This article first appeared in The Edge Financial Daily on December 8, 2017

Lafarge Malaysia Bhd 
(Dec 7, RM6.39)
Maintain hold with an unchanged target price (TP) of RM5.82: After a 6% drop in the cement industry sales volume last year, we understand that Lafarge Malaysia Bhd’s decline in 2017 is expected to be more severe, percentage-wise. This is caused by a continued slowdown of the property sector albeit slightly offset by a pickup in the infrastructure projects. We reckon that cement sales volume has bottomed this year and is poised for a recovery going forward as infrastructure projects regain momentum. However, we opine that the magnitude of recovery will be limited by a persistent weak property market.

We understand that several attempts to raise cement price by industry players in order to pass through the increased input costs have not been successful. This was mainly due to the shrinking of industry-wide cement volume and overcapacity.

Capacity from other plants has been deployed to make up for the shortfall caused by the Rawang plant after a recently reported explosion. We understand that the operation of the Rawang plant has since normalised.

Although we expect a recovery of cement sales volume driven by infrastructure projects, the industry prospects remain challenging in the near term due to subdued property market (the major driver of cement demand) and depressed cement prices caused by overcapacity.

Lafarge is a proxy to ride on the construction upcycle. The bottoming of cement sales volume due to the pickup of mega infrastructure projects signified that earnings had bottomed and poised for recovery. However, we deem the expected earnings recovery has been largely reflected after the recent run-up of share price. — Hong Leong Investment Bank Research, Dec 7