Cautious on Lafarge Malaysia as weak cement demand persists
KUCHING: A continuous slowdown in domestic cement production led Affin Hwang Investment Bank Bhd (AffinHwang Capital) to anticipate higher losses for Lafarge Malaysia Bhd (Lafarge Malaysia).
Domestic cement production – which provides an indication of cement demand – remained weak as it fell another 14 per cent year on year (y-o-y) in the first four months of 2018 (4M18) after posting a two per cent y-o-y decline in 4M17, underpinned by the subdued property market and delays in the roll-out of new infrastructure projects.
The growth in construction work done has slowed to 5.9 per cent y-o-y in 1Q18 versus 9.7 per cent in 1Q17, while housing starts have declined by 18.2 per cent y-o-y to 27,551 units in 1Q18.
The current oversupply situation continues to put downward pressure on ASPs due to stiff price competition among the cement manufacturers.
“Our channel checks show that bag and bulk cement rebates remain high at 23 and 44 per cent in May 2018, respectively. The average coal price continues to be on an uptrend, increasing 22 per cent y-oy to US$100 per metric tonne in 4M18,” AffinHwang Capital said.
“This is negative for Lafarge Malaysia as coal contributes more than 27 to 29 per cent of its produc- tion costs. Weak cement demand, depressed selling prices and high production costs will likely persist in 2H18, negatively affecting Lafarge’s performance.”
This led them to increase its FY18-19E loss by five to 11 per cent and reduce the FY20E EPS by 18 per cent after imputing lower average selling prices (ASPs) and higher coal costs.
“We also assumed higher interest expenses as we expect an increase in debt to fund its capex, but we believe Lafarge has a strong balance sheet and will be able to weather the downturn, given its low net gearing of 0.13 times in 1Q18.
“We expect its free cash flow to turn positive in FY19 as the integration costs from the LafargeHolcim merger should be fully incurred by end-2018 and losses narrow.
“We remain cautious on the stock due to the sluggish domestic cement demand and prolonged stiff price competition.
“We reaffirm our sell call on Lafarge Malaysia, with a lower target price of RM2.50 per share. The key upside risks are higher ASPs if the cement price war eases and lower coal prices cutting its production cost.”