Results

• Lafarge Malaysia reported 2QFY17 results with revenue of RM531.8m (-5.4% qoq, -19.3% yoy) and core net loss of RM49.7m, bringing 1HFY17 core net loss to RM108m. The results were way below expectations against HLIB FY17 earnings estimate of RM34m (consensus of RM58m).

Deviations

• Weaker than expected cement contribution.

Dividend

• None.

Highlights

• YoY: Revenue declined 19.3% while bottom-line reverted to a loss of RM49.7m. This was mainly attributed to lower sales contribution from the cement segment caused by soft market demand, increased industry capacity and continued pricing pressures.
• QoQ: Revenue dropped 5.4% qoq due to lower cement sales. However, the loss was lower sequentially mainly due to lower depreciation charges and improved operating cost.
• YTD: Revenue declined 17.7% while bottom-line reverted a loss of RM107.9m. This was mainly due to significantly lower contribution from cement segment, partially offset by higher contribution from the concrete segment.
• 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

• We cut our FY17-18 earnings forecasts by 100% and 3.6% respectively after incorporating lower cement price and lower industry sales volume assumptions. Given YTD accumulated core losses of RM107.9m, we opine that Lafarge at best can only break- even in FY17 assuming that the cement industry recovers in 2H.

Rating

SELL ↔ , TP: RM4.02 ↓

• 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 RM4.02 (from RM4.17) following the earnings cut at an unchanged P/E multiple of 20x on FY18 EPS.

Source: Hong Leong Investment Bank Research - 30 Aug 2017