1Q16 core net profit (CNP) of RM25.7m missed our and market expectations at only 9% of full-year estimates, due to higherthan- expected margin compression in cement segment and oneoff Holcim integration costs. First interim dividend of 3.0 sen was also below expectation. Hence, we trimmed FY16E earnings by 20% on lower cement margin. We maintain UNDERPERFORM but lowered TP to RM8.18, after rolling forward valuation base to FY17E on PER of 21.8x, based on 5-year -0.5 SD (previously RM8.44 based on FY16E PER of 24.4x, on 5-year mean level), in view of softer earnings outlook.

1Q16 core net profit (CNP) of RM25.7m came in way below expectations, making up only 9% of consensus’ and our estimates, mainly due to higherthan- expected margin compression in cement segment and one-off Holcim integration costs. Our CNP is derived after excluding unrealised forex loss of RM5.0m. Note that this is the fourth consecutive quarter of earnings disappointment.

Proposed first interim dividend of 3.0 sen was also below expectation as it made up only 9% of our initial FY16E NDPS of 32.0 sen.

Double whammy from margin compression in cement segment and traditional weak 1Q due to seasonally lower construction activity. In the last four years, aside from 1Q15 which was boosted by pre-GST rush, 1Q CNP made up 15% to 19% of full-year CNP due to seasonally lower construction activity in the quarter. Aside from lower cement revenue (-8.8%), 1Q16 CNP fell 39.2% QoQ on the back of compression in cement margin (- 4ppt to 7.3%), in view of stiff competition and persistent pricing pressure.

Ytd- YoY results displayed similar trend with CNP reduced sharply by 66.5% YoY, on the back of lower cement revenue (-4.7% YoY), sharp drop in cement margin (-9.7ppt to 7.3%), and one-off Holcim integration costs.

Remain cautious on industry outlook. We believe that domestic cement demand should remain resilient in FY16, in line with our in-house’s construction GDP growth forecast of 7.6%. Nonetheless, we remain cautious on the cement players’ earnings outlook as the expected 14% capacity expansion in Peninsular Malaysia up to FY16 will escalate the price war among cement players.

Reduced FY16E earnings by 20% to RM235m. We lowered FY16E earnings by 20%, after: (i) trimming margin by increasing our rebate assumption and reduce cement plant utilisation rate, (ii) updating our USD/MYR exchange rate to RM4.00/USD (from RM4.21/USD), and (iii) lowering our coal price assumption to USD49/MT (USD51/MT previously).

Reiterate UNDERPERFORM with lower TP of RM8.18 (previously RM8.44). Given the fourth consecutive quarter of earnings disappointment, we are concerned of the group’s earnings outlook due to persistent price war and margin compression in cement segment to single-digit from historical double-digit EBIT margin. Post earnings adjustment and rolling forward our valuation base year to FY17E from FY16E, we lowered our TP to RM8.18, based on FY17E PER of 21.8x, on 5-year -0.5SD (previously RM8.44 based on FY16E PER of 24.4x, on 5-year mean level). At last price, FY16E/FY17E Core PER of 30.6x/22.5x indicate rich stock valuations; thus, we reiterate UNDERPERFORM. Nonetheless, significant recovery in sales volume and margin will be a rerating catalyst for this stock. Risks to our call include higher-than-expected cement prices, lower-thanexpected raw material and energy costs, and stronger-than-expected cement demand.

Source: Kenanga Research - 24 May 2016