Investment Highlights

• We downgrade our recommendation for Lafarge Malaysia (Lafarge) to UNDERWEIGHT from HOLD with a lower FV of RM1.52 based on a reduced P/B ratio of 0.5x (from RM3.67 with a P/B ratio of 1.25x previously). The change in our P/B ratio is to reflect an expected prolonged trough in the cement sector in Peninsular Malaysia. Historically, Lafarge traded at a P/B ratio of about 0.5x during the trough period (Exhibit 1).

• We now project a steeper net loss of RM278.5mil in FY18F (vs. a net loss of RM178mil previously) and RM196mil and RM47.8mil net losses in FY19–20F respectively (from small profits previously) as we further cut our assumptions on average selling prices (ASP) and sales volumes to reflect the cutback in public infrastructure spending, coupled with the sustained weakness in the property sector.

• We lower our ASP/tonne assumptions in FY18-20F for Lafarge by 15–24% to RM200, RM190 and RM210 (from RM235, RM250 and RM260 previously). We also reduce our sales volume assumptions in tonnage in FY18–20F for Lafarge by 2–22% to 6.9mil, 6.5mil and 7.2mil (from 7.1mil, 8.4mil and 9.1mil previously).

• The outlook for the cement sector in Peninsular Malaysia remains challenging over the medium term due to the wide gap between the local demand vs. installed capacity. We estimate that the total clinker capacity in Peninsular Malaysia now stands at 26mil tonnes, as compared with the local demand that we project at only 17mil in 2018 and 16mil in 2019. Apart from the hefty capacity cost (depreciation), the absence of pricing power in a glut situation means players are also unable to pass on higher production cost to end users. Based on historical statistics, we estimated that, in general, players could only turn profitable when the local demand recovers to 20mil tonnes and above annually.

Source: AmInvest Research - 4 Jan 2019