1H16 CNPof RM41.6m was below expectations, accounting for 17% of both our and consensus estimates mainly due to higher-than-expected margin compression. Declared 2.0 sen interim dividend, bringing YTD dividends to 5.0 sen; below our full-year expectation of 25.0 sen. FY16-17E earnings, CALL & TP are under review (previously UP & TP: RM8.00) with potential downside bias pending an analysts’ briefing this coming Friday (2/9/2016).

1Q16 core net profit (CNP) of RM41.6m was below expectations, making up only 17% of both consensus’ and our estimate, mainly due to the higher-than-expected margin compression, likely stemming from: (i) our conservative cost assumptions i.e. coal cost, and (ii) higher-than-expected rebates given due to stiff competition in the market. Declared second interim dividend of 2.0 sen, bringing YTD dividend to 5.0 sen which was way below our expectation accounting for only 20% of our full-year estimate.

Results highlight. 1H16 CNP was down 69.4% YoY-Ytd due to: (i) decrease in EBIT by 58.4% on the back of lower margins from cement (-8.9ppt) driven by higher rebates due to the on-going cement price war, (ii) higher losses from associates (Alliance Singapore) (+46.9%), (ii) higher effective tax rate (+13.8ppt), and (iv) higher net interest expense of RM3.1m (-143%), vis-à-vis 1H15’s net interest income of RM7.2m, arising from borrowings raised in late-FY15 for the acquisition of Holcim Malaysia. 2Q16 CNP of RM15.9m was down 38% QoQ, underpinned by: (i) higher interest expense (+112%), (ii) higher loss from associates (+31.1%), and (iii) a higher effective tax rate (+13.8ppt).

Remain cautious on industry outlook. For the remainder of FY16, we foresee lower demand for cement due to: (i) the slowdown in residential and commercial properties market, and (ii) mega infrastructure works (MRT2, SUKE, DASH, LRT3) still at initial stages, which require little cement. That said, the increasing coal prices (average USD65 for the last two months vis-à-vis average of USD50 for 1H16) does not bode well for the cement sub-sector. Moving ahead from FY16, we believe cement demand might pick up from its current levels due to the large amount of infrastructure jobs awards this year entering into more advanced stages. However, we still remain concerned over: (i) uncertainty over the overall property market as it makes up 60% of cement demand, and (ii) cement oversupply capacity, which could cause price competition to persist.

Earnings under review. We place FY16-FY17E earnings UNDER REVIEW pending the upcoming analysts’ briefing on Friday (2/9/2016). Note that we are leaning towards cutting earnings estimates post briefing.

Call and TP UNDER REVIEW (previously UP; RM8.00). Post results, we place LAFMSIA UNDER REVIEW pending a result briefing this coming Friday. Previously, we had an UNDERPERFORM with a TP of RM8.00, which was based on 21.8x FY17 PER.

Source: Kenanga Research - 1 Sep 2016