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This article first appeared in The Edge Financial Daily on June 19, 2019

Lafarge Malaysia Bhd
(June 18, RM3.82)
Maintain hold with an unchanged target price of RM3.75:
Last week, a letter from a ready-mixed concrete producer was circulated saying ready-mixed concrete prices were to be increased RM20 to RM40 per cubic metre effective June 15, due to the recently announced cement price increase of 40% and other significant increases in input costs.

Media reports also cited other cement suppliers had notified property developers that cement price will be increased from July 2019. We note the recent developments resulted in Lafarge’s share price increasing 8.5% since early last week.

While the takeover of Lafarge Malaysia Bhd by YTL Corp Bhd will result in a better pricing power — the takeover, once completed, will boost YTL Corp’s market share in the cement industry to 60% — but we believe a 40% hike in cement price, if it materialises, is too steep and will unlikely be sustainable.

This is as we believe underlying demand for cement will still be weak in the near term, on weak construction activities. Further, the potential price increase has been brought to the government’s attention, and the finance ministry and domestic trade and consumer affairs ministry will soon meet to deliberate on the matter. We understand the current market price of cement is at RM195 per tonne and a 40% increase would be at RM273 per tonne.

Our forecasts are unchanged for now as we reckoned the situation remains fluid. We forecast Lafarge to report losses of RM168.8 million for the financial year 2019 (FY19) and to further narrow losses to RM66.6 million in FY20. We reiterate our cement price assumption of RM200 per tonne for now.

With YTL Corp’s acquisition of a 77% stake in Lafarge completed, this should lead towards a recovery in cement prices over the longer term given the lion market share held by the enlarged entity. Nonetheless, we believe the potential benefits of improved pricing power and operational rationalisation to improve efficiency will only be evident over the longer term. — Hong Leong Investment Bank Research, June 18

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