Investment Highlights

• We now project a much larger net loss of RM165.1mil in FY17F (from a RM36.5mil net loss forecast previously) as we cut our FY18-19F net profit forecasts by 90% and 40% respectively, trim our FV by 4% to RM4.23 ( from RM4.39), but maintain our HOLD call for Lafarge Malaysia (Lafarge). Our FV is based on 1.25x revised FY17F BVPS, consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles.

• Lafarge's 9MFY17 results missed expectations, at a higher net loss of RM135mil vs. our full-year net loss forecast of RM36.5mil and the full-year consensus net profit estimates of RM18.5mil. We believe the key variances against our forecast came from the slowerthan- expected recovery in sales volume.

• We now lower our sales volume assumptions for FY17- 19F by 7%, 5% and 7% from 7.6mil MT, 8.2mil MT and 9.0mil, to 7.1mil MT, 7.8mil MT and 8.4mil MT respectively, while maintaining our FY17-19F ASP assumptions for Lafarge of RM245/MT, RM255/MT and RM265/MT respectively.

• Lafarge recorded 9MFY17 net loss of RM135mil vs. net profit of RM43mil a year ago largely due to soft demand, increased industry capacity and hence lower 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 improved significantly registering an operating profit of RM14.4mil in 9MFY17, vs. an operating profit of RM5.1mil a year ago.

• We like Lafarge 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 - 4 Dec 2017