Prolonged pricing pressure, lower cement demand coupled with higher fuel, depreciation and one-off separation costs were key reasons behind Lafarge’s losses of RM215.2m in 2017. The outlook for the cement industry remains challenging in our view. Lafarge’s long-term debt rating was also recently downgraded to A1, premised on the sharp deterioration of its debt-servicing metrics. Maintain SELL as we believe a turnaround is not imminent. We cut our 12-month DDM-based TP to RM4.89.

Higher-than-expected 4Q17 Net Losses

Lafarge 4Q17 net loss widened to RM80.1m compared to 3 previous quarters, resulting in a 2017 net loss of RM215.2m, the largest in its history. The loss was larger than our and market expectations of RM166-173m, mainly attributable to a prolonged price war due to increased industry capacity (+15%), soft market demand, higher fuel, depreciation and one-off separation costs.

Price Competition Still Aggressive

We gather that the on-going cement price war has not eased and has worsened in certain segments as rebates given for bulk cement has jumped to 77% in Jan-18 (Jan-17: 36%), while rebates on bag cement are unchanged at 32% since Oct-17 (Fig 2&3). We also believe that stronger demand is unable to fully absorb the existing market oversupply, and very unlikely to translate to any meaningful improvement in cement prices at this juncture. Our 2018E forecast however implies a recovery in 2H18 on the assumption that property and construction activities pick up and progress on infrastructure projects accelerate in 2H18. Any delays to this could pose a risk to our earnings.

Maintain SELL

We maintain SELL given the i) extended price war in the industry; and ii) weak demand due to slower-than-expected roll-out of infrastructure projects and a protracted weak property market (2/3 of its revenue derived from property andthe rests from infrastructure). We maintain 2018-19E earnings and introduce our 2020E EPS. We cut our DDM-based TP to RM4.89 from RM5.62 for equity beta adjustment and assume dividend payment will resume in 2019E when the group return to be profitable.

Risks to Call

Upside risks to our SELL 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.

Source: Affin Hwang Research - 26 Feb 2018