Extended Loss

Lafarge incurred a third consecutive quarter of losses, ie. RM42m (-5% qoq) in 3Q17. Net loss expanded to RM135m in 9M17. Lower revenue and higher depreciation, fuel and electricity costs pushed Lafarge into the red. Stiff competition and continued pricing pressures remains a challenge for Lafarge, as the largest cement producer in Malaysia. We downgrade our call to SELL from Hold as we believe a turnaround is not imminent. We now expect a net loss of RM173m in FY17E and RM26m in FY18E and cut our 12-month DDM-based TP to RM5.62.

Further Losses

Lafarge’s 3Q17 result was disappointing. We were expecting a turnaround but further losses were incurred. Net loss of RM135m in 9M17 was a surprise as consensus and us were expecting a net profit of RM19-50m in FY17E. Revenue declined 13% yoy to RM1.67bn in 9M17. Operating costs decreased 1% yoy as lower fixed costs offset the higher fuel and electricity costs. Lafarge continues to incur further rationalisation costs related to the merger with Holcim Malaysia.

Breakeven at EBITDA Level

Lafarge broke even at the EBITDA level. But the high depreciation costs following the increase in capacity last year knocked the group into the red with core net loss of RM157m in 9M17. Headline net loss was reduced by exceptional gains of RM22m including a land sale gain. Revenue increased 9% qoq in 3Q17, reducing net loss by 5% qoq.

Expect Turnaround in 2H18

We gather that Lafarge’s efforts to reduce selling price rebates failed as competitors did not follow suit, resulting in selling prices remaining depressed in 2H17. Hence, we now expect Lafarge to remain in the red in 4Q17 and only expect a turnaround in 2H18. This is on the assumption that cement demand growth turns positive as property construction activities picks up and progress on infrastructure projects accelerate in 2H18, easing the current price war in the industry.

Downgrade to SELL

We downgrade our call to SELL from Hold as the turnaround for Lafarge has been delayed due to the protracted price war in the industry. Instead of a net profit of RM50m in FY17E and RM119m in FY18E, we now expect net losses of RM173m and RM26m respectively. We cut our DDM-based TP to RM5.62 from RM5.75, assuming dividend payment will resume in FY19E instead of FY18E.

Source: Affin Hwang Research - 4 Dec 2017