Investment Highlights

• We maintain our HOLD call but raise our FV for Lafarge Malaysia (LM) to RM4.45 (from RM3.55) as we switch our valuation methodology from earnings-based (P/E) to assetbased (P/B). As LM's earnings are likely to remain depressed over the medium term, an earnings-based valuation methodology becomes less relevant. We now value LM based on 1.25x P/B, consistent with its historical P/B during the transitional period between trough and mid cycle (Exhibit 1).

• We now project LM to make a net loss of RM23mil in FY17F (from a net profit of RM12mil previously). We also cut FY18- 19F net profit forecasts by 29% and 15% respectively. This follows our slight disappointment after a recent visit to the company.

• Key takeaways from our visit are: 1. Sales volume – LM remains cautious on sales volumes over the short term, as the pace of the rollout of mega infrastructure and property projects has been slower than expected. LM only expects to see a more meaningful pick-up in cement demand from 2H18, as these projects will have gathered stronger momentum by then. We therefore lower our FY17-19F sales volume assumptions to 7.8mil MT, 8.4mil MT and 9.1mil MT (from 8.1mil MT, 9.1mil MT and 9.3mil MT previously). In the meantime, to optimise its operations, LM has temporarily taken certain production lines off-line, pending the pick-up in demand. 2. ASP – However, LM said that the effective cement selling prices have started to recover, albeit marginally, from 3QFY17, and should continue to trend up for the remainder of the year, in 2018 and beyond. This follows the increasing realization by players in the industry that it does no good to anyone by continuously absorbing the rising production costs, resulting in depressed margins or losses. We are more inclined to wait and see if this materialises, and therefore keeping our FY17-19F ASP assumptions at RM245/MT, RM255/MT and RM265/MT respectively. YTD, we estimate that cement ASP has averaged at RM250-RM260/MT. 3. Capex – LM guided for RM250mil annually, largely for the upgrading of its existing plants to improve efficiency which will translate to cost savings.

• We like LM 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 practises strong environmental, social and governance (ESG) standards. However, while the demand for cement will 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.

Source: AmInvest Research - 10 Oct 2017