This article first appeared in The Edge Financial Daily on June 28, 2019
Lafarge Malaysia Bhd
(June 27, RM3.62)
Maintain hold with a fair value (FV) of RM3.74: We project financial years 2019 to 2021 (FY19-21F) net loss of RM125.7 million, RM45 million and RM11.9 million respectively for Lafarge Malaysia Bhd (versus net profit forecasts of RM2.2 million, 221.4 million and RM215 million previously). Our FV is based on 1.25 times book value, consistent with its historical 1.25 times price-to-book (P/B) ratio during the transitional period between trough and mid cycles.
A week has passed with no major news reports about local cement players being disgruntled with the decision by the ministry of domestic trade and consumer affairs to reject a proposed 40-50% hike in cement prices in Peninsular Malaysia, which could have translated into higher costs of affordable housing. We take it that the cement players have come to terms with the reality that depressed cement prices are here to stay.
However, we believe that with Lafarge Malaysia and YTL Cement Bhd coming under the same roof after the recent takeover exercise, there is ample room for the merged entity to streamline their combined operations, including closing some of their plants to reduce certain variable costs, and derive cost synergies, for instance, better bargaining power in procurement of raw materials and plant maintenance services.
The earnings downgrade is largely to reflect the reversion of our average selling price assumption for cement in FY19-21F to RM190 per tonne (from RM220 per tonne in FY19F, and RM250 per tonne in FY20-21F previously), partially cushioned by better operational efficiency and cost synergy. We are keeping our FY19-21F assumptions for sales volumes of 6.4 million, 7 million and 7.4 million tonnes respectively.
The outlook for the cement sector in Peninsular Malaysia will remain challenging over the medium term due to the wide gap between the local demand versus installed capacity. We estimate that the local clinker capacity in Peninsular Malaysia now stands at 26 million tonnes, as compared with our projected local demand of only 15 million tonnes in 2019 and 16 million tonnes in 2020. However, the takeover of Lafarge Malaysia by YTL Cement, resulting in the merged entity controlling about 60% of the cement market in Peninsular Malaysia, should bring about great operational efficiency and cost synergy. — AmInvestment Bank, June 27