1. Analysis of the company's competitive strategy, and how this has manifested itself in historical return on assets and equity (ROA/ROE); how is this competitive strategy expected to evolve in the future; what are specific threats and risk factors the company faces?
ROA/ROE:
*ROA = Return on total assets, (e) = estimated
The commendable fact is that ROA & ROE of LMC showed a positive growth during the recent crisis period. This observation is bolstered by the report from The 7th Malaysia construction sector review & Outlook where it is quoted that the Malaysian Construction Sector was the only sector that recorded a positive growth during every quarter of 2009. This is attributed to the 9th Malaysia Plan’s two Stimulus Packages amounting to RM67 billion as well as the relative stability of building material prices.
Decline in 2010: The cement demand was expected to grow on the strength of housing demand and construction in 2010 in peninsular Malaysia but there was only a marginal growth. The lack of growth was partly contributed to a more volatile domestic market with very keen competition for sales volume especially in the beginning and towards the end of the year, couple with the lower prices in the export markets and the cost pressure from escalating coal and Oil prices.
There was a setback in the performance of the plants in 2010 resulting in higher cost of production, repairs and maintenance. As a result, the revenue and pre-tax declined to RM 2.323 billion and RM 345 million in 2010 respectively from RM 2.483 billion and RM 442 million in 2009 (CEO’s statement in 2010 - Annual report).
Decline from 2003 till 2005:
The construction sector recorded a decline of 2% in 2004 compared to a 2% growth in 2003. This lead to a reduced cement demand by 5% compared to a 20% growth in the previous year. Lower selling prices and higher fuel costs also contributed to the poor performance. The operating cash flow declined to RM 224 million in 2004 from RM402 million in 2003.Capital expenditure increased in 2004 due to a relocation of plant which was done in an effort to increase logistic cost savings. Also, on 25 November 2004, Lafarge Aggregate Sdn Bhd (“LASB”), a wholly-owned subsidiary of Lafarge Malayan Cement Berhad, acquired the entire issued and paid-up share capital of Mutiara Kuari Sdn Bhd (a company incorporated in Malaysia) for a cash consideration of RM14.6 million, which was accounted in the expenses.
The cement demand contracted to a further 3% in 2005. Net profit in 2005 was 64% lower than the previous year which is, again, attributed to the squeeze in margins arising from higher fuel costs and lower selling prices. Production and logistic costs increased by more than 30% in 2004 & 2005, for fuel and transportation costs. Overall, the poor performance was attributed to increase in fuel and logistic costs, lower cement demand, lower average selling prices and competition. (Source: Annual reports 2003,2004 & 2005)
Specific threats and risk factors: LMCB remains exposed to volatile thermal coal prices as well as the cyclicality of the construction and property sectors. Price undercutting, which had occurred in the past, has been less of an issue in recent times due to a more concentrated sector with fewer manufacturers. The structural change in the cement industry has also resulted in the ability to pass on a large part of higher production costs to consumers. (Source: RAM Ratings)
Pros:
· Leading player in the sector
· Pricing power and hence, ability to transfer rising costs of coal and other fuel prices.
· 10th Malaysia plan leading to more infrastructure based products
· Parent company, Lafarge SA’s, global network and hence, ability to export excess capacity leveraging on the international trading network of Lafarge.
· Product innovation; First Malaysian cement company to have two of its cement products awarded the green label certification by the Singapore environment council, in May 2010.
· Rising trend in ROA & ROE in 2011 and 2012, as forecasted by Reuters.
Cons:
· Rising thermal coal prices and fuel prices
· The competition Act 2010. This act, which will come into force from Jan 2012, ensures to provide a level playing ground for all companies, international and local, to promote a competitive environment. On a side note, this act could be aimed more towards making Government Linked Companies (GLC’s) more competitive. But, LMC’s pricing power, due to its leadership position, may get hit.
· The customer satisfaction survey conducted in 2010 showed a decline in customer confidence.
The stock looks to be good for long term investment, say, for one to two years, from now.
