Lafarge’s 1QFY18 core net loss of RM61.1m was significantly weaker than our and consensus estimates. The weaker results YoY was mainly due to continued pricing pressure and higher coal prices while the slight improvement QoQ was mainly due to the absence of separation cost incurred in 4QFY17. We are turning even more cautious on Lafarge’s earnings outlook as we believe the new administration post-GE14 may pose uncertainties to cement demand recovery as reviews of mega infrastructure projects may potentially lead to delays or cancellations. We downgrade our recommendation on Lafarge to HOLD with lower TP of RM3.65 (from RM5.65) to reflect (i) the revision in our earnings forecasts, (ii) lower P/B multiple of 1.23x BVPS and (iii) the roll forward of our valuation base year to FY19.

Below expectations. 1QFY18 core net loss of RM61.1m (4QFY17: loss of RM71.2m, 1QFY17: loss of RM55.2m) was significantly weaker than ours and market expectations. For FY18, we were projecting a core net loss of RM21.7m while consensus was projecting a core profit of RM12.1m. The weaker-than-expected results were due mainly to higher than expected coal prices and selling & distribution expenses coupled lower ASP. No dividend was declared.

YoY. 1QFY18 core net loss widened to RM61.1m (from RM55.1m in 1QFY17) mainly on the back of continued pricing pressure from soft market demand and oversupply of cement and higher coal prices.

QoQ. Revenue declined by 5.1% mainly due to lower sales contribution from the cement segment caused by continued pricing pressure from soft market demand and oversupply of cement. Despite weaker revenue, 1QFY18 core net loss narrowed to RM61.1m (from RM71.2m in 4QFY17) mainly due to the absence of lumpy separation cost (which was incurred in 4QFY17).

Outlook: We are turning even more cautious on Lafarge’s earnings outlook as we believe the new administration post-GE14 will pose uncertainties to cement demand recovery, as reviews of mega infrastructure projects could potentially lead to delays or cancellations.

Forecast. We widen our core net loss forecast for FY18 to RM218.3m (from RM21.7m previously) and reverse our FY19 forecast to a core net loss of RM136m (from a core net profit forecast of RM45.5m previously) after incorporating (i) lower ASP reflecting our cautious near term outlook on construction, (ii) higher coal prices, and (iii) higher selling & distribution expenses.

Downgrade to HOLD, TP: RM3.65. We downgrade our recommendation on Lafarge to HOLD with a lower TP of RM3.65 (from RM5.65 previously) to reflect (i) the revision in our earnings forecasts, (ii) lower P/B multiple of 1.23x (from 1.7x) BVPS which is 1SD below Lafarge’s 10-year mean to reflect the poor market condition and (iii) the roll forward of our valuation base year to FY19 (from FY18 previously). We feel that the uncertain construction outlook does not bode well for building material players such as Lafarge.

Source: Hong Leong Investment Bank Research - 23 May 2018