Cement segment hits hard on Lafarge’s outlook
KUCHING: Due to weak demand and intensifying competition in the cement segment, Lafarge Malaysia Bhd (Lafarge) saw a 5 per cent decrease in its cement revenue.
This decrease revenue contributed to Lafarge’s first nine months of 2016 ( 9M16) earnings before interest, tax, depreciation, and amortisation ( EBITDA) plummeting to RM232 million – a decrease of 43 per cent year over year (y- o-y).
While this was partially mitigated by a higher sales contribution from Lafarge’s concrete segment, overall revenue still saw a decline of 5.7 per cent y- o-y to RM1.9 billion in 9M16.
The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) believed the weak cement demand was a byproduct of a slowdown within the property market, and delays in major infrastructure projects such as Merdeka Permodalan Nasional Bhd 118.
Intense competition from other cement manufacturers such as Hume Cement Sdn Bhd, YTL Cement Bhd, and Tasek Corporation Bhd has led to both oversupply of cement and pricing rivalry between bigger cement manufacturers.
“Lafarge commands a brand premium but price is a significant sales parameter to cement, aggregates and premix concrete as it is a homogenous product,” shared the research arm of MIDF Amanah Investment Bank (MIDF Research).
MIDF Research added that Lafarge’s ordinary Portland cement ( OPC) product such as Phoenix and pre-mixture concrete products are also competing in an environment with a narrower distribution channel, saturated with
Lafarge commands a brand premium but price is a significant sales parameter to cement, aggregates and premix concrete as it is a homogenous product.
rebated and longer credit facilities by other cement manufacturers.
Additionally, research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital) said as Lafarge has yet to purchase the remaining 15 to 20 per cent of its coal requirement, it is exposed to rising coal prices, which has jumped 105 per cent y- o-y to US$ 100 per tonne.
This has contributed to a EBITDA margin contraction of 3 ppts quarter over quarter (q- o- q).
These factors have all contributed to a volatile and unwelcoming environment for the cement segment, leading to severe margin compression for Lafarge, as such, no dividends were declared this quarter, the first occurrence in the five years since Lafarge’s initial public offering ( IPO).
Yield to date, cumulative dividend was declared to just 5 sen in 9M16, a 79.17 per cent drop from 24 sen in 9M15.
With an unfavourable outlook for Lafarge, analysts have decided to revise its financial year 2016-17 estimated earnings; Kenanga Research has cut it by 35 and 23 per cent, while Affin Hwang Capital has slashed the estimates by 47 and 26 per cent, respectively.
MIDF Research maintained its ‘sell’ recommendation for Lafarge with a lower target price ( TP) of RM5.50 per share; Kenanga Research maintains its ‘ Underperform’ rating with and unchanged TP of RM6.06; and AffinHwang Capital maintains its ‘ Sell’ call with a lowered TP of RM6.40.
MIDF Research