Losses Continue

Lafarge’s results were disappointing, recording a wider core net loss of RM149m in 1H18 (+33% yoy). This was mainly due to higher energy costs, soft market demand and prolonged pricing pressure. We believe the cement market remains challenging and we do not expect any immediate earnings catalyst. Thus, we increase our FY18E-19E losses by 37- 134%, and cut our FY20E earnings by 74%. Maintain SELL with an unchanged TP of RM2.50 based on a price/book of 0.8x.

Higher Operating Costs, 1H18 Core Net Loss Widened by 33% Yoy

Lafarge posted a wider core net loss of RM82.6m in 2Q18 (+25% qoq) compared to RM66m in 1Q18. Revenue of RM532.2m in 2Q18 was marginally lower (-3% qoq), but higher operating and finance costs of 1% and 18% qoq, respectively, resulted in higher LBT of RM107.6m in 2Q18 (+29% qoq). Similarly, on a yoy basis, revenue was marginally lower by 1% yoy in 1H18 on the back of lower revenue from concrete segment (-5% yoy), while cement segment revenue was flat. 1H18 core net loss widened by 33% to RM148.6m, exceeding consensus full-year net loss forecast of RM87.4m and comprising 67% of our previous estimate of RM220.5m. Lafarge’s 1H18 profitability was negatively impacted by weak demand from the property market, delays in the roll out of new infrastructure projects, stiff pricing competition and higher operating costs due to rising fuel and electricity costs.

Low Net Gearing of 0.2x

We believe Lafarge is able to weather the downturn given its low net gearing of 0.2x. However, we are concerned with the erosion of its balance sheet strength given the sustained negative operating cash flow. We expect its free cash flow to turn positive in FY20E with the return to profitability in 2H19 onwards as the property and construction sectors recover.

Wider Losses Expected

Given the subdued property market and slowdown in infrastructure construction activities, we believe the cement industry prospects remain challenging and do not expect any immediate earnings catalysts. Thus, we increase our FY18-19E net loss by 37-134% and lower our FY20E EPS by 74% on expectation of lower ASPs, slower pick up in cement demand and high coal costs.

Maintain SELL

We remain cautious on the stock due to the soft domestic cement demand and extended price war in the industry. We reaffirm our SELL call on Lafarge with an unchanged TP of RM2.50 based on a 2018E price/book of 0.8x.

Risks to Call

Key upside risks to our SELL call include; (1) a decline in coal prices; (2) higher-than-expected cement selling prices; (3) stronger-than-expected demand; and (4) higher-than-expected dividend payout.

Source: Affin Hwang Research - 3 Sept 2018