rid their stock and expand their market shares.
Additionally, with Lafarge’s fourth quarter of 2016 (4Q16) results expected to be released on February 22, the research arm is expecting the upcoming results to disappoint the market but will still be maintain its earnings forecast on the stock at this juncture.
Currently, the research arm is forecasting Lafarge’s FY16 net profit to be RM57.5 million, which is 38 per cent below the consensus estimate of RM92.8 million.
The stock’s core earnings per share (EPS) is also predicted to decline by 77 per cent y-o-y in FY16.
Despite this pessimistic outlook, the research arm expects Lafarge’s earnings to rebound in the second half of 2017 (2H17) when work progress on large- scale infrastructure projects accelerate as the cement segment contributes to one third of Lafarge’s revenue.
“We also expect the price competition to ease in 2H17 as a result of this recovery in cement demand,” added the research arm.
With this in mind, the research arm maintained its ‘sell’ call on the stock with a target price of RM6.40.