Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit (CNP) of RM135.9m came in below expectations, making up 39% and 41% of our and consensus’ full-year expectations, respectively. The CNP is derived after excluding one-off item, namely unrealised forex gains of RM4.2m.

Dividends

Within expectation. The company announced a second interim dividend of 8.0 sen which totalled up to 16.0 sen YTD. For the full-year, we expect a total dividend of 40.0 sen, which translates into a net dividend yield of 4.2%.

Key Results Highlights

QoQ, 2Q15 revenue fell 4.4% to RM665.5m as both cement (-4.9%) and concrete and aggregates (-2.0%) segment revenue declined while 2Q15 CNP dropped 22.9% to RM59.2m. Weaker bottomline performance was mainly attributable to: (i) lower sales from cement, aggregates and concrete segments, and (ii) a higher share of loss in the group’s associated company of RM3.4m.

YoY, 1H15 CNP was reduced by 10.3% to RM135.9m while revenue declined by 2.3% to RM1.36b, on the back of: (i) lower sales revenue from cement and aggregates segment, (ii) lower interest income (-17% to RM7.2m), and (iii) higher share of loss from the associated company as mentioned above.

Outlook

We believe that domestic cement demand should remain resilient in FY15, in line with our in-house’s construction GDP growth forecast of 7.8%.

Nonetheless, we remain cautious on the cement players’ earnings outlook given that the persistent intense competition will likely result in a price war. This is due to the expected 14% capacity expansion in Peninsular Malaysia until FY16.

Change to Forecasts

We tone down our FY15-16E earnings by 12%-5% to RM305.7-RM350.5m, after: (i) updating our USD/MYR exchange rate to RM3.83/USD (in-line with in-house’s assumption), (ii) trimming margin by reducing our rebate assumption, and (iii) lowering our coal price assumption to USD61/MT (USD67/MT previously).

Rating

Maintain UNDERPERFORM

Valuation

We lowered our TP to RM8.25 (RM8.68 previously), based on unchanged FY16E PER of 20.0x. Our TP implies a -0.5 SD discount on 5-year historical PER.

We think that LAFMSIA is overvalued at this juncture (currently trading at a Fwd-PER of 22.3), given that the industry is still faced with intense competition. As such, we maintain LAFMSIA at UNDERPERFORM.

Risks to our call

Higher-than-expected cement prices

Lower-than-expected raw material and energy costs

Stronger-than-expected cement demand

Source: Kenanga Research - 28 Aug 2015