Investment Highlights

• We cut our FV and earnings forecast for Lafarge Malaysia's (LM) FY17-18F, projecting a higher net loss of RM192.0mil and RM16.4mil in FY17 and FY18F respectively (vs. net loss of RM165.1mil and net profit of RM4.7mil in FY17-18F previously). We maintain our earnings projection for FY19, and trim our FV to RM4.05 (from RM4.23 previously). Our FV is based on 1.25x revised FY18F BVPS, consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles.

• We anticipate weaker-than-expected 4Q17 results for LM, following the subdued results (for the Oct-Dec 2017 quarter) posted by LM’s peers like Tasek Corporation and Hume Industries. Both companies saw a QoQ decline in their revenue and earnings.

• Tasek saw its revenue fall 8% QoQ to RM135mil while reporting an operating loss of RM9.6mil in Oct-Dec 2017 compared to an operating profit of RM0.5mil in the previous quarter. The soft demand for cement products, coupled with the intense cement pricing in the market have further deteriorated Tasek’s earnings. Another factor was the escalation in production costs.

• Similarly, Hume performed poorly in Oct-Dec 2017, when its operating profit plunged by 75% QoQ to RM2mil despite recording a marginal increase in its top line. Hume faced similar issues as Tasek’s, seeing lower sales attributable to weak cement demand and high production costs.

• We do not expect LM to be spared from the lull in Oct-Dec 2017. While we maintain our FY17, FY18F and FY19F ASP assumptions for LM of RM245/MT, RM255/MT and RM265/MT respectively, we lower our sales volume assumptions for FY17-18F by 5% and 3% from 7.1mil MT and 7.8mil MT to 6.8mil MT and 7.5mil MT respectively. Meanwhile, we maintain our sales volume assumption for FY19F at 8.4mil MT on the back of stable demand in FY19F onwards from ongoing mega infrastructure projects.

• We continue to 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 practices 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 - 19 Feb 2018