Results

• Lafarge Malaysia reported 3QFY17 results with revenue of RM578.9m (+8.9% qoq, -1.5% yoy) and core net loss of RM46.3m, bringing 9MFY17 core net loss to RM158.5m. The results were way below expectations against HLIB FY17 (-RM2m) and consensus (+RM19m) earnings estimate.

Deviations

• Weaker than expected cement contribution.

Dividend

• None.

Highlights

• YoY: Revenue declined 1.5% while bottom-line reverted to a loss of RM46.3m. 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 increased 8.9% qoq due to improvement in the pricing of cement and higher sales contribution from the concrete segment. As a result, bottom-line slightly improved 5.7% (from 2Q17 core net loss of RM49.2m)
• YTD: Revenue declined 12.7% while bottom-line reverted to a loss of RM158.5m. This was mainly due to significantly lower contribution from cement segment, partially offset by higher contribution from the concrete segment.
• Outlook: We opine that the earnings of Lafarge have bottomed and are poised for a recovery given the improvement in cement price and leaner cost structure. Nonetheless, the recovery is still slower than expected and the magnitude of its potential recovery remains vague in the near term. Moreover, we believe luxury property development ban imposed by government recently will further delay the recovery.

Risks

• Delays in the implementation of large-scale infrastructure projects, resulting in lower than expected demand for cement consumption.
• Increased price competition.
• Further increase in coal prices.

Forecasts

• We cut our FY17 earnings forecasts to a loss and FY18-19 earnings by 88.0% and 51.9% respectively after incorporating lower cement price and lower industry sales volume assumptions.

Rating

HOLD ↔, TP: RM5.82 ↓

• Lafarge is a proxy to ride on the construction upcycle. The improvement in cement price coupled with picking up of mega infrastructure projects signifies that earnings may have bottomed and is poised for a recovery. However, we reckon that the expected earnings recovery has been largely reflected after recent run-up of share price.

Valuation

• Maintain HOLD with lower TP of RM5.82 (from RM6.15) following the earnings cut at an unchanged P/B multiple of 1.7x on FY18 BVPS.

Source: Hong Leong Investment Bank Research - 4 Dec 2017