Lafarge Malaysia Bhd
(March 4, RM10.10)
Maintain neutral with unchanged target price of RM9.85. While Lafarge may deliver better numbers this year, we believe near term results could be bumpy as West Malaysia pipeline cement capacities may prolong price competition and a dent its profit margins.

Nevertheless, investors may hold on to the stock, given that it is the best proxy to government infrastructure spending as well as its generous dividends.

We attended Lafarge post fourth quarter financial year 2014 (4Q14) results briefing on Tuesday, which was chaired by chief executive officer Bradley Mulroney and chief finance officer-cum-executive director Michael Lim. 

Lim attributed Lafarge’s poor RM49.9 million 4Q14 net profit — down 8.9% quarter-on quarter and 61.5% year-on-year — to extended price competition following the introduction of additional volume by Cement Industries of Malaysia, production difficulties at certain plants due to a technical setback, and higher operating costs as a result of higher electricity tariff, transportation and maintenance costs.

Mulroney agreed with us that cement demand may continue to grow but at a possibly slower pace. Lafarge’s capacity in Langkawi is rather competitive in the export market. 

As such, Mulroney said he was not overly concerned over ongoing pipeline capacities in the industry. Lafarge’s production costs are also stabilising now as all plants are back to normal operational levels.

Management has said it was unsure if the 2.25 sen per kilowatt-hour power tariff reduction from March 1 to June 30 may benefit the company — pending an official response from Tenaga Nasional. 

Mulroney said he has witnessed a pick-up in cement sales as contractors rushed to complete ongoing projects ahead of the goods and services tax implementation, which may result in a slowdown in second quarter sales. — RHB Research, March 4.

This article first appeared in The Edge Financial Daily, on March 5, 2015.