Analysts: Lafarge Can Meet Profit Forecast


10 November 2008


THE cement manufacturing sector remains fairly robust despite concerns of a global economic meltdown and market leader Lafarge Malayan Cement Bhd's performance for the nine months ended Sept 30, is expected to be in line with analysts' forecast.


An analyst with Affin Securities said Lafarge's third quarter performance should be in line with the broking house's forecast and its performance could be maintained until year-end.


"Going forward into 2009, we expect earnings to be impacted as the global economic downturn hits closer to home," she said. The analyst, who has an "add" (equivalent to a hold) call on the stock said that Lafarge, which controls 40% of the domestic market share of cement, was performing well overall and had benefited from the lifting of the ceiling price on cement earlier this year.


"Lafarge can now price its cement based on market forces, which will help improve its profit margin," she said. Prior to that there was a cap on cement price, so cement players including Lafarge could not adjust its retail price too much to mitigate rising material costs.


The company can now price its cement based on market forces, which will help improve its profit margin.  The analyst also said Lafarge and other cement manufacturers would be the beneficiary of the RM7bil economic stimulus package and the abolishment of the 5% import duties on cement and steel.


"The key risk to earnings for cement players emanate from the timeliness in the disbursement of the additional expenditure," he said. The RM1.2bil of the expenditure is specifically to build low and medium-cost houses. This bodes well for the cement manufacturers since about 50% of cement sales are derived from the property sector.


Currently, the average selling price of local cement is on par with cement prices in the Asia Pacific, ranging from RM273 to RM277 per tonne.


"We expect cement prices to remain fairly stable, hovering around RM2.75 per tonne possibly till year end," she said.


On Aug 1, Lafarge raised cement price by RM20 per tonne , which should impact its bottom line positively.


Another local analyst, who has a "buy" call on the stock, remained upbeat about Lafarge, being the largest local player in the cement market. "Lafarge should maintain its earnings momentum at least till the end of the year, buoyed not only by better cement prices, but also from the strong support from parent company, Lafarge SA," he said.


The analyst said there were only four or five major cement manufacturers in Malaysia and Lafarge was the biggest. "Any excess cement can be absorbed by its parent company which has markets worldwide," he said, adding that the brokerage viewed the stock favourably due to its strong management, good dividend yield of 4% to 5% and size, relative to other local players.


Currently about 70% of Lafarge cement is for local use while the balance 30% is exported. "We expect Lafarge's performance in the third quarter to be in line with the brokerage's forecast," he said.  He added that there were no major concerns to think otherwise.


On the impact of the additional tax liabilities imposed on its unit LMCB Holding Pte Ltd (LMCBH) in Singapore, the analyst said: "Lafarge is contesting the tax imposed. The case is very likely to be resolved next year so it should not impact Lafarge's bottomline this year."


The Inland Revenue Authority of Singapore is seeking to recover the tax refunds received by LMCBH by way of additional taxes amounting close to RM24mil.


AmResearch, which has a "hold" on the stock, said the cement maker's share price would likely continue to be weighed down by the threat of additional tax liabilities imposed on its unit LMCBH.


The brokerage sees the total potential tax liabilities translating into an earnings per share (EPS) of three sen leading to an 8% erosion in financial year 2009 EPS forecast. The research house noted that the stock's share price had corrected by 20% since Sept 4.


For the six-months ended June 30, Lafarge posted a 5.6% reduction in pre-tax profit to RM133.29mil versus the same period last year while revenue improved slightly to RM1.19bil from RM1.05bil.