This article first appeared in The Edge Financial Daily on May 9, 2019
Lafarge Malaysia Bhd
(May 8, RM3.73)
Maintain accept offer at RM3.75: Following the instruction received by China Communications Construction (ECRL) Sdn Bhd (CCCE) from Malaysia Rail Link Sdn Bhd on April 15, the suspension of the cement supply contract of Lafarge Malaysia’s wholly-owned subsidiary Lafarge Cement Sdn Bhd will cease with immediate effect. Lafarge had on May 6 received a letter from (CCCE) instructing it to resume supply for the remaining term under the contract until Dec 31, 2019.
To recap, the contract was awarded to Lafarge Cement on March 19, 2018. The job scope is for the supply of cement for all eight packages of work for the proposed East Coast Rail Link (ECRL) project, for a total estimated provisional sum of RM270 million. On July 5, 2018, Lafarge received instruction from CCCE to suspend the contract immediately, as the Malaysian government sought to review the ECRL project.
As outlined in the agreement, contract renewal could be extended for a further two years subject to a mutually-agreed renewal terms and conditions between Lafarge and CCCE. The news is positive for Lafarge, which clears the air over the timeline on contract recommencement. By and large, we reckon this will benefit Lafarge financially and operationally with earnings contributions going ahead from financial year 2019 (FY19). With supplies worth RM270 million, we have estimated an offtake of about 1.1 million to 1.4 million tonnes during the contract period. Assuming supplies span for three years, we derived an offtake of about 370,000 to 470,000 tonnes annually.
While we are positive on the news, we think the current overall demand for the industry is still uninspiring. Accordingly, we believe the confluence of oversupply and higher production costs would remain a stumbling block for Lafarge to stage a major turnaround in the immediate term.
Our earlier recommendation to investors stands. We find YTL Corp Bhd’s mandatory offer for the remaining shares in Lafarge following its recent 51% acquisition of the company, as a welcomed sight for investors. Largely, we believe the offer of RM3.75 per share as attractive at 1.3 times price-to-book value (PBV). This is considering the negative results booked by Lafarge since FY17, which have yet seen any significant signs of improvement. YTL’s valuation represents an attractive premium of more than 100% over our last target price. In a broader sense, the takeover action is strategically positive for the industry, allowing for further capacity cuts and more stable pricing environment. However, with the industry utilisation remains well below its five-year average, we expect it would take a while before demand eventually picks up again. — MIDF Research, May 8