KUALA LUMPUR (Dec 24): Investors appeared lukewarm to Lafarge Malaysia Bhd this morning despite the company securing a RM254 million contract from Petronas Refinery and Petrochemical Corp Sdn Bhd.
As at 10.48am, Lafarge was flat at RM9.91 with 72,800 shares done, in line with the weaker broader market sentiment.
The counter had earlier gained 0.8% or 8 sen when the market opened, but then declined to RM9.75 at 9.14am.
The cement manufacturer was awarded with a contract for supplying concrete to the Refinery and Petrochemicals Integrated Development (Rapid) project and other Petronas-related projects in Pengerang, Johor worth RM254 million for five years, it told Bursa yesterday.
In a separate announcement, Lafarge said it had through its unit Associated Pan Malaysia Cement Sdn Bhd, purchased a cement mill and ancillaries from Lafarge Ciment (Romania) for €10.663 million (RM45.95 million).
Despite being positive on the two major announcements, Kenanga IB Research said the additional earnings contribution averaging RM50.8 million per year to Lafarge was relatively small as it made up only about 1% of estimated revenue from financial year 2015 (FY15) onwards.
"The mill acquisition from Lafarge Romania is within expectations as we believe this is part of the ongoing mill expansion program at Lafarege Malaysia’s Kanthan and Rawang cement plant," said Kenanga IB Research analyst Voon Yee Ping.
Voon said once the acquisition is completed, Lafarge Malaysia should see capacity increased by 1.2 million metric tons (MT) to 14.2 million MT per year by mid-2016.
"The news is positive to Lafarge Malaysia, but we think the impact to share price should be limited due to the relatively small effect on earnings from the RAPID contract, while for the mill acquisition, we believe the earnings growth on the group's expansion has already been priced in," Voon added.
"Despite our expectation of robust domestic construction growth, the sector-wide capacity expansion is likely to intensify competition and result in depressed cement prices in the near-term," Voon stressed.
Kenanga is maintaining Lafarge's core net profit forecast for FY14 and FY15 of RM324 million and RM425 million respectively.
The firm is also maintaining "Market Perform" rating with unchanged TP of RM10 on Lafarge as any positive from improved market demand may be negated by lower average selling price (ASP) due to increased competition in the domestic cement industry.
Meanwhile, Hong Leong Investment Bank Research (HLIB Research) viewed the contract award as positive to Lafarge and in line with its positive outlook on the company.
"We reckon that the above acquisition by Lafarge is beneficial as acquiring a relatively new cement mill and equipment from the related party would generate cost savings compared to buying a new mill by a different party," Mohd Fadzrul Mohd Salman, an analyst with HLIB Research said in a note to clients today.
He said the acquisition impact on the cash level was minimal as the total consideration only accounted for 10.6% of total net cash of RM434.1 million Lafarge has as at 3QFY14.
"We reiterated our 'Buy' call with unchanged target price of (TP) of RM10.72 based on 22.5 times 2016 earnings per share (EPS) of 47.7 sen.