INVESTMENT HIGHLIGHTS

• Lafarge to resume cement supplies for ECRL contract

• The contract is worth RM270m

• The work resumption will allow Lafarge to see earnings contribution in FY19

• The news is positive, but largely expected

• The industry is expected to remain challenging

• Our recommendation on the takeover offer remains

Resumption of ECRL cement supplies contract. Following the instruction received by China Communications Construction (ECRL) Sdn Bhd (CCCE), Lafarge Cement Sdn Bhd has on 6 May 2019 received a letter from the former that the suspension of the company’s supplies shall now be ceased with immediate effect.

The contract is worth RM270m. To recap, the contract was awarded to Lafarge’s wholly-owned subsidiary, Lafarge Cement Sdn Bhd, on 19 March 2018. The job scope is for the supply of cement for all eight packages of work for the proposed East Coast Rail Link project, for a total estimated provisional sum of RM270m. On 5 July 2018, Lafarge has received instruction by CCCE to suspend the contract immediately, as the Malaysian government sought to review the ECRL project.

With the suspension already lifted, it enables Lafarge to resume its supplies of cement for the remaining term until 31 December 2019. As outlined in the agreement, contract renewal could be extended for a further two years subject to a mutually agreed renewal terms and conditions between Lafarge and CCCE.

The news is positive for Lafarge, which clears the air over the timeline on contract recommencement. By and large, we reckon this will benefit Lafarge financially and operationally with earnings contributions going ahead from FY19. With supplies worth RM270m, we have estimated an offtake of approximately 1.1m to 1.4m tonnes during the contract period. Assuming supplies span for three years, we derived an offtake of about 370k to 470k tonnes/ annually.

Environment is expected to remain challenging. While we are positive on the news, we think the current overall demand for the industry is still uninspiring. Accordingly, we believe the confluence of oversupplies and higher production costs would remain a stumbling block for Lafarge to stage a major turnaround in the immediate term.

Our earlier recommendation to investors stands. We find the takeover offer by YTL as a welcomed sight for investors. Largely, we believe the offer of RM3.75/ share as attractive at 1.3x PBV. This is considering the negative results booked by Lafarge since FY17, which have yet seen any significant signs of improvement. YTL’s valuation of RM3.75 per share represents an attractive premium of >100% over our last TP. In a broader sense, the takeover action is strategically positive for the industry, allowing for further capacity cuts and more stable pricing environment. However, with the industry utilization remains well below its 5-year average; we expect that it would take a while before demand eventually picks up again, should we incorporate the outlook in the long-term. ACCEPT OFFER.

Source: MIDF Research - 8 May 2019