Yesterday, we attended LAFMSIA’s post results briefing and highlights from the briefing include: (i) temporary shut- down of one clinker line in Langkawi, (ii) comfortable with existing gearing levels, (iii) cement demand drivers in FY17, and (iv) update on dividend pay-out. Post briefing, we maintain our FY17-18E earnings and make no changes to our UP call and TP of RM6.06.

Optimising capacity. For FY17, management plans to shut down one clinker line out of the two available in their Langkawi plant temporarily (c.1.7mt of clinker capacity) as it has been under-utilised due to the weak market demand. The cost associated for the temporary shutdown includes VSS for 40-50 workers which would be net off against the cost savings arising from less maintenance required for the line. While we applaud management’s management's decision to eliminate idling fixed costs, we believe the impact towards earnings could to felt from FY18 onwards would be minimal given that maintenance only makes up c.5% of our operating costs. As for their new Rawang and Kanthan plant, they are planning for a higher utilisation rate in the future as it is more cost-savvy in terms of transportation costs as compared to their Langkawi plant.

Infrastructure jobs to drive demand and growth. Moving forward, management indicated that infrastructure jobs i.e. MRT2, LRT3, SUKE will be the main drivers for cement demand, and this is expected to improve their top-line growth as management expects the cement demand from these infrastructure works to make up c.40-45% of its future revenue vis-à-vis previous years in which infrastructure typically makes up one-third.

Dividends to come back? For FY16, management paid out dividends amounting to 5.0 sen (equivalent to DPR of 55%) due to their poor earnings performance. Moving forward, management is looking to resume dividend pay-out of 80-100% should its earnings see better improvements in FY17. However, we note that our estimated dividend based on 80% DPR for FY17 only indicates a yield of 2.5%. Furthermore, we believe dividends might not be paid on a quarterly basis given that 1Q17 cement demand remains weak as it has not taken off from the above-mentioned infrastructure projects.

Comfortable with current gearing. Management highlighted their comfortable net gearing level to be below the 0.2x mark and given their existing low net gearing of 0.03x, they have no intention to pare down their debts until FY19 onwards.

Maintain our earnings. Post briefing, we maintain our FY17-18E earnings of RM182m and RM191m, respectively. Note that we had preciously factored in the increase in demand with expectations of lower rebates dished out by cement players for FY17E.

Maintain UNDERPERFORM. Post results, we reiterate our UNDERPERFORM call with an unchanged TP of RM6.06 based on 1.66x FY17E PBV which implies a 5-year historical -2.3x SD PBV. We believe our valuations are justifiable considering that LAFMSIA missed out on dividends for the last two quarters which they had been consistently paying out every quarter since FY10.

Risks to our call include (i) higher-than-expected cement prices, (ii) lower-than-expected raw material and energy costs as well as (iii) stronger-than-expected cement demand.

Source: Kenanga Research - 24 Feb 2017