Affin Hwang stays cautious on Lafarge on weak cement demand

KUALA LUMPUR: Affin Hwang Capital Research remains cautious on Lagarge Malaysia Bhd as domestic cement production remains weak while stiff price competition remains and coal prices contimue to rise.

"Weak cement demand, depressed selling prices and high production costs will likely persist in 2H18, negatively affecting Lafarge’s performance," it said.

It maintained its sell call on the counter with a target price of RM2.50.

The research house said domestic cement production fell another 14% on year in 4M18 underpinned by the subdued property market and delays in the roll-out of new infrastructure projects.

"The growth in construction work done has slowed to 5.9% yoy in 1Q18 (vs 9.7% in 1Q17), while housing starts have declined by 18.2% yoy to 27,551 units in 1Q18," it said.

The oversupply situation is also putting a squeeze on average selling prices due to stiff price competition among the cement manufacturers while bag and bulk cement rebates remaining high.

Lafarge's production cost is also affected by the rising average coal price, which rose 22% on year to US$100 per metric tonne in 4M18. 

"We increase our FY18-19E loss by 5-11% and reduce the FY20E EPS by 18% after imputing lower ASPs and higher coal costs.

"We also assumed higher interest expenses as we expect an increase in debt to fund its capex,
but we believe Lafarge has a strong balance sheet and will be able to weather the downturn, given its low net gearing of 0.13x in 1Q18. 

"We expect its free cash flow to turn positive in FY19 as the integration costs from the LafargeHolcim merger should be fully incurred by end-2018 and losses narrow."

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