Results

• Lafarge Malaysia reported 1QFY17 results with revenue of RM561.8m (-11.7% qoq, -16.1% yoy) and core net loss of RM48.9m which was way below expectations.
• The shock loss incurred by the company was mainly attributed to weak cement demand and continued cement pricing pressure coupled with higher operating costs and one-off separation cost.

Deviations

• Lower than expected cement contribution and higher operating costs attributed mainly to higher fuel and electricity cost.

Dividend

• No dividend declared for the quarter.

Highlights

• Although we expected a subdued 1QFY17 result in our previous write-up, we are still shocked by magnitude of the losses incurred by Lafarge. Note that this is the first quarterly loss incurred by the company in the past 10 years.
• We expect near term demand for cement to remain weak mainly due to (i) slow implementation of mega infrastructure projects; and (ii) weakening of property market which contributes to the majority of cement demand.
• Near term cement prices are expected to remain depressed due to overcapacity and weakened demand. We reckon that the pricing pressure may remain longer than our expectations.

Risks

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

Forecasts

• Reduce FY17,FY18 and FY19 earnings forecasts by 47%, 12% and 7% respectively after incorporating lower cement price and lower industry sales volume assumptions.

Rating

SELL ↔ , TP: RM4.92 ↓

• Although Lafarge is a proxy to ride on the construction upcycle, its short term prospects appears to be plagued by industry overcapacity resulting in 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. Moreover, we believe that Lafarge will decrease its dividend payout significantly given the tough operating environment which further reduce the company attractiveness as a dividend yield play.

Valuation

• Maintain SELL with lower TP of RM4.92 (from RM5.50) following the earnings cut at an unchanged P/E multiple of 20x on FY18 EPS.

Source: Hong Leong Investment Bank Research - 23 May 2017