Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM4.05 based on 1.25x revised FY18F BVPS, consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles.

• Lafarge's FY17 results missed expectations, coming in at a higher net loss of RM215mil vs. our full-year net loss forecast of RM191.6mil and the full-year consensus net loss estimates of RM165.6mil. We believe the key variances against our forecast came from the slower than-expected recovery in sales volume and intense cement pricing in the market.

• The company posted a net loss of RM215mil in FY17 vs. net profit of RM77mil in FY16 YoY mainly due to weaker demand for cement, increased industry capacity and hence lowers 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 disposals and forex gains of RM9.2mil and RM7.8mil respectively, as well as improved aggregates sales. The aggregates business improved significantly, registering an operating profit of RM16.9mil in FY17, vs. an operating loss of RM1.8mil a year ago.

• Meanwhile, we maintain our sales volume assumption for FY18-20F of 7.5mil MT, 8.4mil MT and 9.1mil MT and ASP assumption of RM255/MT, RM265/MT and RM270/MT respectively. We strongly believe cement demand and ASP will improve in the coming years, backed by stable demand from the ongoing mega infrastructure projects and gradual recovery from the property sector.

• 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 - 26 Feb 2018