HONG Leong Investment Bank (HLIB) Research sees the RM254 million concrete supply contract awarded to Lafarge Malaysia and its purchase of cement mill from Lafarge Ciment (Romania) S.A. for RM45.96 million as positive for the group.
The research house said the five-year contract to supply concrete for the Refinery and Petrochemicals Integrated Development project and other Petronas-related projects in Pengerang, Johor, is in line with its positive outlook on the company.
As for the purchase of cement mill and ancillaries, it sees the move as beneficial to Lafarge Malaysia as acquiring a relatively new cement mill and equipment from the related party would generate cost savings compared with buying a new mill from a different party.
“Furthermore, we feel that the acquisition impact on the cash level is minimal as the total consideration is only 10.6 per cent of the total net cash. Lafarge’s net cash was RM434.1 million as at the third quarter of the financial year 2014,” it said in its note to investors.
Lafarge Malaysia is buying cement mill and ancillaries from Lafarge Ciment for €10.7 million (RM45.5 million), following the sale and purchase agreement dated Tuesday.
Under the deal, Lafarge Ciment will supply to Lafarge Malaysia the assets, including the main machine, auxiliaries, electrical, instrumentation, automation parts inclusive of commissioning spare parts. These ancillaries are in an unused state and condition as first received by Lafarge Ciment.
The acquisition will be satisfied by cash in two tranches, the first tranche of €1 million will be paid upfront with the second tranche to be paid within 30 days upon receiving the assets.
HLIB has maintained its forecasts on Lafarge Malaysia as the impact from the acquisition is immaterial and the contract awarded is in line with its view.
It cited catalysts to the acquisition which include timely implementation of Economic Transformation Programme (ETP) projects and sustainable demand from property development projects.
The risks outlined by the research house include delays in the implementation of projects under the ETP, which could result in lower-than-expected demand for cement consumption, intensification of price war, and steep rise in energy prices, especially coal and electricity.
HLIB reiterated its “buy” call on Lafarge Malaysia, with a target price of RM10.72.
Lafarge stock closed 11 sen higher at RM10.02 on Bursa Malaysia yesterday.