Lafarge’s 1Q19 core net loss narrowed to RM32.5m (against core losses of RM68.7m in 1Q18). The improvement in QoQ and YoY was driven by lower operating expenses despite flat domestic sales. We narrow our core net loss forecast for FY19 and FY20 by 33%/51%. Maintain HOLD with TP of RM3.75 to reflect the MGO price.

Better-than-expected. Lafarge’s core net loss narrowed to RM32.5m in 1Q19 (from RM68.7m in 1Q18). The results came in better than our projected core net loss of RM254m for the full-year. Key deviation against our forecast came largely from lower than-expected operating cost. No dividend was declared, as expected.

QoQ. Despite slower revenue of RM538.7m (-1.7%) on the back of flat sales from cement segment (-0.2%), core net loss narrowed to RM32.5m given lower operating expenses. Expenses in 1Q19 lowered to RM536m (-4.4%), mainly due to cost savings arising from headcount reduction and various cost cutting measures earlier.

YoY. Core net loss narrowed by 52.6% to RM32.5m mainly on the back of lower operating cost arising from improved distribution cost, savings arising from headcount reduction and various cost cutting measures. Revenue was lower by 1.5% mainly due to subdued demand, but partially mitigated by higher export sales.

Outlook. Despite weak financial performance, we believe the anticipated industry consolidation (arising from YTL Corp’s recent move to acquire Lafarge Malaysia) will likely result in improved pricing power among the cement players over the longer term.

Forecast. We narrow our core net loss forecasts for FY19-FY20 by 33%-51% after incorporating (i) lower selling & distribution expenses (ii) higher volume especially on export sales (especially from Langkawi plant).

Maintain HOLD with TP of RM3.75. We advise investors with short term investment horizon to accept the MGO as an exit strategy as it may take some time to see improvements in cement prices. On the flipside, those with a longer term investment horizon (i.e. say beyond FY20) may consider holding on to the stock for the potential benefits of possible improved pricing power and operational rationalisation to improve efficiency (although this is still difficult to quantify at this juncture).

Source: Hong Leong Investment Bank Research - 30 May 2019