We attended LAFMSIA’s 3M16 results’ briefing, which was well attended by about 30 participants. We came away feeling neutral, as we opine that the positive capacity expansion contribution from Rawang (from 2Q16) and Kanthan (from end 3Q16) will be negated by intense price competition and capacity expansion of other cement players in the industry. Post-briefing, we trimmed our FY17E earnings by 2% and reiterate our UNDERPERFORM call with lower TP of RM8.00 (previously RM8.18), based on unchanged FY17E PER of 21.8x on 5-year historical -0.5SD level.

1Q16 results recap. Management recap that 1Q16 revenue was down (-3.8% YoY) mainly due to weaker cement revenue (-4.7%) on higher domestic supply and slower demand from residential and commercial segment. Meanwhile, 1Q16 CNP came in lower (-66.5% YoY) on the back of: (i) lower revenue, (ii) higherthan- expected margin compression in cement segment, and (iii) one-off Holcim integration cost.

Commissioning of Rawang plant while Kanthan plant is expected to commence by 3Q16. Management updated that the Rawang plant (0.2m metric ton (MT)) capacity expansion has been completed on Mar-16 and production has started since Apr-16. Meanwhile, Kanthan plant (1.0m MT) capacity extension is on track and expected to be completed by end 3Q16, which is within our expectations. However, in view of stiff pricing competition, we expect FY16E CNP margins to remain flattish at 8.4% (+0.1ppt YoY) due to the high fixed cost for every unit of cement produced.

Weakening residential and commercial segments will drag overall growth. While management is looking forward to major infrastructure projects such as MRT2, LRT3, RAPID Pengerang project, Tun Razak Exchange and Bandar Malaysia from 2H16 onwards, management highlighted that a single infrastructure project may not be sufficient to cover the overall shortfall due to slowdown in residential and commercial segment. This coupled with additional 14.0% capacity increase in Peninsular means that the group has to secure more projects in order to handle the slowdown in demand. Given current stiff pricing competition, we concur with management and maintain our cautious view on earnings outlook.

Trimmed FY17E earnings by 2% while keeping FY16E unchanged. We made no changes to FY16E bottom-line as we had factored in lower margins assumption previously. Meanwhile, we lowered our FY17E earnings slightly by 2% to RM312m, as we increased our FY17E coal price assumption to USD47/MT (from USD45/MT) to reflect lower core net profit margin assumption at 10.3% (from 10.6%).

Applied lower FY16E-17E dividend payout ratio at 90%-95% in view of softer earnings outlook. While there is no dividend policy in place, management has indicated to scale down on dividend payout moving forward, which prompt us to cut our dividend estimates. We opt to be conservative by trimming down our FY16E-FY17E targeted dividend payout to 90%-95% (from 99%), at 25.0-35.0 sen (3.1%-4.4% yield), respectively.

Maintain UNDERPERFORM with a lower TP of RM8.00. While we have factored in higher revenue contributions from the commissioning of Kanthan and Rawang plants for FY16E, we remain concerned on the sector’s fundamentals following margin compression in cement segment and persistent price competition amongst cement players, partly due to the expected additional 14.0% capacity increase in Peninsular Malaysia in FY16. Due to lack of catalysts, we maintain our UNDERPERFORM recommendation. However, significant recovery in sales volume and margin will be a rerating catalyst for this stock. Post-earnings adjustment; we tweaked our TP lower to RM8.00 (from RM8.18), based on unchanged FY17E PER of 21.8x, on the 5-year historical -0.5SD level.

Source: Kenanga Research - 31 May 2016