‘Lafarge needs to show better earnings to support higher valuations’
KUCHING: Analysts called on Lafarge Malaysia Bhd (Lafarge) to improve its earnings to support higher valuations especially after suffering two consecutive quarterly losses so far into financial year 2017 (FY17).
According to AmInvestment Bank Bhd (AmInvestment Bank), Lafarge outlined various strategic initiatives in an analyst briefing last Friday to boost the group’s performance from the second half of FY17 (2HFY17) onwards.
“Firstly, cost optimisation with the key focus of ensuring cement is produced near its consumption/ offtake points to help bring down the transportation cost,” AmInvestment Bank said.
“From now, its plants in Rawang, Kanthan and Pasir Gudang will cater to the northern, central and southern regions respectively, while Langkawi is designated for the export market.”
The research firm noted that prior to Lafarge’s upgrading in recent years, the plant in Kanthan was unable to meet the demand in the central region.
It further noted that as a result, Lafarge had to ship certain tonnage of cement from the group’s plant in Langkawi to the central region by sea (via Westport in Klang) which was not cost effective.
“Also, Lafarge is negotiating with its freight service providers and suppliers of bags and pallets for lower prices.”
Secondly, Lafarge is optimising its assets by disposing of noncore and low-yielding ones which AmInvestment Bank believed would be mainly high- cost quarries and unused land.
The research firm pointed out that already, Lafarge has disposed of land in Lumut and Rawang, as well as a quarry in Ipoh.
“Nevertheless, Lafarge has invested in a new dry mix plant in Pasir Gudang to cater for the increasing demand from the southern region,” it said.
Lastly, Lafarge is widening the group’s reach to the highmargin retail segment (currently AmInvestment Bank believed is just a fraction of total sales), comprising small contractors, renovators and home owners.
The research firm highlighted that this would be via additional flagship stores across the country ( to date 33 stores, target 50 by end- 2017), which showcase Lafarge ProSolutions products and educate end users on the product application.
It would also be via two Pro- Builder Centre (PBC) stores by end2017 which carry comprehensive range of building materials and e-commerce channels (such as Lazada) with attractive offers.
Overall, AmInvestment Bank liked Lafarge because the group is the dominant player in the cement sector in Peninsular Malaysia with a 40 per cent market share, making it a good proxy for public infrastructure spending.
Additionally, Lafarge practises strong environmental, social and governance (ESG) standards, the research firm noted.
“However, while the demand for cement will pick up over the near term thanks to the rollout of key mega infrastructure projects, it may not immediately absorb the expanded industry capacity stemming from aggressive capital expenditure (capex) by key players in recent years,” AmInvestment Bank said.
“We believe Lafarge needs to show better earnings to support higher valuations.”