A plunging quarter

Lafarge’s 9M16 net profit of RM43m (-79% yoy) was below consensus and our estimates. Lower cement sales and stiff pricing pressure has squeezed profit margin. We cut our FY16E EPS by 47% to reflect weak cement demand, stiff pricing competition, higher one-off costs, higher depreciation expense and rising coal prices. For the first time in five years, Lafarge did not declare any dividend this quarter. Maintain SELL with a lower DDM-based TP of RM6.40.

Disappointing result

Lafarge’s 9M16 net profit of RM43m (-79% yoy) only accounted for 25% of full-year consensus forecast of RM173m and 40% of our previous estimate of RM108m. The shortfall is attributable to lower-than-expected cement sales amid sluggish domestic demand and stiff pricing pressure due to oversupply of cement. Lafarge did not declare a dividend this quarter, bringing cumulative dividend declared to just 5 sen in 9M16 versus 24 sen in 9M15.

EBITDA contraction due to lower revenue and rising coal prices

EBITDA plunged 43% yoy to RM232m in 9M16 due to lower cement revenue, arising from weak demand and pricing pressure. This was partially mitigated by higher sales contribution from its concrete segment. Hence, overall revenue declined 5.7% yoy to RM1.9bn in 9M16. Sequentially, EBITDA margin contracted 3ppts qoq, as Lafarge is partially exposed to rising coal prices, which jumped 105% yoy to US$100/T. Note that Lafarge has to purchase the remaining of 15-20% of coal requirement at the current high spot prices. Overall, operating cost has edged up slightly by 3.3% yoy to RM 1.7bn in 9M16, partly due to the rise in coal prices.

Earnings bogged down by higher depreciation and integration costs

EBIT fell 69% yoy to RM90m in 9M16 due to a 20% increase in depreciation expense to RM143m as one of its expanded plant became fully operational in 3Q16. PBT shrank 75% yoy to RM70.6m in 9M16 due to (1) lower cement revenue contribution; (2) one-off insurance claim in the previous year; (3) Holcim integration costs; (4) higher interest expense due to RM340m borrowings raised to acquire Holcim; and (5) lower interest income.

Cut earnings and maintain SELL with a lower TP of RM6.40

We cut our FY16E and FY17E by 47% and 26% respectively after imputing lower domestic average selling prices (ASP), lower domestic sales volume, higher coal prices and higher depreciation expense. We revise down our TP to RM6.40 from RM7.00. Maintain SELL. We are concerned with the earnings volatility and Lafarge’s decision not to declare any dividend this quarter. Key upside risk is a faster-than-expected rebound in sales volume and ASP

Risk to call

Upside risks to our SELL call include; (1) a decline/reversal in coal prices; (2) decreased price competition; (3) stronger-than-expected demand; and (4) higher-than-expected dividend payout ratio.

Source: Affin Hwang Research - 30 Nov 2016