Investment Highlights

• We now project a steeper FY19–21F net loss of RM184.8mil, RM47.3mil and RM14.3mil respectively for Lafarge Malaysia (vs. net loss forecast of RM125.7mil, RM45mil and RM11.9mil previously), reduce our FV by 3% to RM3.61 (from RM3.74 previously) as we now value the company based on US$102 per clinker tonne capacity, at a 15% discount to the replacement cost of US$120 (to reflect the still challenging cement sector outlook in Peninsular Malaysia). We previously valued the company at 1.25x book value. Maintain HOLD.

• Lafarge 1HFY19 results missed expectations. It reported a net loss of RM94.8mil, vs. our full-year net loss forecast of RM125.7mil and the full-year consensus net loss of RM155.6mil. We believe the variances against our forecast came largely from the weak sales volume amidst the prolonged slowdown in the property sector, coupled with higher energy cost. However, the loss before tax of RM99mil in 1HFY19 narrowed vs. RM172mil in 1HFY18 mainly due to the cost synergy arising from the entry of a new controlling shareholder, i.e. YTL Cement.

• Our earnings downgrade is largely to reflect a lower sales volume assumption in FY19F of 6.2mil tonnes (vs. 6.4mil tonnes previously), coupled with a higher energy cost. This is partially cushioned by improved efficiency and cost synergy following the entry of YTL Cement. We are keeping our FY20–21F sales volume assumptions of 7mil and 7.4mil tonnes respectively, as well as our cement price assumption of RM190/tonne for FY19-21F.

• We 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 service).

• 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 which resulted in the merged entity controlling about 60% of the cement market in Peninsular Malaysia (Exhibit 2), should bring about great operational efficiency and cost synergy.

Source: AmInvest Research - 30 Aug 2019