Investment Highlights

• We now project FY19–21F net loss of RM125.7mil, RM45mil and RM11.9mil respectively for Lafarge Malaysia (vs. net profit forecasts of RM2.2mil, 221.4mil and RM215mil previously), but maintain our FV of RM3.74 based on 1.25x book value, consistent with its historical 1.25x P/B ratio during the transitional period between trough and mid cycles (Exhibit 1). Maintain HOLD.

• A week has passed with no major news reports about local cement players being disgruntled with the decision by the Ministry of Domestic Trade and Consumer Affairs to reject a proposed 40–50% hike in cement prices in Peninsular Malaysia (that could have translated to higher costs for affordable housing). We take it that the cement players have come to terms with the reality that depressed cement prices are here to stay.

• However, we now believe that with Lafarge Malaysia and YTL Cement coming under the same roof after the recent takeover of Lafarge Malaysia by YTL Cement, there is ample room for the merged entity to streamline their combined operations (including shutting down some of the plants to reduce certain variable costs) and derive cost synergies (for instance, better bargaining power in procurement of raw materials and plant maintenance services).

• The earnings downgrade is largely to reflect the reversion of our average selling price assumption for cement in FY19–21F to RM190/tonne (from RM220/tonne in FY19F, and RM250/tonne in FY20–21F previously), partially cushioned by better operational efficiency and cost synergy. We are keeping our FY19–21F assumptions for sales volumes of 6.4mil, 7mil and 7.4mil tonnes respectively.

• The outlook for the cement sector in Peninsular Malaysia will remain challenging over the medium term due to the wide gap between the local demand vs. installed capacity. We estimate that the local clinker capacity in Peninsular Malaysia now stands at 26mil tonnes, as compared with our projected local demand at only 15mil tonnes in 2019 and 16mil tonnes in 2020 (Exhibit 3). However, the takeover of Lafarge Malaysia by YTL Cement resulting in the merged entity controls about 60% of the cement market in Peninsular Malaysia, should bring about great operational efficiency and cost synergy.

Source: AmInvest Research - 27 Jun 2019