Malaysia: slow demand, rising costs to hurt Lafarge

Malaysia: slow demand, rising costs to hurt Lafarge
Published: 01 May 2008

Lafarge Malayan Cement Bhd’s YoY (YoY) cement sales growth rates are expected to decelerate over the remaining months this year, due to weaker property development activities and possible delays of certain public projects, said RHB Research.
The research house has also trimmed the company’s FY08 to FY10 net profit forecasts by 26.6%-29.5% to RM202.6m-RM222.1m after factoring in higher thermal coal prices and lower domestic sales growth rate in 2009.
“Lafarge has raised its 2008 sales growth rate forecast for the local cement industry to 6%-7% on the back of a strong 12% YoY growth registered in 1Q08.
“We expect YoY cement sales growth rates to decelerate due to the decline in housing starts and property under construction in Peninsular Malaysia since 3Q2007, indicating weaker property development activities ahead, and further delays, if not cancellation of certain public projects,” it said.
RHB Research said the ready-mixed concrete market in Singapore remained strong on the back of the sustained construction boom in the island state.
“However, consistent with our forecasts, Lafarge only projects flattish performance from its ready-mixed concrete operation in Singapore on the back of intensifying competition arising from an influx of new players from all over the region,” it said.
It said in FY07, Lafarge’s operations in Singapore contributed to 5.6% to the company’s pretax profit.
The research house said rising thermal coal prices could hurt Lafarge, adding that the price of thermal coal which accounts for 25%-28% of Lafarge’s total production cost had doubled from an average of US$45 (RM143.10) per tonne in 2007 to US$91 per tonne on the back of a tight global supply situation.
“While Lafarge has locked in 12 months’ requirement, the delivery timing is open-ended pursuant to these supply contracts.
“This means that if the supplier is unable to meet Lafarge’s demand at any one point (a highly likely scenario, given the tight thermal coal supply situation in the world at present), Lafarge will have to make up the shortfall by buying spot at high spot prices. The escalating thermal coal prices will therefore still hurt Lafarge,” it said.
The research house said that on the other hand, the automatic pricing mechanism (APM), even if it was eventually implemented, would not completely shield Lafarge from the escalating thermal coal prices.
“There will be time lags as cement prices are only adjusted once in every four months under the APM,” it said.
RHB Research maintained its underperform recommendation on the stock, and is rationalising down the indicative fair value by 43.8% from RM4.64 to RM2.61, based on 10 times revised FY08 earnings per share, in line with its benchmark one-year forward target price earnings ratio for the building materials sector.
On the investments risks for the counter, the research house said these included further delays in the implementation of the Nineth Malaysian Plan (9MP) projects that would result in lower growth in demand for cement, and delays in the implementation of the AMP that translates into cement producers suffering margin compression on the back of rising input costs.