Results

• 9MFY16 core net profit of RM43.6m (-77% yoy) came in below expectations, accounting for 37.5% and 31.3% of HLIB and street’s full year estimates.

Deviations

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

Dividend

• -

Highlights

• YoY: 9MFY16 revenue declined 5.7% while core net profit contracted 77% yoy to RM43m. This was mainly attributed to 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 9MFY16, operating profit margin contracted further by 9.3%-pts yoy.
• QoQ: Revenue dropped 10.8% qoq while core net earnings fell by 75%. The sharp decline in core net profit was mainly due to significantly lower revenue from cement sales.
• Outlook: We expect near term prospects of the cement industry to remain challenging due to industry overcapacity, weakening demand and continued pricing pressure.

Risks

• Lower demand for cement consumption due to softer property market and 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

• FY16-18 earnings forecasts are reduced by 40%, 29% and 29% respectively after incorporating higher cement price rebate assumption (which result in lower average selling price assumption) and higher fixed cost assumption.

Rating

SELL ↓, TP: RM5.22 ↓

• Although Lafarge is a proxy to ride on the construction upcycle, its short term prospects appears to be plagued by industry overcapacity resulting to downward price pressures and softening demand associated with the timing gap on project rollouts. Current infrastructure boom may not be sufficient to make up for the demand gap caused by weakening of property market.

Valuation

• Downgrade to SELL with TP reduced from RM7.14 to RM5.22. Aside our earnings downgrade, we also cut our P/E target from 22.5x to 20x pegged to FY18 earnings. We reckon that the reduction in our P/E multiple is justified given the disappointing results posted.

Source: Hong Leong Investment Bank Research - 30 Nov 2016