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Lafarge Malaysia insulated from major risks

Apr, 10 2012

LAST week, there was some newsflow indicating that Indonesia may impose a 25% export tax on coal. The policy has not been firmed up. However, if the proposal is implemented, it will have a negative impact on Lafarge.

The group currently sources 100% of its coal requirement from Indonesia, while in terms of costs, fuel and energy constitutes about 30% of the group's production cost. However, we take comfort that Lafarge has locked in the price and volume for some of its coal requirement this year, and has also hedged some its requirement via index-linked prices, leaving very little exposure to spot prices and risk to the proposed 25% tax.

Alternatively, the group is able to source its coal requirement from Australia, of which prices could range from 10% to 20% higher due to transportation cost and quality of coal, but still below the potential effective cost rising from the proposed 25% tax.

Based on our simulation, all things remain equal, for every US$5 increase in coal price, earnings will be cut by 6%. Currently, the price of coal remains high at around US$110 per tonne. Despite the high coal cost in recent years, Lafarge has managed to consistently maintain its earnings before interest, taxes, depreciation and amortisation margin at above 20%, through various initiatives including improving plant efficiency.

This year, fuelled by on-going projects like the Second Penang Bridge, KLIA 2 and the LRT extension, we expect the construction sector to register a stronger growth of 7% from the 3.5% in 2011.

Despite the anticipated slew of infrastructure projects in the pipeline, we believe there will be sufficient capacity to accommodate the demand growth, as we gather that industry utilisation is only at around 70%.

As for Lafarge, the proportion of sales between local consumption and exports remains relatively unchanged at 70:30. This suggests that the group could easily switch its sales mix if there is a spike in local demand.

Despite the strong volume growth, we gather that the rebates offered by manufacturers continue to be within the RM40-to-RM60-per-tonne range. This results in an effective selling price of about RM280 per tonne.

On a positive note, the rebates being handed out over the past nine months remained relatively stable, hence reducing the concern of a price war. Going forward, we expect the trend to continue if not narrow, as demand is anticipated to grow.

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