Lafarge facing stiff competition and higher costs, says Maybank IB Research

KUALA LUMPUR : Lafarge Malaysia's Bhd weaker first quarter earnings was reflective of the stiff competition and higher costs faced by players in the building materials segment, said Maybank IB Research.


In a note today, the research house said that the company's quarterly earnings made up only 10% of its full year forecasts. At the same time, Lafarge's net debt has widened to RM136mil from RM30mil in the fourth quarter of last year (4Q15) due to its ongoing expansion and lower operating cashflow.


“Furthermore, Lafarge has also lost its only appeal as a high-yield play with its first interim dividend reduced to only three sen per share, or a 63% year-on-year reduction. Annualising it indicates a dividend yield of only 1.4% for 2016,” it said.


For its first quarter ended March 31, Lafarge's net profit fell to RM20.65mil from RM73.69mil a year ago.


Its revenue for the quarter amounted to RM669.78mil, compared to RM696.09mil a year ago.


According to Maybank IB, despite the consolidation of Holcim Malaysia's earnings and lower coal costs, Lafarge's 1QFY16 earnings were poor due to lower revenue arising from more competitive average selling prices (ASPs), a decline in pretax margins due to competition and higher costs.


Among the higher costs faced by Lafarge include one-off costs from its integration with the Holcim Group, derivative losses, and other finance costs.


Going forward, the research house forecasts that the company's earnings will improve in the coming quarters in the absence of the one-off integration costs in 1QFY16.


“However, the earnings recovery will be slow considering the keen competition. We estimate that the capacity in Peninsular Malaysia could grow 15% in 2016, outstripping potential demand growth of around 5%,” it said.


Maybank IB is maintaining its 'sell' rating for Lafarge's stock with a price target of RM7.

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