Lafarge Confident of 2013 Outlook

09.03.2013
 

Business
By Fintan Ng

 

Saturday March 9, 2013

  

DESPITE the increased competition brought on by a new player in the local cement industry, Bradley Mulroney, president and chief executive officer of Lafarge Malayan Cement Bhd, the country's largest cement producer, is confident the outlook for the industry, which closely tracks the construction sector and property development, remains bright.

 

One cannot fault him for his confidence as signs of construction are popping up all over the central Klang Valley with the rollout of the infrastructure projects under the Economic Transformation Programme (ETP) and 10th Malaysia Plan (10MP).

 

Furthermore, the local property development scene continues to be robust with projects being launched in the key regions of Penang, the Klang Valley and Johor.

 

Mulroney points to positive signs in construction trends this year with demand “positively orientated”, supported by overall growth in the economy. He is also encouraged by the positive trend of projects in the pipeline.

 

Mulroney tells StarBizWeek that earnings should be “satisfactory” this year but declined to give any guidance on earnings although the 4%-5% sales volume growth seen last year should continue this year.

 

For the financial year ended Dec 31, 2012, the company's net profit rose about 10% year-on-year to RM349mil on revenue which grew 7% to RM2.74bil.

 

On the other hand, due to lower domestic cement selling price and plant maintenance, fourth-quarter net profit slipped 10% to RM105.72mil even though revenue increased 5% to RM690mil.

 

Mulroney says that a combination of product differentiation in terms of more environmentally sustainable products, continued growth in the construction sector and exports will help the company maintain its position in the domestic market, where it has a 40% share.

 

Price Instability
If there is one issue which Mulroney is concerned about, it's the pricing instability that has affected cement prices ever since Hume Cement Sdn Bhd came into the picture last year, adding another 1.5 million tonnes of capacity to the industry.

 

He says local cement producers cannot “stand still” in terms of their capacity or they will not be able to cope and lose their market share.

 

“YTL Cement Bhd and Cement Industries of Malaysia Bhd's (CIMA) expansion plans are very logical. They're in a growth market and so they need to increase their capacity,” Mulroney says.

 

Due to the increased competition, major industry players have taken to giving rebates and bulk discounts as they scramble to protect market share even after raising prices last August.

 

“The instability is extremely damaging to the construction sector and to our customers because it affects the service level we provide to our customers,” Mulroney adds.

 

He expects cement prices to gradually return to a more stable level in the next several months as demand for cement rises in the second half of the year with a number of infrastructure projects announced earlier coming through.


Resilience of Construction Sector
MIDF Investment Bank Bhd analyst Iqbal Zainal says in a report that the company's management believes signs of stability have emerged for cement prices in the first two months of the year.

 

He echoes Mulroney's views on the resilience of the construction sector as projects under the ETP and 10MP progress with property launches in the Klang Valley and Iskandar Malaysia.

 

But Mulroney says there is a lag between the announcement of projects and when the contracts are parcelled out where ETP and 10MP projects are concerned, therefore any realisation of earnings for the company will take time to show up.

 

Meanwhile, CIMB Investment Bank Bhd analyst Sharizan Rosely says the entry of Hume which triggered the industry-wide price instability in the fourth quarter is expected to continue into most of this year.

 

He observes that competition will intensify as industry capacity rises 22% by year-end. YTL Cement and CIMA plan another 1.5 million tonnes each of capacity.

 

“This will continue to affect Lafarge's net selling prices as industry average rebates remained high,” Sharizan points out, adding that the company may offset this with higher margin products.

 

He says net selling prices are expected to be under pressure in the medium term as it usually takes six to nine months for new plants to stabilise.

 

Going forward, analysts say mass rapid transit tunnel-lining works may help to lift earnings despite the price pressures.

 

Iqbal says Lafarge has a higher chance of securing the exclusive cement and concrete supply for the tunnelling project (managed by the MMC Corp Bhd-Gamuda Bhd joint venture) as the company not only has the various composite cement products to meet the requirements but also has the track record supplying cement to the same consortium.

 

Currently, Lafarge has exclusive contracts to supply cement for the KLIA2 project as well as the Manjung and Tanjung Bin power plant projects.

 

Given the competition, Mulroney says the company will look to secure projects with higher margins. “We'll look at the critical aspects of the project and where we can help in relation to the design and product required,” he says.

 

Moreover, Mulroney says the company's export buffer will help to mitigate some of the pressure from domestic competition. “We've the luxury, the room and flexibility compared to the others in terms of how we choose to manage competition.”