Malaysia: demand risk for Lafarge

Malaysia: demand risk for Lafarge
Published: 21 November 2008

A slowdown in construction activities will weaken demand for cement in the first half of next year, after registering modest growth in 2008, analysts said.

CIMB Research said demand growth in 2008 would be no more than five per cent, on expectation demand will continue shrinking in the fourth quarter, a view shared by Lafarge Malayan Cement Bhd (LMC).

“For 2009, although LMC agreed that demand for cement will drop, especially in the first half, it did not commit to any guidance. We continue to project a 4% fall in demand although we do not discount the possibility of an upside to our numbers as the recent stimulus package may give construction activities a lift,” it said in a report.

Nevertheless, the research house said the outlook for the industry is improving, due to pump-priming by the government and stable selling prices.

HwangDBS Research also expects demand for cement in the fourth quarter to remain flat or decline marginally YoY and QoQ due to slower construction activities.

“However, the impact (on LMC) should be mitigated by sustained export sales, lower maintenance costs, higher contribution from concrete and aggregates business, and a one-off gain on disposal of carbon credits (RM22m). We expect the earnings before interest and tax (EBIT) margin for the fourth quarter to improve further due to the full-quarter impact of the August cement price hike and easing cost pressures,” the research house said.

It expects average selling price (ASP) to hold despite easing cost pressures, as the recent hikes were to compensate for previous cost increases (>40 per cent over the last 10 years). Also, Indonesian coal prices remain high while LMC has yet to secure its coal supply for 2009.

“LMC will continue to focus on improving plant performance, cost control and working capital management,” it said.

CIMB Research, meanwhile, said LMC had given an assurance that there will be no more price increases for the rest of the year. Prices were raised by 18 per cent in July and eight per cent in August.

“The domestic ASP is holding at RM265/tand export prices are also holding firm at US$40-45 (RM144-162)/t. We maintain our projection of an export price of US$43 for FY09 to FY10,” the bank-backed research house said.

The research house added that there is little ground for the industry to raise prices for at least the next six months considering the downturn in demand and easing cost pressures.

“It is also unlikely that local manufacturers will start another price war, given that domestic selling prices are the most competitive in the region and the price war in 2005 had a detrimental effect on the players. We maintain our view that domestic selling prices will remain stable at RM260 to RM265 (net of rebates) in 2009, it said.

In addition, CIMB Research lowered its tax rate assumptions on LMC from 15 to 10 per cent for FY08 and FY09 while keeping FY10 estimate of 15 per cent, as the cement maker had unutilised reinvestment allowances of about RM747 million as at Dec 31 last year, hence the lower effective tax rate of about 10 per cent for this year and 2009.

“The lower tax rates lead to a 5.9 per cent upgrade of our FY08-09 earnings forecasts. We maintain our trading buy recommendation at RM3.20 with a target price of RM4.35, which uses a blend of price-to-book value of one time and price-earnings (PE) valuations of 10 times CY10.

“Re-rating catalysts include improving quarterly margins following the softening of coal prices and a turnaround for the construction industry, which will trickle down to the building material sector,” it added.