Investment Highlights

• We cut our FY17-19F net profit forecasts by 84%, 24% and 2% respectively, reduce our FV by 24% to RM3.67 (from RM4.68) 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) 1HFY17 results missed expectations, at a net loss of RM93mil vs. our full-year net profit forecast of RM75mil and full-year consensus net profit estimates of RM78.3mil. We believe the key variances against our forecast came from the slowerthan-expected recovery in both ASP and sales volume as well as high operating cost.

• We now forecast sales volume to drop by 3% in FY17 and to pick up gradually by 1% in FY18 (vs. 1% and 3% we assumed previously), while maintain our average ASP assumptions of RM245/tonne and RM255/tonne in FY17F and FY18F.

• LM dived into the red with a net loss of RM93mil in 1HFY17 vs. a RM39mil net profit a year ago largely due to weak demand and hence ASP for cement on the back of fierce competition in the market. Not helping either was the high operating cost (i.e. fuel and electricity) and higher depreciation cost for PPE.

• These were partially cushioned by land disposal and forex gains of RM9.2mil and RM5.6mil respectively, as well as improved aggregates sales. The aggregates business returned to the black with an operating profit of RM6mil in 1HFY17, vs. an operating loss of RM1.2mil a year ago.

• LM continues to optimise its assets and operations (particularly in logistics) in order to cut cost. To boost its topline performance, LM is stepping up its efforts to differentiate its products and services (for instance, via the introduction of Lafarge PROSOLUTIONS which offers complete range of product portfolios from brick laying to skim coating), and expand its reach to customers by setting up flagship retail outlets across the country (11 flagship retail outlets have been set up so far).

• We like Lafarge Malaysia because: 1) it is the dominant player in the cement sector in Peninsular Malaysia with a 40% market share, making it a good proxy for public infrastructure spending; and 2) it practices strong environmental, social and governance (ESG) standards. However, while the demand for cement shall pick up over the near term thanks to the rollout of key mega infrastructure projects, it may not immediately absorb the expanded industry capacity stemming from aggressive capex by key players in recent years. We believe LM needs to show better earnings to support higher

Source: AmInvest Research - 30 Aug 2017