Lafarge’s 1Q18 result was disappointing, recording a wider core net loss of RM66m in 1Q18 (+5% yoy) compared to RM63m in 1Q17. This was mainly due to prolonged pricing pressure, soft market demand and higher coal and petcoke prices. The outlook for the cement industry remains challenging in our view. We increase our net loss forecast to RM211m in 2018E and now project losses to extend into 2019E (net loss of RM54m vs RM114m net profit previously). Maintain SELL with lower TP of RM3.50.

Below Expectation

Lafarge reported a net loss of RM69m in 1Q18, compared to consensus fullyear net profit forecast of RM12m and our previous net loss estimate of RM26m. Lafarge’s 1Q18 revenue declined by 3% yoy to RM547m on the back of lower revenue from cement segment (-4% yoy), partially offset by higher revenue from aggregates and concrete segment (+1% yoy). Excluding one-off items, the group’s 1Q18 core net loss widened by 5% yoy to RM66m compared to core net loss of RM63m in 1Q17. This was mainly due to soft market demand coupled with continued pricing pressure and higher coal and petcoke prices.

Ongoing Price Competition

We gather that rebates on bulk cement sales increased to 44% in March 2018 (Fig 2) given the prolonged price war. Meanwhile, rebates on bag cement remains high at 23% in March (Fig 3). We believe the current market oversupply situation will persist due to the weak demand from the property sector and pressure on average selling price (ASP) will remain. Possible delays in implementation of planned infrastructure projects such as East Coast Rail Link, KL-Singapore High Speed Rail and Klang Valley MRT Line 3 post-election could delay the recovery in cement demand.

Maintain SELL

We increase our net loss forecast to RM211m in 2018E from RM26m previously on expectations of weak ASP and flat cement sales volume, while high coal prices persist. We project a net loss of RM54m in 2019E (net profit forecast of RM114m previously) as we expect a slow pick up in cement sales and pricing pressure remains. Similarly, we cut our DDM-based TP to RM3.50 given the i) extended price war in the industry; and ii) weak demand due to an expected delay in the roll out of new infrastructure projects and a protracted weak property market (2/3 of its revenue is derived from property sector and the balance is from the infrastructure sector). Maintain SELL.

Source: Affin Hwang Research - 23 May 2018