We came away from Lafarge briefing with no major surprises. Management reiterated their commitment to improve operational efficiency and financial position of the group to weather the current downturn in the cement industry. 3Q18 results were impacted by higher production costs, mainly due to major maintenance shutdowns at its Kanthan and Langkawi plants for 3 weeks. Losses are expected to narrow in 4Q18 on the back of cost efficiency gains coupled with a pick up in cement sales. We maintain our HOLD call with a TP of RM2.00 based on 2019E price/book of 0.8x.

Losses Peaked in 3Q18

To recap, 3Q18 losses came in wider than expected, mainly driven by lower revenue coupled with higher production costs, resulting from major shutdown at its Kanthan and Langkawi plants for 3 weeks. Apart from that, costs were higher due to inventories write down due to stock-take discrepancies, higher electricity costs due to tariff hike in July, and higher coal prices. We concur with the management’s view that losses are expected to narrow moving forward on the expectation of cost efficiency gains and better cement sales given the better export market.

Continue to Improve Cost Efficiency

Selling, general and administration (SG&A) costs in 3Q18 declined by 23% qoq following the group’s restructuring initiatives, and we believe this will likely continue in 2019. Better efficiency is expected at its Langkawi and Kanthan plants following the maintenance works in 3Q18. The installation of fuel top-feed mechanism at Rawang plant is expected to be completed in 4Q18 and save about 9% of fuel cost for the plant.

Better Export Sales

Management believes that export volume and prices will continue to improve in 2019, driven by increased in exports to Bangladesh. China has started importing clinker following the government’s supply-side reform, which reduced domestic clinker production. This has reduced regional supply and improved export prices. However, since Lafarge only exports 20% of its cement production and export prices are traditionally lower than domestic prices, the earnings impact is not substantial. Pick up in domestic sales and prices remain the key factors for earnings recovery.

Maintain HOLD With TP of RM2.00

We make no changes to our estimates as there were no major surprises. We are positive on Lafarge’s strategy to focus on operational efficiency and cash flow improvements to weather the downturn in the industry. We maintain our HOLD call with an unchanged TP of RM2.00, based on 2019E Price/book of 0.8x.

Source: Affin Hwang Research - 23 Nov 2018