Lafarge’s 1HFY18 core net loss of RM139.3m was weaker than our and consensus estimates. The weaker results YoY and QoQ were mainly due to continued pricing pressure and higher coal prices. We are turning even more cautious on Lafarge’s earnings outlook as the review and cancellation of mega infrastructure projects will pose uncertainties to cement demand recovery. We downgrade our recommendation on Lafarge to SELL with lower TP of RM2.78 (from RM3.65) to reflect (i) the revision in our earnings forecasts, and (ii) lower P/B multiple of 1x BVPS.

Below expectations. 1HFY18 core net loss of RM139.3m (1HFY17: loss of RM100m) was significantly weaker than ours and market expectations. For FY18, we were projecting a core net loss of RM214.5m while consensus was projecting a core net loss of RM182.8m. The weaker-than-expected results were due mainly to lower cement ASP coupled with higher than expected coal prices. No dividend was declared.

QoQ. 2QFY18 core net loss widened to RM78.2 (from RM61.1m in 1QFY18) mainly on the back of continued pricing pressure from soft market demand and oversupply of cement, higher effective tax rate and higher coal prices.

YoY. 2QFY18 core net loss widened from RM44.9m in 2QFY17 mainly on the back of continued pricing pressure from soft market demand and oversupply of cement, increased finance cost and higher coal prices.

YTD. 1HFY18 core net loss widened to RM139.3m (from RM100m in 1HFY17) mainly on the back of continued pricing pressure from soft market demand and oversupply of cement, higher finance cost and higher coal prices.

Outlook. We are turning even more cautious on Lafarge’s earnings outlook as the review and cancellation of mega infrastructure projects will pose uncertainties to cement demand recovery. We believe profitability in the near term will continue to be hit by weaker cement demand and ASP coupled with the increase in coal prices.

Forecast. We widen our core net loss forecast for FY18 to RM272.2m, FY19 to RM225.1m and FY20 to RM115.9m after incorporating lower ASP reflecting our cautious near term outlook on construction and higher coal prices.

Downgrade to SELL, TP: RM2.78. We downgrade our recommendation to SELL on Lafarge with a lower TP of RM2.78 (from RM3.65 previously) to reflect (i) the revision in our earnings forecasts, and (ii) lower P/B multiple of 1x (from 1.23x) BVPS which is 2SD below Lafarge’s 10-year mean to reflect the poor market condition. We feel that the uncertain construction outlook does not bode well for building material players such as Lafarge.

Source: Hong Leong Investment Bank Research - 3 Sept 2018