We met up with LAFMSIA’s recently for an update on the company’s prospect moving forward. While we expect cement demand to pick up in FY17, we believe key re- rating catalysts depend on the recovery of the property sector. We make no changes to our earnings and reiterate our UP call with unchanged TP of RM6.06.

FY16 results recap. Management reiterated that FY16 was a bad year (CNP -64% YoY), mainly due to poor cement pricing and volume decline. Industry wide, management noted that FY16 cement volume dipped by 6% vis-à-vis the last 9 years when cement industry volume was growing at rate of at least 3%. That said, management noted that they were hit hardest by the depressed pricings from increased rebates within industry due to the 15% increased capacity industry wide exacerbated by the weak demand.

Demand to improve in FY17. Cement demand is expected to improve driven by infrastructure jobs namely MRT2, LRT3, TRX in FY17. While cement demand typically makes up 1/3 each from residential property, commercial property and infrastructure, management believes that infrastructure will make up a higher portion of c.40% demand in FY17 while the other 2 sectors filling up the remaining 60% as property market remains challenging. We anticipate that cement demand is expected to grow marginally compared to last year which saw decline of 6%. The improvement in demand is expected to ease pricing pressures. However, we note that there is still a huge mismatch in terms of supply and demand as Malaysia cement demand/annum is c.20m metric tonnes while rated capacity of all players is c.35m metric tonnes. That said, we believe there will not be any additional capacities within the market for the next few years considering that players has just upgraded capacity in FY16. Our ground survey indicates that cement rebates still persists albeit at a better level compared to last year. Hence, we are anticipating a relatively weak 1Q17 results with a high chance that LAFMSIA would miss dividend pay-out this coming quarter again (missed for the last 2 quarters). We only anticipate demand to pick up at a quicker pace moving into 2H17.

Costs in FY17 to increase. In terms of costing, management notes that FY17 would face higher cost from: (i) coal (due to China capacity cuts), (ii) diesel fuel (+16% YTD) which is mainly used in transportation, and (iii) electricity (+c.2% YoY) from lower industry tariff rebates. Generally, energy related costs (coal, diesel, electricity) make up a bulky 40-45% of total costs.

Outlook. All in, we believe that a recovery in property market is a key rerating catalysts for the cement industry sector wide. While management did pushed the idea of increased construction of concrete roads (currently <2% of all roads in Malaysia) given that less maintenance is required compared to asphalt roads; we believe implementation and adoption would take a long period and is unlikely to happen in the near future.

Maintain UNDERPERFORM. We make no changes to our earnings and believe LAFMSIA’s near to mid-term prospect remains bleak. Reiterate our UNDERPERFORM call with an unchanged TP of RM6.06 based on 1.66x FY17E PBV.

Source: Kenanga Research - 15 Mar 2017