Investment Highlights

• We cut our FY17F-19F earnings by 58%, 32% and 17% respectively, trim our FV to RM4.39 (previous RM4.45) but maintain our HOLD call for Lafarge Malaysia (LM). Our FV is based on 1.25x P/B, consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles.

• We anticipate a weaker-than-expected 3QFY17 for LM, taking the cue from the subdued Jul-Sep 2017 quarterly results announced by LM's smaller competitors Tasek and Hume Industries last week.

• Tasek, which currently controls ~7% market share (annual capacity of 2.3mil MT), posted an operating profit that was relatively flat QoQ at RM0.5mil despite an 8.5% increase in its top line to RM146.5mil. We believe Tasek could have resorted to a more aggressive pricing strategy to gain market share. Also not helping was the escalation in production costs.

• Similarly, Hume Industries, which controls ~6% market share (annual capacity of 1.8mil MT), saw both revenue and operating profit slipping by 14% to RM161mil and 11% to RM8.1mil QoQ respectively. Hume Industries had warned about lower ASP and higher operating cost QoQ. We believe its sales volume was flat or slightly lower QoQ during the quarter.

• We do not expect LM to be spared the lull in Jul-Sep 2017. While we maintain our FY17-19F ASP assumptions for LM of RM245/MT, RM255/MT and RM265/MT respectively, we lower our sales volume assumptions for FY17-19F by 2%, 3% and 1% from 7.8mil MT, 8.4mil MT and 9.1mil MT, to 7.6mil MT, 8.2mil MT and 9.0mil MT respectively.

• 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 - 13 Nov 2017