Lafarge president and chief executive officer Thierry Legrand said the company planned to increase sales to regional markets and negotiate new contracts.
UALA LUMPUR: AmInvestment Bank Research is retaining its Hold call for Lafarge Cement but raised its fair value to RM4.45 from RM3.55 as it switched its valuation methodology from earnings-based (P/E) to price-to-book (P/B) or asset based.
As Lafarge’s earnings are likely to remain depressed over the medium term, an earnings-based valuation methodology becomes less relevant, it said on Tuesday.
“We now value based on 1.25 times P/B, consistent with its historical P/B during the transitional period between trough and mid cycle.
“We now project Lafarge to make a net loss of RM23mil in FY17F (from a net profit of RM12mil previously).
“We also cut FY1819F net profit forecasts by 29% and 15% respectively. This follows our slight disappointment after a recent visit to the company,” it said.
AmInvest Research said Lafarge remains cautious on sales volumes over the short term, as the pace of the rollout of mega infrastructure and property projects has been slower than expected.
Lafarge only expects to see a more meaningful pick-up in cement demand from 2H18, as these projects will have gathered stronger momentum by then.
“We therefore lower our FY17-19F sales volume assumptions to 7.8 million tonnes, 8.4 million tonnes and 9.1 million tonnes (from 8.1 million tonnes, 9.1 million tonnes and 9.3 million tonnes previously),” it said.
To optimise its operations, Lafarge has temporarily taken certain production lines off-line, pending the pick-up in demand.
However, Lafarge said that the effective cement selling prices have started to recover, albeit marginally, from 3QFY17, and should continue to trend up for the remainder of the year, in 2018 and beyond.
This follows the increasing realization by players in the industry that it does no good to anyone by continuously absorbing the rising production costs, resulting in depressed margins or losses.
AmInvest Research was more inclined to wait and see if this materialises, and therefore keeping our FY17-19F average selling price assumptions at RM245 a tonne, RM255 and RM265 respectively.
Year-to-date, estimate that cement ASP has averaged at RM250-RM260/MT. 3. Capex – Lafarge guided for RM250mil annually, largely for the upgrading of its existing plants to improve efficiency which will translate to cost savings.
AmInvest Research liked Lafarge because it is the dominant player in the cement sector in Peninsular Malaysia with a 40% market share, making it a good proxy for public infrastructure spending;
The research house also said the cement maker practises strong environmental, social and governance (ESG) standards.
However, while the demand for cement will pick up over the near term thanks to the rollout of key mega infrastructure projects, it may not immediately absorb the expanded industry capacity stemming from aggressive capex by key players in recent years.
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