This article first appeared in The Edge Malaysia Weekly on July 17, 2017 - July 23, 2017

LAFARGE Malaysia Bhd is not immune to a slowdown. Faced with overcapacity due to a lack of demand on the back of fewer projects, the country’s largest cement producer reported its first quarterly loss in 12 years in the first financial quarter ended March 31, 2017 (1QFY2017).

However, president and CEO Thierry Legrand is not dwelling on the negative aspects of its performance. He is focusing on tackling the challenges to ensure that the recent poor results remain just a blip.

As part of a broader move to reduce overcapacity and tackle pricing pressure, Lafarge Malaysia is setting its sights on exporting more of the products made at its plant in Langkawi, Kedah.

Lafarge Malaysia is 51% owned by Switzerland-based LafargeHolcim Ltd.

“If you look at what we have done in Langkawi, we are adapting to the new situation. Lafarge Malaysia has been exporting for many years, but what is changing now is our export destinations,” he tells The Edge in an interview.

“We used to export to Indonesia. Today, we are exporting more to growing markets such as Bangladesh, Myanmar and Sri Lanka,” says Legrand, who is also the executive director of Lafarge Malaysia.

The 50-year-old Frenchman was appointed to the board in August 2015, taking over from Brit Bradley Mulroney.

Previously, Legrand was CEO of Lafarge South Africa from 2009 to 2014, and Lafarge Group senior vice-president of transformation acceleration (innovation), based in France.

He says when the Langkawi plant was built in 1984, Lafarge Malaysia already had in mind that it could be used to serve exports as well as the domestic market.

“The export markets are quite volatile. We always monitor where our opportunity is, and we are really looking market by market,” he says, adding that the group currently exports about 15% of its production.

Apart from Langkawi, the Petaling Jaya-headquartered group has two other integrated cement plants in Kanthan, Perak, and Rawang, Selangor. It operates two grinding stations in Pasir Gudang, Johor,  as well as two dry mix plants, 40 ready-mixed concrete batching plants and four aggregates quarries across Peninsular Malaysia.

These facilities are supported by a network of depots, terminals and distribution facilities, connected by road, rail and sea.

Lafarge Malaysia swung to a net loss of RM48.93 million in 1QFY2017 from a net profit of RM20.65 million a year ago, its first quarterly loss since 2QFY2005. Revenue also declined  by 16.1% to RM561.85 million in 1QFY2017 from RM669.78 million in 1QFY2016.

The group blames its poor financial performance on weaker local demand, worsening pricing pressures and escalating operating costs, attributed mainly to higher fuel and electricity cost.

For the financial year ended Dec 31, 2016 (FY2016), Lafarge Malaysia saw its revenue fall by 7.2% to RM2.55 billion from RM2.75 billion in FY2015. Net profit dropped 69.2% to RM77.7 million from RM252.6 million the previous year.

Legrand notes that the country has enjoyed steady growth in cement demand at 4% to 5% per annum for many years. But the trend reversed last year as the local cement market contracted by more than 6% — the first decline following six years of continuous growth from 2009. In addition, an increase in production capacity locally led to intensified competition and further price pressure. “Other cement producers increased capacity last year, which put significant pressure on prices. We knew there would be new capacity coming onto the market but the volume was unexpected,” Legrand says.

He points out that a number of large-scale infrastructure projects have come to an end while new ones have yet to get off the ground. Moreover, the local residential property market is experiencing a slowdown.

Still, there is light at the end of the tunnel.

According to Legrand, some of the affordable housing and mega infrastructure projects, including the mass rapid transit Line 3, light rail transit 3, Damansara-Shah Alam elevated highway, Sungai Besi-Ulu Kelang expressway, Damansara-Ulu Kelang expressway and East Coast Rail Line are expected to gain momentum in the second half and going into next year and 2019.

“We are paying special attention to these projects and we have a good track record. In the past, we were involved in some prominent jobs, such as the Kuala Lumpur International Airport, klia2 and the Stormwater Management and Road Tunnel,” he says.

Legrand is of the view that the current cement prices — pressured by the oversupply situation — are not sustainable for the capital-intensive industry.

“I believe that the price today doesn’t fully reflect the true value of cement and our input cost and return on capital.

“It costs RM1 billion in total to build a new plant with a capacity of 1.5 billion tonnes. That’s a lot of capital ... Then you need coal, the price of which has increased significantly since the end of last year and the beginning of this year,” he says.

Legrand says Lafarge Malaysia has to contend with the fact that the local demand for cement has contracted while rising coal prices and additional capacity will only make things worse.

“It is what it is. We are in a situation [that is] a little bit different from the previous years. What we have to do is to work on what we can act on, that is, reducing cost and improving efficiency,” he says.

Going forward, Legrand says there remain many catalysts in the cement business in the medium to long term. “The young population will need houses, which means the property market will improve (one day) while the government will also further invest in infrastructure.”

Lafarge Malaysia’s shares have been on a downward trend since the start of this year. Year to date, the counter has declined 22% to close at RM5.60 last Thursday, giving it a market capitalisation of RM4.758 billion. It is one of the worst-performing stocks on Bursa Malaysia so far this year.

Bloomberg data shows that five research houses have a “hold” call on Lafarge Malaysia, four others are calling “sell” and only two have a “buy” recommendation. Target prices range from as low as RM3.80 to RM7, showing just how divided analysts’ opinions are.

Taking Bloomberg’s consensus target price of RM5.42, Lafarge Malaysia has a 3% downside risk.

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