Results

• Lafarge Malaysia reported 4QFY16 results with revenue of RM636m (+8.3% QoQ, -11.4% YoY) and core net profit of RM42.2m (+2913.8% QoQ, -0.1% YoY). The significant QoQ earnings increase for the quarter was due to the recognition of deferred tax assets arising from the reinvestment allowance.
• Cumulative 12M core net profit totalled RM76.7m, decreasing 69.5% YoY. This significant plunge was attributed to (i) lower sales revenue from cement segment affected by weak demand and pricing pressure, (ii) one-off Holcim integration costs (iii) one-off loss on disposal of a subsidiary and (iv) higher finance costs due to new borrowings raised to fund the acquisition of Holcim Malaysia.

Deviations

• 12M core net profit made up 115% of our full year forecast which is above our expectations. This is mainly due to higher than expected sales contribution from aggregates and concretes segment.

Dividend

• No dividend declared for the quarter, bringing full year DPS to 5 sen which is below our forecast of 6.9 sen.

Highlights

• We expect near term demand for cement to remain weak mainly due to i) short term timing gap in the implementation of mega infrastructure projects; and ii) soft property market which contributes to the majority of cement demand.
• Near term cement prices are expected to remain depressed due to overcapacity and weak demand. We reckon that the pricing pressures will start to ease off once mega infrastructure projects pick up in the 2HFY17.

Risks

• Stronger demand for cement consumption due to stronger property market and pickup of mega infrastructure projects
• Reduced price competition
• Further decline in coal prices

Forecasts

• We maintain our earnings forecast pending further updates from the analyst briefing which will be held today.

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. Furthermore, the current infrastructure boom may not be sufficient to make up for the demand gap caused by weakening of property market.

Valuation

• Maintain TP of RM5.22 (based on unchanged 20x P/E and FY18 earnings) as well as SELL recommendation for now, pending the analyst briefing today.

Source: Hong Leong Investment Bank Research - 23 Feb 2017