Lafarge reported a wider core net loss of RM292m in 2018 mainly due to lower revenue (-6% yoy) on the back of lower selling prices and volume, given challenging market conditions. This was within market expectations, but below our expected loss of RM351m. Sequentially, its core net loss narrowed by 50% qoq to RM52m, on the back of improved revenue (+11% qoq) and lower energy and distribution costs. We maintain our 2019E earnings forecasts, but we think that losses will continue in 2020E before a turnaround in 2021E. Maintain our HOLD call with an unchanged TP of RM2.00.

Narrower Core Net Profit on Qoq Basis

Lafarge’s 2018 core net loss widened by 35% yoy to RM292m on the back of lower revenue (-6% yoy) from lower selling prices and volumes, given the stiff pricing competition in the cement sector and prolonged weak property market. This was within market expectations, but smaller than our expected loss of RM351m. On a qoq basis, its 4Q18 core net loss was narrower by 50% at RM52m, on the back of a 11% qoq increase in revenue. The improved result is also due to favourable energy and distribution costs following the operational efficiency enhancement taken by the management. We believe the cost savings will continue over the next few years to mitigate the downturn in the cement industry.

Expect Losses to Continue in 2019-20E

Domestic market conditions remain uncertain and challenging given stiff pricing competition among the cement manufacturers. Property market remains sluggish, plagued by high overhang units and affordability issues. We think that it will take longer for the property market to rebound. Hence, we expect the group to continue to incur losses in 2019-20E before it turnarounds in 2021E. We maintain our 2019E forecast, but we expect Lafarge to incur a marginal loss of RM12m in 2020E.

Maintain HOLD With An Unchanged TP of RM2.00

We maintain our HOLD call with an unchanged TP of RM2.00, based on 2019E Price/book of 0.8x. We are positive on Lafarge’s strategy to focus on improving operational efficiency. We believe the pick up in domestic sales and selling prices remain the key factors for an earnings recovery.

Source: Affin Hwang Research - 28 Feb 2019