Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit (CNP) of RM234.3m came in below expectations, making up 87% and 83% of our and consensus’ full-year expectations, respectively. The CNP is derived after excluding a one-off item, namely unrealised forex gains of RM1.1m. The negative deviation was due to one-off acquisition expense from acquiring Holcim and higher-thanexpected finance cost. Note that this is the third consecutive quarters of earnings disappointment.

Dividends

Met expectation. The company announced a fourth interim dividend of 7.0sen, totalling up to 31.0 sen YTD (net dividend yield: 3.4%), which met our FY15 full-year forecast.

Key Results Highlights

QoQ, 4Q15 revenue rose 7.1% due to higher cement revenue (+5.2%). However, CNP shrunk 24.9%, mainly attributable to: (i) one-off Holcim acquisition expense, and (ii) higher finance cost arising from borrowings for the acquisition of subsidiaries.

Ytd-YoY, FY15 revenue was flattish while CNP eroded by 9.0%, on the back of: (i) one-off acquisition expense, (ii) lower interest income as lesser amount of funds was placed in short-term deposits.

Outlook

We believe that domestic cement demand should remain resilient in FY16, in line with our in-house’s construction GDP growth forecast of 8.8%.

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 among cement players.

Change to Forecasts

We lowered FY16E earnings by 14%, after: (i) updating our USD/MYR exchange rate to RM4.21/USD (from RM4.00/USD), (ii) trimming margin by increasing our rebate assumption, and (iii) lowering our coal price assumption to USD51/MT (USD57/MT previously). Meanwhile, we introduce our FY17E earnings.

Rating

Maintain UNDERPERFORM

Valuation

Although earnings have disappointed, we noticed that its 5-year rolling Fwd PER mean has been moving up, possibly due to investors looking forward to the new capacity while the stock is highly institutionalized. We also reckon that the cement price war has been heavily factored into the share price. Thus, we apply a higher 24.4x FY16E PER which implies a higher TP of RM8.44 (from RM8.01). Our applied PER is based on its 5-year mean (previously 20.0x Fwd PER @ -0.5SD)

At last price, FY16-17E Core PERs of 26.2-24.2x indicate rich stock valuations; thus, we reiterate 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 - 1 Mar 2016