Lafarge Malaysia Bhd
(Nov 14, RM2.05)
Upgrade to hold with a lower target price (TP) of RM2.10: The cement oversupply situation continues to put pressure on average selling prices (ASPs). However, we believe ASPs are unlikely to decline further as most players are currently selling at lower than the break-even for earnings before interest, taxes, depreciation and amortisation (Ebitda) price. Additionally, rising raw material and fuel costs will likely pressure manufacturers to reduce cement rebates. Hence, we believe ASPs will likely remain flat for the rest of the year and improve in 2019 and 2020.
Year to date, coal prices have increased by 25% year-on-year (y-o-y) to US$104 (RM435.76) per tonne. In October 2018, coal prices averaged at US$110 per tonne, higher by 14% y-o-y, but down by 3.7% month-on-month. We believe coal prices will ease in 2019 and 2020, averaging around US$100 per tonne to US$104 per tonne as global economic growth moderates.
Lafarge Malaysia Bhd put a new senior management team in place early this year. We believe this is positive, given their extensive experience in the cement industry. To address the losses, management is focusing on cost-optimisation initiatives including flattening the organisation structure, giving up its office in Petaling Jaya, and using more petcoke and alternative fuel production in the fuel mix. We expect free cash flow to improve on the back of tighter working capital control and limited capital expenditure spending. However, we note that it will take some time to achieve cost optimisation, hence we expect profitability in financial year 2020 (FY20).
We raise our FY18 and FY19 loss estimates by 4% and 35% after accounting for higher coal and energy prices. We also lower our TP to RM2.10 after rolling forward the base year to FY19 and apply the same price-to-book value of 0.8 times. We upgrade our call to “hold” from “sell” as the shares are trading close to our new TP.
We believe long-term prospects for the sector is still positive, and this should support the stock price. Key upside or downside risks include: i) higher or lower ASPs as the price war eases or is prolonged; ii) faster or slower-than-expected recovery in the property and construction sector; and iii) lower or higher coal prices. — Affin Hwang Capital Research, Nov 14