Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit (CNP) of RM192.1m came in below expectations, making up 63% and 64% of our and consensus’ full-year expectations, respectively. The CNP is derived after excluding a one-off item, namely unrealised forex gains of RM14.4m.

The negative deviation was due to: (i) higher-thanexpected losses in concrete and aggregates segment, (ii) lower interest income, and (iii) higher effective tax rate.

We believe the losses in concrete and aggregates segment was aggravated by the on-going intense competition in the cement industry.

Dividends

Within expectation. The company announced a third interim dividend of 8.0 sen, totalling up to 24.0 sen YTD. For the full-year, we expect a total dividend of 31.0 sen, which translates into a net dividend yield of 3.4%.

Key Results Highlights

QoQ, 3Q15 revenue was flat at RM670.9m, as the increase in revenue from cement (+4.5%) was offset by the reduction in revenue from concrete and aggregates (- 15.5%). However, 3Q15 CNP dropped by 4.9% to RM56.2m, due to: (i) higher losses in concrete and aggregates segment (8x higher than 2Q15), and (ii) lower interest income (-13.7%) as lesser amount of funds were placed on short-term deposits.

YoY, 9M15 revenue declined by 1.3% to RM2.03b while its CNP was eroded by 7.7% to RM192.1m, on the back of: (i) lower sales revenue from cement and aggregates segment (-5.8%), (ii) lower interest income (-24.3%), (iii) losses of RM7.2m from associated companies as compared to profit of RM1.3m in 9M14 due to intense competition, and (iv) higher effective tax rate (+0.9ppt).

Outlook

We believe that domestic cement demand should remain resilient in FY15, in line with our in-house’s construction GDP growth forecast of 9.1%.

Nonetheless, we remain cautious on the cement players’ earnings outlook as the expected 14% capacity expansion in Peninsular Malaysia up till FY16 will escalate the price war between cement players.

Change to Forecasts

Due to two consecutive quarters of disappointment in earnings, we have toned down our FY15-16E earnings by 12%-3% to RM269.9-340.4m, after: (i) updating our USD/MYR exchange rate to RM4.00/USD (in-line with inhouse’s assumption), (ii) trimming margin by increasing our rebate assumption, and (iii) lowering our coal price assumption to USD57/MT (USD61/MT previously).

Rating

Maintain UNDERPERFORM

Valuation

Post earnings cut, we lowered our TP to RM8.01 (RM8.25 previously), based on the unchanged FY16E PER of 20.0x. Our TP implies a -0.5 SD discount on 5-year historical PER.

Given the intense competition in the market, we strongly believe that LAFMSIA is overvalued at this juncture (currently trading at a Fwd-PER of 24.4), as there could be more downside to its earnings should the price war persists. As such, we are maintaining our UNDERPERFORM call on LAFMSIA with a lower TP of RM8.01.

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 - 19 Nov 2015