There was a letter circulating from a ready mixed concrete player to increase price by RM20-40/m³ effective 15 Jun 2019, due to recently announced cement price increase of 40%. We believe a 40% hike in cement prices (if materialises) is too steep and will unlikely be sustainable, as we believe underlying demand for cement will still be weak in the near term. No change to our forecast. Maintain HOLD with TP of RM3.75 which reflects the MGO price.

NEWSBREAK

Last week, there was a letter from a ready mixed concrete producer being circulated that prices of ready mixed concrete will be increased by RM20-40/m³ effective 15 Jun 2019, due to recently announced cement price increase of 40% and other significant increases in input costs. Besides, it was reported in the press that other cement suppliers also notified property developers that cement price will be increased from July 2019 onwards. We note the recent development has already resulted in Lafarge’s share price increasing by 8.5% since early last week.

HLIB’s VIEW

Hike may be unsustainable. While the takeover of Lafarge (by YTL Corp) will result better pricing power (as the takeover, once completed, will boost YTL Corp’s market share in the cement industry increasing to 60%), we believe a 40% hike in cement price (if materialises) is too steep and will unlikely be sustainable. This is as we believe underlying demand for cement will still be weak in the near term, on the back of weak construction activities. Furthermore, the issue of the potential price increase has been brought to the attention of the Government and that the Finance Ministry and Domestic Trade and Consumer Affairs Ministry will soon meet to deliberate the matter. We understand that the current market price of cement is at RM195/MT and that a 40% increase would price it at RM273/MT.

Forecast. Unchanged for now as we reckon that the situation still remains fluid. We forecast Lafarge to report losses of RM168.8m in FY19 and further narrow the losses to RM66.6m in FY20. We are reiterating our cement price assumption of RM200/MT at this juncture.

Maintain HOLD with TP of RM3.75. With the acquisition of 77% stake in Lafarge by YTL Corp completed, this should lead towards a recovery in cement prices over the longer term given the lion market share held by the enlarged entity. Nonetheless, we believe that the potential benefits of improved pricing power and operational rationalisation to improve efficiency will only be evident over the longer term. Our TP of RM3.75 reflects the recent MGO price.

Source: Hong Leong Investment Bank Research - 18 Jun 2019