Lafarge expected to see better earnings in 3QFY17

TheEdge Mon, Oct 16, 2017 10:12am - 6 years View Original


Lafarge Malaysia Bhd
(Oct 13, RM6.56)
Downgrade to hold with an unchanged target price of RM6.90:
Resistance in raising net average selling prices (ASPs) by one key player could undermine the sector’s ASP recovery in the fourth quarter of financial year 2017 (4QFY17). Nevertheless, we still believe that the volume recovery could materialise in 2018 to 2019 given our expectation of infrastructure-led demand growth.

Maintain our earnings forecasts but downgrade Lafarge Malaysia Bhd to “hold” from “buy” given the reduced upside to our unchanged TP of RM6.90 (1.9 times price-to-book).

Based on our channel checks, in 3QFY17, most cement players attempted two hikes in bag ASP and one hike in bulk ASP. However, as one of the big players only implemented one hike for bag ASP, we believe the higher cement ASPs of the other players could be unsustainable in the near term.

Assuming only the first hike in bag ASP is sustained, the net bag ASP would be RM40 to RM50 a tonne higher (+20%-25%) from June 2017’s level while the bulk ASP would remain unchanged.

Lafarge’s sales volume split between bulk and bag is around 65:35.

We believe the sector will continue to push for higher ASPs in 2018 to 2019 given our positive top-down view on the sector: we expect the industry’s demand to grow 5% per annum in 2018 to 2019 on infrastructure demand such as the Klang Valley mass rapid transit Phase 2, light rail transit Line 3 and East Coast Rail Line which will lead to higher industry plant utilisation rate of 67% and 70% in 2018 to 2019; and all cement players have suffered poor profitability in the past two years and would strive for higher ASPs ahead.

We expect Lafarge to report better earnings in 3QFY17: bag cement ASP hike would lift revenue or bottom line by RM28 million to RM35 million per quarter, and cost could be lower given the cost savings from its cost-cutting exercise and lower exceptional cost.

We project substantial earnings rebound in 2018 (+RM133 million net profit) as our model has assumed for a blended ASP hike of 15% and volume growth of 6% in 2018. — Maybank IB Research, Oct 13

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