Capacity expansion in the pipeline for Lafarge

Capacity expansion in the pipeline for Lafarge
Business & Markets 2013
Written by Affin IB Research
Friday, 13 September 2013 09:45

Lafarge Malaysia Bhd
(Sept 12, RM9.80)
Maintain reduce at RM9.49 with a target price of RM8.50: While the average selling price (ASP) for ordinary portland cement was under pressure in the first half of 2013 (1H13), falling below 1H12’s average price level, we gather that the ASP has been showing signs of stability.

This is anticipated as we expect the demand level for cement to continue to hold up well into the medium to long term period, supported by the various ongoing and planned infrastructure projects.

In our earnings model, we have factored in an ASP of RM307 per tonne in 2013, a RM4 per tonne increase from 2012 financial year’s (FY12) ASP.

To ensure that the company is able to ride on the buoyant domestic demand as well as retain its market position, Lafarge is embarking on a capacity expansion programme. Management guided that they would add grinding capacity at its plants in Rawang, Selangor and Khantan, Perak. The proposed capacity expansion will increase Lafarge’s cement capacity by 1.2 million tonnes a year, from its existing installed cement capacity of about 13 million tonnes a year.

The capital expenditure (capex) required for the expansion has not been finalised yet. As such, we have yet to make any changes to our capex assumption of RM55 million for FY13 to FY15, which only takes its working capital into consideration.

We are not concerned over funding as Lafarge has minimal borrowings and is currently in a net cash position. CONSTRUCTION [] is expected to start by the fourth quarter of 2013 and the new capacity is expected to come on stream by 1H15.

Once the new capacity comes on stream, Lafarge will release its Langkawi plant’s capacity to further tap into the export markets — Sri Lanka, Indonesia and Bangladesh, among others.

Currently, Lafarge exports an average of 30% of its production volume. Although the margin is more attractive in the domestic market, Lafarge will continue to sustain its export market to maintain its existing regional relationship and distribution network.

One of the concerns, in our opinion, is the rising cost of fuel as well as the potential hike in electricity tariffs, going forward. The total cost of energy (apart from coal) accounts for about 20% of Lafarge’s total cost of production. Given the current pressure on ASP, we think it is not easy for Lafarge to fully pass through the higher cost of fuel to customers. However, the impact will be negated by lower cost of coal. Year-to-date, the average cost of coal has fallen by 13% year-on-year to US$86 (RM281) per tonne compared to the same period last year.

Our current assumption for coal is US$90 per tonne in FY13 and FY14. — Affin IB Research, Sept 12
This article first appeared in The Edge Financial Daily, on September 13, 2013.