Lafarge incurred another core net loss of RM48.4m in 2Q17, increasing the loss to RM111.3m in 1H17. This is below consensus and our full-year net profit forecasts of RM58-73m despite the earlier earnings cut post- 1Q17 results. Prolonged pricing pressure due to industry overcapacity continues to plague the cement industry. Soft demand for cement due to the subdued property market led to production cuts, which adversely affected Lafarge’s earnings. We cut our earnings further by 19-44% for FY17-19E, considering the weak medium-term outlook. We maintain our HOLD call with a lower DDM-derived TP of RM5.75. No dividend was declared for this quarter.

Another Quarter of Loss

Lafarge reported another core net loss of RM48.4m in 2Q17, although narrowing by 23% qoq from the RM62.9m loss in 1Q17. Core net loss was RM111.3m in 1H17, deviating from previous consensus and our full-year net profit forecasts of RM58.1m and RM73m respectively. For 1H17, overall revenue declined 18% yoy to RM1.1bn due to weak cement revenue (-25% yoy), partially mitigated by higher revenue for its concrete segment (+11% yoy). Weak demand from the property sector and delays in the roll out of large-scale infrastructure projects contributed to the weak cement demand. Lafarge incurred a pre-tax loss of RM121.4m in 1H17 (1H16: PBT of RM65.3), attributable to higher depreciation, fuel and electricity costs. However, this was partly offset by a land disposal gain of RM5.6m.

Further Earnings Cuts

Considering the weak medium-term outlook for the cement industry, we cut EPS further by 32% in FY17E and 19-44% in FY18-19E. We believe the current infrastructure boom is insufficient to absorb the excess cement capacity as property market remains subdued. Infrastructure demand accounts for only 1/3 of Lafarge’s cement volume, while the rest comes from the residential and commercial property sectors. We gather that cement demand declined 5-7% yoy in 1H17. Lafarge’s high locked-in coal price of about US$94/t for 50% of its annual requirement will hit FY17E earnings.

Maintain HOLD With a Lower TP of RM5.75

We believe the cement industry’s prospects remain challenging in the medium term and do not expect any immediate earnings catalysts, unless the current price war eases with a recovery in the property market. Although Lafarge is a proxy for the current infrastructure boom, we believe cement demand will only pick up when construction works accelerate. As such, we maintain our HOLD call with a lower DDM-derived TP of RM5.75, following the cuts in our EPS and DPS forecasts. Lafarge did not declare any dividend for this quarter.

Source: Affin Hwang Research - 30 Aug 2017