KUCHING: Despite the recent positive news flow of giant infrastructure projects, cement giant Lafarge Malaysia Bhd (Lafarge) will likely continue to face dark times due to its tenacious operating expenditure (opex).
In a corporate update by the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), Lafarge’s opex has persisted at a five year median of RM600 million.
The unwavering opex has caused the group’s operating margin to plunge to a low of minus 11.43 per cent and has been cited by the research arm as one of the main reasons why they expect the group’s operating income to further deteriorate in the near to medium term.
Other reasons include the continued oversupply of the cement market, including premix concrete and clinkers and the sharp drop of conventional infrastructure awards.
In comparison to Lafarge’s peers, only Jinyuan Cement Co Ltd and Gansu Qilianshan Cement Group Co Ltd showcased similar operating margins at -17.39 per cent and -19.06 per cent respectively.
Furthermore, the research arm notes that there is a potential of Lafarge’s opex further increasing due to the possibility of the electricity tariff being revised higher in Jan 2018 in response to the rising global coal prices.
“Currently, energy and electricity consist of over 50 epr cent of Lafarge’s opex,” MIDF Research said in the note.
“Thus, changes in electricity tariff and commodities prices bear significant impact to Lafarge’s operating income.”
Looking forward, the research arm is also expecting compressed earnings for the group as its volatile earnings since the third quarter of financial year 2016 (3QFY16) will likely beckon tougher times ahead for Lafarge, especially when considering the sharp drop in conventional infrastructure projects for 1QFY17.
Any early signs of a comeback or revival, however, would mostly stem from the performance of the group’s pre-mix concrete segment which constitutes 20 per cent of its current revenue mix.
“So far, the premix concrete revenue growth is sluggish registering only _2.06 per cent quarter over quarter,” reported the research arm.
All things considered, MIDF Research maintained its ‘sell’ recommendation on the stock with a target price of RM3.80 per share.