Lafarge M’sia’s outlook remains challenging in the near-term

KUCHING: Lafarge Malaysia Bhd’s ( Lafarge) performance is set to remain challenging in the near term as the supply of cement continues to outpace demand.

To recap, cement demand in Malaysia has remained sluggish since FY16 due to oversupply of cement within in the market, the conclusion of several mega infrastructure projects and a weak property segment.

This has caused Lafarge’s FY16 net profit to plunge by 69.5 per cent year over year (y- o-y).

According to the research arm of Hong Leong Investment Bank Bhd ( HLIB Research), this has caused current industry-wide volumes to drop by six per cent in FY16 while domestic cement capacity has expanded by about 14 per cent in FY16 as cement players push to upgrade their capacities and gain market share.

This move of expansion in cement capacity is expected to remain stable to the next few years as much of the expansion has been completed but prices are not expected to rebound significantly in the near term as cement demand growth demand is set to continue in the low single digits.

Additionally, HLIB Research also expects Lafarge to face higher production costs in FY17 due to increases in coal and diesel prices.

“About 40 per cent of the company’s total production costs are derived from energy related costs such as coal, diesel and electricity,” explained the research arm.

Whi le cement demand is expected to recover marginally in FY17 thanks to the picking up a several mega infrastructure in the second half of FY17, the research arm opines that any positive impact from this will be offset by this increased production costs in the near term.

“Besides, any signi f icant improvement demand must be reinforced by a recovery of the property market which we deem unlikely in the near term,” added the research arm.

Despite such disappointing near term outlooks, Lafarge is still gearing up for better efficiencies for the future as it is reported that they will be incurring capital expenditure (capex) at higher level than its usual maintenance capex of RM150 million in FY17.

The higher expenditure will be used to improve internal cost efficiencies which will be advantageous to Lafarge in the long term.

Besides this, the company is also set to enjoy tax reinvestment allowance arising from this capex.

HLIB Research reiterates its ‘Sell’ call on the stock with an unchanged target price pF RM5.50 which is pegged to PE multiple of 20 fold of FY18’s earnings per share.