Lafarge reported an unexpected quarter net loss of RM48.9m in 1Q17, drastically deviated from our and consensus expectations. The loss was attributable to prolonged weak demand and weak cement prices. We have cut our earnings by 51% in FY17E to RM73m as we view that the current construction upcycle in infrastructure is insufficient to absorb the excess cement capacity given the subdued property market. We maintain our HOLD call with a revised down DDM-derived TP of RM6.20. No dividend was declared in this quarter.

Plunged Into the Red

Lafarge reported an unexpected quarter net loss of RM48.9m in 1Q17, the first since 2008. The result drastically deviated from consensus and our fullyear net profit forecasts of RM158.6m and RM130.5m respectively. Overall revenue declined 16% yoy to RM561.9m in 1Q17, mainly due to the 22% yoy decline in its cement segment revenue. But the revenue drag was partially offset by higher contribution from its concrete segment (+20% yoy). Cement segment remained plagued by weak demand and industry overcapacity, which resulted in weak selling prices. Operating loss of RM57m was attributable to higher fuel and electricity costs, and one-off staff rationalisation cost. Excluding the land sale and forex gains, Lafarge reported a core net loss of RM62.9m in 1Q17 compared to a core net gain of RM27.4m in 1Q16.

Earnings Cut

Considering the weak near-term outlook for the cement industry, we cut EPS by 51% in FY17E and 22-32% for FY18-19E. We believe the current construction upcycle in infrastructure is insufficient to absorb the excess cement capacity as the property market remains subdued. Note that the infrastructure sector takes up only 1/3 of Lafarge’s cement volume, while the rest comes from residential and commercial property segments. High coal prices locked in by Lafarge in 4Q16 will likely to impact FY17E earnings. Average coal price increased by 79% yoy to US$94/t in 4Q16.

Maintain HOLD With a Lower TP of RM6.20

We view the cement industry remains challenging in the near term and do not expect any immediate earnings catalysts unless the current price war eases on the back of a recovery in the property market. Although Lafarge is a proxy to the current infrastructure boom, we believe cement demand will only pick up in 2H17 as works accelerate. As such, we maintain HOLD with a lower DDMderived TP of RM6.20 assuming a lower payout ratio of 55% from 98% previously. Lafarge did not declare any dividend for the third consecutive quarter. The expected removal of the Lafarge from the list of MSCI Malaysia component stocks effective from 31 May 2017 could have contributed to the recent share price correction.

Risks to Call

Upside risks to our HOLD call include; (1) a decline in coal prices; (2) higherthan-expected rebound in cement selling prices; (3) stronger-than-expected demand; and (4) higher-than-expected dividend payout ratio. Downside risks to our HOLD call include: (1) stiff price competition persists; and (2) cement demand declining further.

Source: Affin Hwang Research - 23 May 2017