Results

• 1H16 core net profit of RM41.6m (-68% yoy) came in below expectations accounting for 19.0% and 16.7% of our and street’s full year estimates.

Deviations

• Lower than expected cement contribution and one-off Holcim integration cost.

Dividend

• Declared 2nd interim single-tier DPS of 2 sen (2Q15: 8 sen), bringing DPS YTD to 5 sen. For the full year, we are projecting a total DPS of 11.0 sen.

Highlights

• YoY: 2QFY16 revenue declined 1.0% while core net profit contracted 73.1% yoy to RM15.9m. This is mainly attributed by softer market demand (affected by slowdown in property market and delay in implementation of some mega infrastructure projects) which led to lower cement sales and ASP, and to some extent, higher financing cost. In 1HFY16, operating profit margin squeezed further by 6.5%-pts yoy.

• QoQ: Despite coming from a seasonally weaker 1QFY16, revenue dropped 1.6% qoq while core net earnings fell by 38%. Notwithstanding a higher PBT of 12.4% qoq, the sharp decline in core net profit was due to higher taxation. At PBT level, the Cement segment staged a 5.1% improvement reinforced by a turnaround in the Aggregates and Concretes segment.

• Outlook: We expect near term demand for cement to remain soft as any initial demand pick up from implementation of mega infrastructure projects is likely to be offset by the expected supply expansion of circa 14% of the domestic cement capacity.

Risks

• Lower demand for cement consumption due to delays in the implementation of mega infrastructure projects

• Price competition worsened by cement capacity expansion

• Steep rise in energy prices, particularly coal and electricity

Forecasts

• FY16-FY17-FY18 earnings forecasts are reduced by 52%, 21% and 1.5% respectively after incorporating higher cement price rebate assumption (which resulted in lower average selling price assumption) and softer demand growth for cement in the near term.

Rating

HOLD, TP: RM7.14

• Positives – (1) Largest cement player; and (2) Positive cement demand outlook in the long term

• Negatives – (1) Illiquid share trading volume; (2) Weakening balance sheet; and (3) Pricey valuations.

Valuation

Maintain HOLD with TP reduced from RM7.19 to RM7.14 reflecting the downward revision in earnings. Our TP is pegged to P/E multiple or 22.5x of FY18 EPS as we expect earnings to begin normalizing once infrastructure projects are implemented.

Source: Hong Leong Investment Bank Research - 1 Sep 2016