Lafarge’s 3Q18 results were disappointing, with the core net loss widening by 27% qoq and 105% yoy to RM105m. For 9M18, the core net loss widened 61% yoy to RM253m. This was mainly due to lower revenue (-6% yoy) given the soft cement demand and continued pricing pressure, coupled with higher operating costs from higher energy prices and lower production output. We increase our FY18-19E losses by 7-12%, and cut our FY20E earnings by 5% to account for the worsethan-expected results. Maintain HOLD with a lower 12-month TP of RM2.00 based on a 2019E price/book of 0.8x.

Higher Operating Costs, 9M18 Core Net Loss Widened by 61% Yoy

Lafarge posted a wider core net loss of RM104.7m in 3Q18 (worsened by 27% qoq) on the back of 7% qoq lower revenue given the lower domestic sales, as well as higher production costs due to increased energy prices, restructuring costs and lower clinker production. We expect losses to continue in 4Q18, partly compensated by lower coal costs compared to 3Q18. On a yoy basis, revenue was down by 6% due to lower revenue from both the concrete (-8% yoy) and cement (-5% yoy) segments. 9M18 core net loss widened 61% yoy to RM253.3m, exceeding the concensus FY18 full-year net loss forecast of RM232.9m and comprising 81% of our previous estimate of RM314.3m. Apart from higher production costs and soft cement demand, 9M18 losses were higher partly due to the 53% yoy increase in interest expense on the back of higher borrowings.

Focus on Enhancing Operational Efficiency

We believe the cement industry’s short-to-medium term prospects remain challenging, given the subdued property market and slowdown in infrastructure activities. We expect losses to continue in 2019E before the group turns around in 2020E. It will continue to focus on cost reduction and operational efficiency enhancement to weather the downturn in the industry. Following a restructuring exercise and cost-cutting measures, the group achieved a significant reduction in sales and general administration expenses in 3Q18, which partly mitigated the higher production costs. We expect the cost savings to continue over the next few years.

Maintain HOLD With Lower TP of RM2.00

Given the higher-than-expected losses, we increase our FY18-19E net loss by 7-12% and lower our FY20E EPS by 5%. We reduce our 12-month TP to RM2.00 based on an unchanged 2019E price/book of 0.8x. We reaffirm our HOLD call as we believe the stock price will be supported by the sector’s long-term positive prospects.Risk to call

Key upside and downside risks to our call include; (1) decreased/increased price competition; (2) stronger/weaker domestic cement demand; and (3) further declines/increases in coal and raw material prices.

Source: Affin Hwang Research - 19 Nov 2018