There were no major surprises in our recent meeting with Lafarge’s management. Lafarge expects subdued domestic demand in 2019, given the prolonged soft property market and ongoing government review of public-sector projects. This will be partially offset by better export sales, driven by higher export volumes to Bangladesh and Sri Lanka. While we expect the depressed domestic average selling prices (ASPs) to continue in general, some ASP pick-up may occur moving forward as the rising production costs are passed through. Following the share price run-up recently, we downgrade our call to SELL from Hold with an unchanged TP of RM2.00.

Domestic Cement Demand Remains Lacklustre

Lafarge foresees subdued domestic cement demand to continue in 2019. The recovery in the property market will take longer as the oversupply overhang and affordability issue continue to plague the industry. The potential revival of the East Coast Rail Link (ECRL) project is positive for the group as it had secured a cement supply contract previously. But we believe it is not sufficient to bump up the group’s domestic sales as it only adds 300-400k MT per year of cement sales over a 3-year period. The cement export ASP has improved by c.20% in 2018 and is expected to be flat in 2019. We expect export volumes to improve in 2019, driven by clinker demand from Bangladesh and Sri Lanka. Though a pick-up in domestic demand and prices remain the key factors for an earnings recovery, better export sales will help partially mitigate the impact of a subdued domestic market.

Current Oversupply Continues to Suppress Selling Prices

The current situation continues to put downward pressure on domestic cement prices. The domestic cement ASP was at its lowest in 4Q18, and Lafarge expects prices to pick up in 2019 as the current domestic cement price is not sustainable, given that most of the cement companies are making losses. The higher cost of production, partly due to higher energy costs, is likely to put pressure on domestic players to raise cement prices.

Rising Cost of Production

The cost of production has been high partly due to the higher electricity cost (comprises about 20% of total production cost) as a result of a 3% increase in the effective electricity tariff from 1 March 2019. The coal cost (comprises about 30% of total production cost) remains high, though it moderated to about US$93-97/MT in March 2019 compared to US$101- 103/MT in December 2018.

Source: Affin Hwang Research - 5 Apr 2019