Lafarge Malaysia Bhd (June 11, RM9.30)

Maintain underperform with a higher target price of RM8.68: Management said the first quarter ended March of financial year 2015 (1QFY15) performed better than 4QFY14 due to better sales from cement and concrete.

This is believed to have been driven by a pre-goods and services tax rush and strong domestic sales. Improved cost of production was also a factor, due to better cost efficiency via increased petroleum coke usage and the renegotiation of a contract for transport cost in view of declining global oil prices. Note that fuel cost (including coal) comprises 12% of total revenue and transport costs 20%.

We visited Lafarge’s Construction Development Lab and looked at showcased projects, and we came away feeling reassured by the group’s continuous efforts to maintain its status of market leader by providing value-added solutions to its customers.

The projects showcased were Fastbuild, a new industrial building system, and Smart Build, a house built via conventional construction solution.

Fastbuild has consistent quality, and reduces construction time —  for the entire structure of one floor by 84% and the cost by 36%.

This means the one-floor structure can be completed within just four days compared with 25 days using conventional methods. Using Fastbuild, eliminates the need for brickwork and plastering, which reduces construction time significantly.

We gather that management is currently still in discussions with the government to adopt the Fastbuild solution for the affordable housing market and is planning to commercialise Fastbuild by this year.

If this materialises, Lafarge could benefit from the 11th Malaysia Plan (11MP), under which 606,000 affordable houses will be built. But this may not take place in the near term as the discussion with the government is still in the preliminary stage.

Given that there is no disclosure on pricing of these solutions, we are unable to ascertain the earnings impact once all of these products are fully commercialised.

The ordinary cement products still contribute to the bulk of Lafarge’s earnings. — Kenanga Research

This article first appeared in The Edge Financial Daily, on June 12, 2015.

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