Investment Highlights

• We now project a higher net loss of RM178mil in FY18F (vs. a net loss of RM16.4mil previously), cut our FY19- 20F forecasts by 68% and 37% respectively, and trim our FV by 9% to RM3.67 (from RM4.05). Our FV is based on 1.25x revised FY19F book value, consistent with its historical P/B ratio during the transitional period between the trough and mid-cycles. We maintain our HOLD call.

• Lafarge's 1QFY18 results missed expectations. It reported a net loss of RM68.7mil, vs. our full-year net loss forecast of RM16.4mil and the full-year consensus net profit estimates of RM12.1mil. We believe the key variances against our forecast came from the weak recovery in cement sales volume, intense price undercutting in the market, coupled with rising costs for inputs coke and petcoke. The 1QFY18 net loss widened compared with a net loss of RM48.9mil a year ago due to the same reasons.

• We reduce our sales volume assumption in FY18 to 7.1mil MT (from 7.5mil MT previously) while keeping FY19-20F sales volumes unchanged at 8.4mil MT and 9.1mil MT respectively. Additionally, we cut our ASP assumptions to RM235/MT, RM250/MT and RM260/MT in FY18-20F respectively (from RM255/MT, RM260/MT and RM270/MT previously) to reflect the soft conditions of the local cement industry.

• The prospects of cement players will weaken further following the government’s decision to put under review various mega infrastructure projects on grounds of fiscal prudence. These projects could potentially be deferred, scaled down or even cancelled, translating to weaker demand for cement.

• Particularly, Lafarge could be directly hit by the potential cancellation of the East Coast Rail Link (ECRL) project. Recall, Lafarge has signed a 2-year cement supply contract worth RM270mil (with an estimated volume of 1.1mil MT to 1.3mil MT) with China Communication Construction (CCCC), the main contractor for the ECRL project.

Source: AmInvest Research - 23 May 2018