Lafarge call lifted to ‘hold’, seen as proxy to ride on construction upturn

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research has upgraded Lafarge Malaysia Bhd to “hold” with a higher target price of RM6.15 and said the group is a proxy to ride on the construction upcycle.

In a note today, its analyst Yip Kah Ming said the research house opined that although the group’s earnings have bottomed, it is poised for a recovery given the improvement in cement price and leaner cost structure.

Moreover, Yip said he believes the improvement in cement price is sustainable given no new supply capacity coupled with demand pick up in the near term.

“We upgrade Lafarge to ‘hold’ with a higher target price of RM6.15 after pegging the stock at price-to-book (P/B) ratio of 1.7 times, which is 1SD below Lafarge’s two-year historical mean.”

Yip further explained that the improvement in cement price coupled with picking up of mega infrastructure projects signifies that earnings may have bottomed and is poised for a recovery.

However, he said the research house believed that the expected earnings recovery has been largely reflected after a recent run-up of the share price.

“Although we opine that earnings have bottomed, the magnitude of its potential recovery remains vague in the near term.

“Hence, we think that a price earnings based valuation underappreciates the intrinsic value of the company given its giant market share in the local cement industry, which is a beneficiary from the construction boom.”

To recap, Lafarge Malaysia’s 1H’FY17 bottomline swung year-on-year from profit to a loss of RM49.7 million, mainly due to lower sales contribution from the cement segment caused by soft market demand, increased industry capacity and continued pricing pressures.

However, Yip said the research house gathered that cement price has stabilised and improved since 2H’2017 even without significant improvement in demand.

“We deem this as a signal that cement price has hit rock bottom and is poised for a recovery,” he added.

On demand, he said based on the research house’s tracking of domestic contract awards to listed contractors, last year saw a record RM56 billion dished out, supported by mega jobs such as the MRT2 and several highway projects.

“We reckon that most of these jobs will hit a more significant rate of progress from 2H’2017 onwards, aiding the demand for cement.”

Going forward, Yip said HLIB Research expected Lafarge to have a leaner operating cost structure due to cost optimisation exercises, which resuledt in improved efficiency in its Rawang and Kanthan, Perak plant.