This article first appeared in The Edge Financial Daily on May 24, 2017 - May 30, 2017

Lafarge Malaysia Bhd
(May 23, RM5.37)
Upgrade to hold with a lower target price (TP) of RM5.15: We upgrade our call on Lafarge Malaysia Bhd to “hold” with a revised RM5.15 TP following the share price correction. While earnings are likely to remain underwhelming in the near to medium term, we believe there is still inherent value in Lafarge’s plant and its position as largest cement producer in Malaysia, which could be attractive to any potential acquirer.

We believe competitive pressures in Malaysia’s cement industry are unlikely to ease in 2017 given that Lafarge and Hume Cement Sdn Bhd added new production capacity (representing about 12% of industry capacity), while domestic cement demand is only expected to grow by 3% to 5% per annum at best. As such, pricing pressures are likely to persist as cement players offer larger rebates to fill capacity and/or gain market share.

Lafarge recorded a quarterly loss of RM48.9 million in the first quarter of financial year 2017 (1QFY17) (from RM20.7 million profit in 1QFY16), which was below our and consensus expectations. The disappointing results were mainly attributed to lower sales contribution from the cement segment that declined by 25% year-on-year on the back of soft cement demand and continued pricing pressure. In addition, higher coal prices and electricity costs had also further dragged down Lafarge’s profitability.

Given the weak numbers, Lafarge did not declare any dividend for this quarter. This means, the company has not declared any dividend for the third consecutive quarter since 3QFY16. For comparison, it previously declared three sen and two sen dividend per share in 1QFY16 and 2QFY16 respectively.

With several large-scale infrastructure projects expected to be rolled out in 2017, we think there could be some uplift to cement prices from firmer demand which translates into a better utilisation rate and better margins for the sector. However, this could be partly offset by higher coal prices (accounting for about about 30% of production costs) which has almost doubled to about US$90 (RM386.10) to US$100 per tonne currently from a year ago. We believe pricing discipline by cement players is yet to be seen given the excess capacity in the industry. — AllianceDBS Research, May 23