Lafarge’s 2Q19 core net loss of RM45.3m (1Q19: loss RM32.3m, 2Q18: loss RM78.2m, brought 1H19 core loss to RM77.6m (1H18: loss RM139.3m). 1H19 core loss was lower than ours and consensus loss forecast of RM169m and RM175m, mainly attributed to the lower operating expenses and lower depreciation. The board of directors are proposing a name change from "Lafarge Malaysia Berhad" to "Malayan Cement Berhad”. We narrow our core net loss forecasts for FY19-FY21 by 13%-60% as we impute lower operating expenses from its recent initiatives. Maintain HOLD with TP of RM3.28. Our TP of RM3.28 is based on replacement cost of USD100/tonne for Lafarge’s clinker capacity

Better than expected. Lafarge’s 2Q19 core loss of RM45.3m (1Q19: RM32.3m loss, 2Q18: RM78.2m loss), brought 1H19 core loss to RM77.6m (1H18: RM139.3m loss). The 1H19 core loss was lower than our and consensus full year core loss forecast of RM169m and RM175m respectively. The better than expected results was mainly attributed to the lower operating expenses and lower depreciation charges. No dividend was declared, as expected.

QoQ. In line with slower revenue of RM471.5m (-12.5%) on the back of weaker cement sales due to festival season, core loss widened to RM45.3m against RM32.3m in 1Q19. During the quarter, Lafarge undertook scheduled maintenance on its facilities, resulting higher production and maintenance costs that resulted to wider loss for the quarter.

YoY. Core net loss narrowed to RM45.3m vs. RM78.2m in 2Q18 on the back of lower operating cost arising from improved distribution cost, savings from headcount reduction and various cost cutting measures. Revenue was lower by 11.4% to RM471m mainly due to subdued domestic demand, but partially mitigated by higher export sales.

YTD. Despite lower revenue by -6.4% to RM1.01bn, largely from lower cement sales on the back of weak domestic demand, core loss narrowed to RM77.6m against RM139.3m. The key reason was better cost management, namely from lower distribution cost and various cost cutting measures and lower depreciation charges.

Proposed change of name. During the EGM yesterday, the board of directors proposed a name change from "Lafarge Malaysia Berhad" to "Malayan Cement Berhad”. The proposal is pending the shareholder approval in another EGM which will be held on 23 September 2019.

Outlook. Despite weak topline, Lafarge managed to narrow its core loss, largely thanks to cost cutting measures. We believe the measures taken are sustainable in the immediate term and necessary in the absence of revenue growth, no thanks to tepid construction activity and lack of new launches by property developers.

Forecast. We narrow our core net loss forecasts for FY19-FY21 by 13%-33% as we impute lower operating expenses from its recent initiatives.

Maintain HOLD with TP of RM3.28. We believe cement consumption will remain lacklustre in 2H19. Nevertheless, we take comfort on improving prospect especially on lower iron ore prices that are currently trading below USD90/tonne. Looking forward, cement prices should recover in line with the revival of construction activities. Our TP of RM3.28 is based on replacement cost of USD100/tonne for Lafarge’s clinker capacity.

Source: Hong Leong Investment Bank Research - 30 Aug 2019