1Q17 core net loss (CNL) of RM58.0m was off ours and consensus expectations. We believe the negative variance was due to lower-than-expected cement demand coupled with the higher-than-expected rebates dished out by cement manufacturers. No dividends declared for the 3rd consecutive quarter who disappointed our 17.0sen forecast. Downgrade FY17-18E earnings by 101% and 44%. Maintain UP with a lower TP of RM4.33 (from RM6.06).

Unprecedented loss. 1Q17 Core Net Loss (CNL) of RM58.0m was off ours and consensus CNP expectation of RM182m and 159m respectively. We believe the negative variance was due to lower-than expected cement demand on the back of higher-than-expected rebates dished out by cement manufacturers of up to c.30-50% (based on channel checks) vs our 26% rebate estimates for 1Q17. We derive our CNL after reversing out RM9.1m gains from a land sale. We note that the loss registered in 1Q17 is the first loss LAFMSIA has made since 2005 and the worst loss ever since listing in 1999. No dividends declared for the 3rd consecutive quarter, a disappointment to our NDPS forecast of 17.0sen.

Results Highlight. 1Q17 CNL of RM58.0m was down against 4Q16’s CNP of RM40.4m underpinned by: (i) lower cement revenue (-12%) due to weak demand coupled with pricing pressure as a result of the slowdown in property market and delay in major infrastructure projects and (ii) higher depreciation costs (+9%) from new plant in Rawang and Kanthan. 1Q17 CNL was also down against 1Q16’s CNP of RM25.7m on similar reasons stated above.

A recovery unlikely in FY17. Based on channel checks, cement rebates are currently still high at a range of 30-50% in 2Q17 due to the weak demand on top of an enlarged capacity (+16%) by cement manufacturers in FY16. Given that the trend of high rebates has not subsided, we believe demand remains weak and hence anticipate 2Q17 to register similar weak results as in 1Q17. While we note that we expect cement demand to pick up from 2H17 due to increased infrastructure works as major projects dished out last year enters into more advanced stages, we believe the recovery in demand will be gradual (c.6-9% in 3Q17 and 4Q17) and would not be suffice to reverse out the losses registered in 1H17.

Downgrade FY17-18E earnings. Post results, we downgrade our FY17E earnings from a CNP of RM182m to a core net loss (CNL) of RM10m after (i) increasing our average cement rebates from 26% to 32% in FY17 and (ii) reduce our utilization capacity to 51% (from 55%). Meanwhile, we reduce our FY18E CNP by 44% to RM107m after adjusting for a lower utilization rate of 53% (from 58%). Following the loss expected in FY17E, we trim our dividend expectation in FY17E to nil (from 17.0 sen).

Maintain UNDERPERFORM with a lower TP of RM4.33 (from RM6.06)

based on lower FY18E (rolled forward from FY17E) PBV valuations of 1.2x (from 1.66x). We believe our downgrade in valuations is fair given that (i) this is the worst quarterly loss LAFMSIA has registered since listing, (ii) this is the 3rd consecutive quarter LAFMSIA has missed out on dividends which they had been consistently paying our every quarter since FY10 and (iii) we do not expect any dividends for the rest of FY17E. We derive our 1.2x PBV valuation from 1999-2005’s average Fwd PBV range of 0.9x-1.5x in which profits were relatively volatile then, ranging from a loss position of RM8.8m to earnings of RM118m.

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

Source: Kenanga Research - 23 May 2017