Operating Efficiency is Key for Lafarge, says CIDB Research



7 March 2014


KUALA LUPUR: Lafarge Malayan Cement's assessment of the FY13 results, and the outlook in 2014, ties in with CIMB Equities Research's expectations.


"Competition is likely to undergo a natural progression into 2014 as demand for cement should continue to be healthy, though the rate of growth is likely to moderate from the 6-8% in 2013 to around 3-4% in 2014," the research house said on Friday.


CIMB Research said this was in line with the completion of orders from major infra and specialised projects in 2013, such as the KLIA 2.


It added that Lafarge's management highlighted that the sales volume for ready mixed concrete was weak in 4Q13 due to KLIA 2, which is now expected to be operational by May this year.


"For 2014, there are still pockets of opportunities, especially in the residential and non-residential segment, which makes up a combined 60% of the breakdown of the domestic construction sector.


"The balance 40% are major infra projects such as the MRT and highways, but new jobs in this segment have yet to take off," it said.


CIMB Research said differentiation will be the main focus in 2014 for Lafarge, which is similar to the strategy last year.


Being the dominant cement player, distribution network and value added products are two main factors that put Lafarge ahead of its competitors.


"Lafarge also plans to continue to optimise plant efficiency in order to preserve margins," it added.


The group's new flagship ready-mix cement plant which will come on stream soon in Jalan Chan Sow Lin speaks volumes about the group's continued efforts to strengthen its production and distribution network.


Value added products, which yield higher margins, continue to be one of the key opportunities to partially offset the impact of rising competition.


"Overall, we are encouraged that these will continue to be the core strategy but competition and cost risks remain the dampeners," it pointed out.


Lafarge's guidance of RM250mil to RM300mil capex phased over the next two to three years was not a surprise, as this should also reflect the capex for the group's plant in Kanthan in the northern region.


This should not impair the group's ability to maintain its historical dividend payout ratio of 80%-90%.


"Management hinted that the group will see the full impact of rising costs in 2014, coming from the average 19% increase in electricity tariffs, substantial but undisclosed higher freight tariffs by KTM, forex risks and the removal of diesel subsidies.


"Margin erosion is still a possibility unless it is partially countered by raising selling prices, which, could be the next move unless competition intensifies in line with rising demand.


"We continue to feel that in the environment of likely rising competition ahead and continued volatility in pricing rebates, larger quantum selling price increases may be ineffective and could be a last resort.


"As it is, management concurred that the current average effective selling prices, particularly for cement, looks unsustainable. Management will continue to evaluate this option on a month on month basis," said CIMB Research.