CIMB Research retains Reduce call for Lafarge, sees net losses

YTL Corp subsidiary YTL Cement

KUALA LUMPUR: CIMB Equities Research has slashed it FY17F earnings per share (EPS) for Lafarge Malaysia and now projects a net loss of RM93mil.

It said on Thursday the net loss was to reflect the steeper cement volume decline and sustained losses at its cement division in 4Q17. It retained its FY18-19F forecasts. 

“As we roll over our valuation to end-2018F, we maintain our Reduce rating, with lower target price, still pegged to 1.8 times price-to-book value (P/BV) – a  10% discount to Lafarge’s five-year average P/BV. 

“Potential de-rating catalysts include a prolonged price war, and quarterly losses. Key upside risk is a price hike,” it said.   

CIMB Research said Lafarge indicated that major infra projects (mainly MRT 2) have begun ordering cement in 3Q17. 

However, a negative surprise was the guidance that overall cement volume contraction in 2017 is likely steeper than the 6% in 2016, signalling a more muted 1H18 demand outlook; it initially guided for demand to come from new infra contracts, mainly rail. 

At this juncture, only two major rail contracts would consume more cement, the RM32bil MRT 2 and RM9bil LRT 3.  

“Indications show that the quarter-on-quarter 8.9% revenue growth in 3Q17 was the result of improved net selling prices (we suspect due to the stabilisation of price rebates) and a slight rise in cement sales volume due to the ramp up in progress works for the overall sector. 

“However, the group cautioned that the market was still engaged in a price war that could continue, at the expense of margins.

“Also, the oversupply landscape still does not justify a much needed cement price hike to pass on the higher cost (particularly energy cost),” it said. 

CIMB Research pointed out that while 2018F could still be a recovery year for cement demand though from a low base, the recent freeze on approvals for high-end properties priced at above RM1mil each could negate the anticipated turnaround in residential/non-residential cement demand. 

This leaves larger scale infrastructure, civil works and iconic high-rise projects as the key driver for a more robust recovery in cement volumes next year.  

Major new contracts such as the RM55bil East Coast Rail Link (ECRL), est. RM40bil MRT 3 (circle line), and RM50bil to RM60bil KL-Singapore high-speed rail (HSR) would only begin awarding civil works packages from 2H18F. 

The RM8bil to RM9bil Gemas-JB double tracking rail project would be the only rail job apart from MRT 2 and LRT3 that could start physical works in 2018F. 

“In all likelihood, new stream of cement- intensive stage/order for new major projects could only emerge in 2H18F at the earliest, in our view. 

“We gather that in the short term, Lafarge will continue to emphasise on cost control. It has reduced its workforce to reflect lower utilisation rates, and will optimise its fuel mix as a buffer against rising coal, diesel, and petroleum coke prices. 

“We believe the strengthening ringgit (+9.1% YTD) would have a bigger fuel savings impact in FY18F,” it said.
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