Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM4.23 for Lafarge Malaysia (Lafarge) following an analyst briefing yesterday. Our FV is based on 1.25x FY17F book value of equity per share (BVPS), consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles.

• Lafarge reiterated that it will continue to pursue its ongoing strategic initiatives to achieve profitability in the near term, after suffering a RM135mil net loss for 9MFY17. This is consistent with our forecast of a turnaround in FY18F with a net profit of RM4.7mil, from a net loss of RM165.1mil in FY17F. In our forecasts, the turnaround will also be driven by a higher ASP and sales volume. We are keeping our FY17-19F ASP assumptions of RM245/tonne, RM255/tonne and RM265/tonne respectively and FY17-19F sales volume assumptions of 7.1mil tonnes, 7.8mil tonnes and 8.4mil tonnes respectively.

• The strategic initiatives include:

1. Cost optimisation – Lafarge plans to source petroleum coke (20-30% of total production cost) directly from the Middle East, which will result in 5- 10% savings in terms of cost, apart from buying it from local suppliers.

2. Asset optimisation – The Rawang plant is in the process of “modernisation” (to be completed in 2018) in order to achieve greater efficiency and reliability. This includes the installation of a roller press and bag filter as well as the upgrading of packer and palletizer lines. Additionally, Lafarge plans to reduce its logistic cost by switching the transport mode from road to rail, minimising demurrage (charges for the delays in loading/unloading at the ports) and network optimisation.

3. The company is also widening its reach to the high-margin retail segment (which we believe is just a fraction of total sales currently), comprising small contractors, renovators and homeowners, via: (1) additional flagship stores across the country (to date 33 stores, target 40 by end-2017), (2) two Pro-Builder Centre (PBC) stores by end- 2017 which carry a comprehensive range of building materials; and (3) e-commerce channels (such as Lazada) with attractive offers.

Source: AmInvest Research - 7 Dec 2017