CIMB Equities Research encouraged by Lafarge Malaysia's 2Q17 performance

CIMB Equities Research is maintaining a 'Hold' verdict on Lafarge Malaysia. The research entity said on Monday it had raised its target price to MYR6.34 (US$1.50) from MYR5.50 (US$1.30).

CIMB Research said it came away from Lafarge’s post-2Q17 results briefing last week with positive expectations of a gradual recovery in domestic cement demand, but it remains cautious on the earnings outlook for 2H17.

Higher operating cost, sustained competitive pressure and restructuring costs could impact profit margins.

Average cement selling prices have stabilised somewhat on-quarter at end-2Q17, though price rebates remained high at 20-30 per cent, based on the research house's estimates.

"Encouragingly, bag cement prices rebounded in July, though it remains to be seen if this can be sustained in the coming months.

"There were also some noticeable cement volume improvements in May-June but this may taper off in 2H17, in CIMB's view, as most of the new larger infra projects would only begin major work in 2018," it explained as property-led cement demand remained weak.

In view of the still-lethargic cement market, Lafarge will continue to focus on its cost optimisation moves as it rolls out its new capacities at its Rawang and Kanthan plants. Lafarge has been reducing shipments from its Langkawi works and re-channeling them to the Kanthan unit should result in further transport cost savings for its central and southern regions. The Langkawi plant should benefit when the export market recovers, which is expected in 2018.

"The likely 4-5 per cent total cement volume contraction remains intact for 2017 (versus a six per cent decline in 2016). Apart from MRT 2, other projects that could rejuvenate cement demand in 2H17 are LRT 3 and highways. The East Coast Rail Link (ECRL) is also a huge demand driver in 2018. 

"We maintain our FY18-19F numbers and our assumption of a 1-5 per cent cement industry volume growth in those years. While the likelihood of a cement price increase in 2H17F is uncertain, we think it could be triggered by sustained industry cost pressures in the coming months,” said CIMB Research.