Maybank Research retains Hold for Lafarge, TP RM5.10

YTL Corp subsidiary YTL Cement

KUALA LUMPUR: Maybank Investment Bank Research is retaining its Hold call for Lafarge Malaysia with a target price of RM5.10, which is 13% over the last traded price of RM4.50.

It said on Tuesday that Lafarge, which is Malaysia's largest cement player with market share of around 35%,  has secured a RM270mil contract to supply cement to all eight packages of the East Coast Rail Link (ECRL) for 21 months. 

“This could add c.4% and c.2% to Lafarge’s and the industry’s 2018 cement offtake respectively,” it said. 

To recap, Lafarge had inked a cement supply agreement with China Communications Construction (ECRL) Sdn Bhd to supply cement to all eight construction packages for the ECRL project. 

“Our target price is pegged to 1.5 times price-to-book value (P/BV) (- two standard deviation to mean).  

The research house said the contract value of RM270mil is valid from now until Dec 31, 2019 (21 months). Lafarge also has an option to renew the contract for another two years. 

However, Lafarge’s announcement did not state the volume to be supplied under the RM270mil contract. 

Assuming bulk cement average selling prices (ASP) of RM215 to RM250 a tonne (up to +16% of current bulk ASP), this translates to c.1.08 million tonnes to 1.25 million tonnes of offtake from Lafarge.

Maybank Research said this was 43%-50% of ECRL’s total cement requirement of 2.5m tonnes for the estimated construction duration of five years.

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 Lafarge’s contract. 

“This ECRL cement award along with our expectations of further progress in construction works for KVMRT2 and KVLRT3 (entering their third / second year) reaffirms our positive outlook on cement demand in 2018. 

“Further, we understand 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. Our FY18-20E forecasts for Lafarge have assumed for ASP growth of 9%/11%/3% and industry volume growth of 5% per annum,” Maybank Research said.