Cement – built-up capacity will offset demand pick-up

PETALING JAYA: Demand from infrastructure projects that will drive cement usage growth is expected to kick in next year, but the pick-up in demand will eventually be offset by capacity built since last year.

Cement manufacturer Lafarge Malaysia Bhd, whose net profit fell 71% in the second quarter ended June 30, 2016 (Q2), expects demand for the commodity to decline by 3-5% for the financial year ending Dec 31, 2016 (FY16) as demand from infrastructure projects is expected to kick in only in FY17.

“However, we remain convinced that any initial demand pick-up from implementation of mega infrastructure projects will be offset by the additional cement capacity built since 2015. We also believe growth for cement in FY17FY18 is dependent on the upcoming Budget on Oct 21,” Hong Leong Investment Bank (HLIB) Research said in its report yesterday.

According to Lafarge, the sharp drop in its Q2 earnings was due to rising competition, one-off integration cost and a high effective tax rate. The rising competition was due to the delay in infrastructure project implementation and industry capacity expansion.

“Moving into 2H, management guided that the integration cost, which is related to employee separation scheme, will remain for the remainder of 2016 as the exercise is still ongoing,” said HLIB Research.

On the positive side, Lafarge’s management has guided that effective tax rate will normalise on the utilisation of reinvestment allowance. It also does not expect further expansion in industry capacity, given the investment cost involved.

“Lafarge has introduced its first flagship store in Muar which we believe will enhance its visibility while allowing users to better understand its products,” it said.

The company now offers a concrete pumping service and recently completed a mass pour of over 3,000 cubic metres of concrete for the Rapid petrochemical project in Pengerang, Johor. It also introduced Rumah, a limestone cement product, as the company believes there is demand for it in the northern region.

HLIB Research maintained its “hold” call and target price of RM7.14 on Lafarge, based on expectations that earnings will begin normalising once infrastructure projects are implemented.