LAFARGE MALAYSIA BHD

By Maybank IB Research Hold Target price: RM5.10

LAFARGE Malaysia has announced that it has entered into an agreement with China Communications Construction (ECRL) Sdn Bhd to supply cement to all eight construction packages for the East Coast Rail Link (ECRL) project.

The contract value of RM270mil is valid for 21 months, from now until December 31, 2019. Lafarge Malaysia also has an option to renew the contract for another two years. The announcement did not state the volume to be supplied under the RM270mil contract.

“Assuming a bulk cement average selling price (ASP) of RM215 to RM250 per tonne, up to 16% of current bulk ASP, this translates to an estimated 1.08 million to 1.25 million tonnes of offtake from Lafarge Malaysia, 43% to 50% of ECRL’s total cement requirement of 2.5 million tonnes for the estimated construction duration of five years, the latter based on our channel checks.

“However, given that cement usage is typically low during year one of construction, a bigger portion of the cement supply will happen in the second year of the contract.

“Assuming a ratio of 30:70 of cement supply in the two-year contract period, this translates to about 0.3 to 0.4 million and 0.8 to 0.9 million tonnes of offtake in financial year 2018 (FY18) and FY19 respectively, making up 4% to 5% of Lafarge Malaysia’s FY17 volume and 2% of 2017 industry volume,” said Maybank IB Research.

This ECRL cement award, along with the research house’s expectations of further progress in construction works for the Klang Valley Mass Rapid Transit 2 and Klang Valley Light Rail Transit 3 projects, reaffirms Maybank IB Research’s positive outlook on cement demand in 2018.

Further, the research house understands that the industry’s attempt at raising bag cement ASPs by more than 20% on March 1, 2018 is still being held up. That said, industry bulk cement ASPs have yet to increase.

Maybank IB’s FY18 to FY20 forecasts for Lafarge Malaysia have assumed for ASP growth of 9%, 11% and 3%, and industry volume growth of 5% per annum.