Results

• Lafarge Malaysia reported 4QFY17 results with revenue of RM576.4m (-0.4% qoq, -9.4% yoy) and core net loss of RM80.1m, bringing FY17 core net loss to RM222.0m. The results were way below expectations against HLIB FY17 (-RM171m) and consensus (-RM166m) earnings estimate.

Deviations

• Higher than expected fuel costs.

Dividend

• None.

Highlights

• YoY: Revenue declined 9.4% while bottom-line reverted to a loss of RM80.1m. This was mainly attributed to lower sales contribution from the cement segment caused by soft market demand, increased industry capacity and continued pricing pressures. The decrease in revenue in the cement segment was partially offset by higher sales contribution from the concrete segment.
• QoQ: Revenue declined 0.4% qoq primarily due to continued pricing pressure in the cement segment.
• YTD: Revenue declined 11.9% while bottom-line reverted to a loss of RM222.0m. 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 FY18 earnings from profit to net loss and FY19 earnings by 48.1% after incorporating higher fuel cost assumptions.

Rating

HOLD ↔ , TP: RM5.65 ↓

• 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 call with lower TP of RM5.65 (from RM5.82 previously) based on unchanged P/B multiple of 1.7x on FY18 BVPS after earnings forecast adjustment.

Source: Hong Leong Investment Bank Research - 26 Feb 2018