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Wednesday, May 23, 2018

CIMB Research retains reduce call on Lafarge

Wednesday, 23 May 20189:26 AM MYT

KUALA LUMPUR: CIMB Equities Research is maintaining its reduce call on Lafarge Malaysia with a lower target price of RM3.63 compared with the earlier RM4.85 as it remains bearish on infrastructure companies and the cement industry.

It said on Wednesday the lower target price was based on 1.09 times CY18F price-to-book value (a higher 40% discount to its five-year historical average price-to-book value compared with 20% before.

CIMB Research said Lafarge’s 1Q18 revenue drop of 2.7% on-year was symptomatic of an industry still besieged by intense price war and weak demand.

The 1Q18 core net loss widened at a larger rate of 8.9% on-year as operating costs continued to climb.

The group was impacted by higher coal and petcoke prices, while fixed costs still rose despite efforts to contain them.

“With 1Q18 core net loss at RM63.8mil, it may be a tall order for Lafarge to reach our full-year net profit projection of RM40.5mil,” it said.

CIMB Research believes industry overcapacity is unlikely to subside in 2H18F. Its earlier expectations of a recovery in cement demand after the 14th General Elections (GE14) no longer hold.

Apart from cement required for the ongoing MRT2 and LRT3 projects (U-girdle and pier head) which should not unaffected, all new rail contracts could be reviewed by the new government.

“As such, our forecast 3% growth in 2018F could be too optimistic. Cement consumption contracted 8% on-year in 2017 (vs. 6% decline in 2016),” it said.

The research house pointed out that post-GE14, foreign contractor-led contracts will be reviewed. This raises concerns over contracts awarded to date for the RM55bil East Coast Rail Line (ECRL), including building material orders.

In March, Lafarge secured a two plus two year RM270mil cement supply contract for all eight packages of ECRL which mainly covers phase one of the project.

“We estimate that it translates one million to 1.2 million tonnes of cement (RM230 to RM260/tonne average selling price).

“Cement oversupply (13% growth in industry capacity to 34.5 million tonnes in 2017) is unlikely to subside in the post-GE14 industry landscape, in our view.

“If that holds true in 2H18F, i.e. delay in demand recovery with mega rail contracts as the main drag, cement price competition could intensify.

“This would in turn be negative for 2H18F earnings outlook, making it unlikely for any cement player to initiate a price hike (i.e. cut rebates) to cover for the rising operating cost. For Lafarge, cement margin could remain under pressure,” it said.


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