9M16 CNP of RM44.1m was way below our (46%) and consensus (32%) full-year estimates. Negative deviation likely stemmed from higher-than-expected rebates dished out for their cement division causing severe margin compression. No dividend was declared this quarter. YTD dividends of 5.0 sen missed our 11.0 sen expectations. We slash FY16E-17E earnings by 35%-23%. Reiterate UP with an unchanged TP of RM6.06.

Below expectations. 9M16 CNP of RM44.1m came in way below our and consensus expectations registering only 46% and 32% of full-year estimates, respectively. We believe the negative deviation stemmed from higher-than-expected rebates dished out for their cement division causing severe compression towards margins. No dividend was declared this quarter which comes as a surprise as LAFMSIA has been consistent in their quarterly dividend pay-outs. Consequently, YTD dividends of 5.0 sen missed our 11.0 sen expectation.

A set of poor results. 9M16 CNP was down 69% YoY underpinned by: (i) lower cement revenue (-5%) due to weak demand as a result of the slowdown in property market and delay in major infrastructure projects (KL118) coupled with pricing pressure causing margins compression (- 11ppt), (ii) higher depreciation costs (+20%) from new plant in Rawang and Kanthan, and (iii) net interest expense of RM5m incurred (vis-�-vis net interest income of RM10m) due to the borrowings raised in end- FY15 for the acquisition of Holcim Malaysia. 3Q16 CNP of RM2.5m was down 38% QoQ dragged by: (i) lower cement revenue (-6%) coupled with lower EBIT margins (-7.4ppt), (ii) higher financing costs (+10%), and (iii) higher depreciation charges (+16%) from similar reasons as above.

Cautious 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 (KL118, MRT2, SUKE, DASH, LRT3) still at initial stages/facing delays, which require little cement. Moving ahead from FY16, we believe cement demand should 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.

FY16E-17E earnings slashed by 35%-23%. Post results, we cut our FY16-17E earnings by 35%-23% to RM62m-RM182m after factoring higher rebates (+1.5ppt to 29% in FY16; +3.0ppt to 26% in FY17) for cement division due to the current poor market demand.

Maintain UNDERPERFORM. Post reduction in earnings, we are reiterating our UNDERPERFORM rating with an unchanged TP of RM6.06 as we switch towards a new valuation of 1.66x FY17E PBV (from 21.8x FY17 PER) which implies a 5-year historical -2.3x SD PBV. We believe that our switch to PBV from PER is fair as LAFMSIA?s earnings have been on a downtrend since FY13. Despite new valuations methodology at lows of <-2.0x SD PBV, we find it justifiable considering: (i) this is the 6th consecutive quarter results below expectations, and (ii) this is the first time that they missed out on dividends which they had been consistently paying out every quarter since FY10 ? possibly causing share price to trade at new lows. Nonetheless, we make no changes to our TP at this juncture. However, should there be further earnings deterioration; we shall look to further reduce our TP.

Risks to our call include higher-than-expected cement prices, lower-than- expected raw material and energy costs, and stronger-than-expected cement demand.

Source: Kenanga Research - 30 Nov 2016