Lafarge’s 9M18 core net loss of RM223.8m came in larger than market and our projected net loss of RM232.9-272.2m. The weaker-than-expected results were due mainly to lower-than-expected cement ASP and higher-than-expected production cost. We believe Lafarge’s near-term fortunes will remain weak (if not weakening further) amidst weak demand prospects and rising coal price environment. We widen our core net loss forecast for FY18-20 to RM308.1m, RM256.3m and RM138.1m, respectively. We maintain our SELL recommendation on Lafarge with a lower TP of RM1.81 (from RM2.50 previously).

Below expectations. 9M18 core net loss of RM223.8m (9MFY17: loss of RM141.6m) came in larger than consensus and our projected full year net loss of RM232.9- 272.2m. The weaker-than-expected results were due mainly to lower-than-expected cement ASP and higher-than-expected production cost. No dividend was declared.

QoQ. 3Q18 core net loss widened to RM84.6m (from RM78.2m in 2Q18) mainly on the back of continued pricing pressure from soft market demand and oversupply of cement coupled with higher production cost (arising from lower production volume).

YoY. 3Q18 core net loss widened from RM41.5m in 3Q17 mainly on the back of lower sales from the continued pricing pressure from soft market demand and oversupply of cement, increased finance cost, and production cost (arising from lower production volume).

YTD. 9M18 core net loss widened to RM223.8m (from RM141.6m in 9M17) mainly on the back of continued pricing pressure from soft market demand and oversupply of cement, increased finance cost, and higher average production cost due to lower production output.

Outlook. We are turning even more cautious on Lafarge’s earnings outlook as the review and cancellation of mega infrastructure projects will pose even bigger uncertainties to cement demand recovery. We believe Lafarge’s near-term fortunes will remain weak (if not weakening further) amidst weak demand prospects and rising coal price environment.

Forecast. We widen our core net loss forecast for FY18-20 to RM308.1m, RM256.3m and RM138.1m, respectively, after incorporating lower ASP assumptions reflecting our cautious near-term outlook on construction.

Maintain SELL, TP: RM1.81. We maintain our SELL recommendation on Lafarge with a lower TP of RM1.81 (from RM2.50 previously) to reflect (i) the revision in our earnings forecasts, and (ii) lower P/B multiple of 0.67x (from 0.9x P/B previously), as we believe the less promising prospects will likely remain for a while. Our new TP is based on 0.67x P/B which is -1SD below the valuation during the previous sector downturn (i.e. 2008). We feel that the uncertain construction outlook does not bode well for building material players such as Lafarge.

Source: Hong Leong Investment Bank Research - 19 Nov 2018