Brighter outlook for Lafarge

Brighter outlook for Lafarge
Published: 18 November 2008

Lafarge Malayan Cement Bhd’s third quarter (3Q) earnings surpassed market expectations, prompting an upward revision in the firm’s forecast earnings and share price performance.

ECM Libra tweaked its earnings per share (EPS) estimates higher by between 35 per cent and 48 per cent to 40.4 sen, 45.1 sen and 45.9 sen for Lafarge in financial years (FY) 2008, 2009 and 2010 respectively.

This is in anticipation that the cement producer’s operating costs will decline, amid stable selling prices despite the threat of imported goods following the removal of cement import taxes.

“The recent RM7 billion fiscal stimulus under the government’s economic stabilisation plan is positive for the cement sector as RM4.1bn of the allocation will go towards infrastructure expenditure such as schools and roads,” ECM Libra wrote in a note. The research firm, which upgraded its rating for Lafarge shares to a buy from a hold, also raised its target price for the stock by 18.4 per cent to RM4.50.

In 3QFY08 ended September, Lafarge’s net profit surged 45.3 per cent to RM124.5m from RM85.7 million a year earlier, as the firm grew its revenue, improved its operational cost efficiency and raked in more income from its Singapore cement operations.

Revenue for the period climbed 20.3 per cent to RM699.16m from RM581.28m, helped by higher cement prices locally and abroad, besides a bigger portion of export sales.

Cumulative net profit for the nine months rose 24.8 per cent to RM248.55m, while revenue was up 16 per cent to RM1.89bn.

RHB Research also has higher expectations on Lafarge albeit more cautious on the cement maker’s performance.

FY08 untill FY10 net profit estimates for Lafarge were raised by between 5.8 per cent and 16.7 per cent to RM314.8m, RM333.3m and RM315.3m respectively to reflect lower net interest expense, higher associates’ contribution and lower tax rates.

“We reiterate our cautious stance on Lafarge, as earnings risks are high on the back of weakening cement demand due to the slowdown in both the construction and property sectors and the recent abolishment of 10% import duty on cement that may result in the influx of cheap imports,” RHB said.

The research firm kept its underperform call for the stock but raised its fair value by 3.7 per cent to RM1.95.

Affin Research also highlighted its concerns. In a note, it said Lafarge’s earnings could be vulnerable to the timing of planned public sector spending, besides a price war should domestic demand falls.

“Annualised, results exceeded our and consensus expectations by 14 per cent. We expect a weaker 4Q in FY08 in tandem with slower demand from a clouded economic outlook coupled with the holiday festivities.

“As an indication, Oct-08 sales contracted by 10 per cent YoY,” said Affin which maintained its add call and RM3.40 target price for Lafarge shares. An add rating indicates total returns may reach up to 15 per cent over a 12-month period.

Lafarge put on six sen to RM3.12 yesterday.