Investment Highlights

• We cut our FY17-19F net profit forecasts by 39%, 19% and 23% respectively, reduce our FV by 18% to RM4.70 (from RM5.70) but maintain our HOLD call. Our FV is based on 24x revised FY18F EPS (our forward target PE of 24x is unchanged – at a 20% discount to its 5-year historical average).

• Lafarge Malaysia's (LM) 1QFY17 results missed expectations, at a net loss of RM63.4mil vs. our full-year net profit forecast of RM122mil and full-year consensus estimates of RM78.3mil. We believe the key variances against our forecast came from the slower-than-expected recovery in both ASP and sales volume.

• We now expect sales volume to only grow 1% and 3% in FY17F and FY18F respectively (vs. both 5% we assumed previously), while ASP to average at RM245/tonne and RM255/tonne in FY17F and FY18F (vs. RM250/tonne and RM260/tonne previously).

• LM dipped into the red with a loss before tax of RM63.4mil, vs. net profits of RM30.8mil in 1QFY17 and RM3.7mil in 4QFY16. The key culprits were: 1. Lackluster cement ASP and demand – Cement ASP remained weak in 1Q2017 as demand failed to pick up. Escalated operating cost from both higher fuel and electricity costs as well as a one-off disposal of subsidiary further aggravated the company’s earnings.

2. Partially mitigated by disposal and forex gains – A one-off gain of RM9.2mil and forex gain of RM4.9mil partially cushioned the losses before tax to the company’s bottom line.

• As LM's top line continues to come under pressure, it intensifies its efforts to cut cost by optimizing the company’s asset, operations and logistics. In addition, LM will continue to provide product differentiation, and develop solutions and offers to meet customers’ needs.

• We continue to like Lafarge Malaysia because: 1) as the country’s largest cement player, it controls 40% of Peninsular Malaysia cement market share, which makes it a good proxy for infrastructure spending; 2) the cement industry overcapacity which resulted in the softening ASP and low demand in 2016 has bottomed out with Incoming infrastructure projects expected to pick up in 2HFY17 and FY18; and 3) its strong corporate governance signals a high ESG score for the company. However, we believe it needs to show better earnings to support higher valuations

Source: AmInvest Research - 23 May 2017