1H17 Core Net Loss (CNL) of RM102m is deemed broadly inline with our expectations but was off consensus CNP estimate of RM67m. We deem the results as broadly in-line as we expect 2H17 to return into the black, underpinned by relatively healthier rebates and increased cement demand from the acceleration of infrastructure construction activities. No dividends declared, as expected. Maintain our FY17-18E earnings estimates. Reiterate UP with unchanged TP of RM4.33.

Broadly within expectations. 1H17 Core Net Loss (CNL) of RM102m is deemed broadly in-line with our expectation but was substantially off consensus CNP estimate of RM67m. We deem the results as broadly in-line with our estimate, as we expect 2H17 to return into the black, underpinned by healthier rebates and increased cement demand from the acceleration of infrastructure construction activities. On the other hand, we believe consensus could be overly bullish due to lower rebates assumptions. No dividends were declared for the 4th consecutive quarter, which was within our expectation as we expect no pay-out this year. Note this is the second consecutive quarter that LAFMSIA registered a loss.

Results Highlight. YoY, 1H17 CNL of RM102m deteriorated against 1H16 CNP of RM42.5m from weaker cement revenue (-25%). This is due to higher rebates and lower volume of cement sales on the back of a more competitive environment. Market demand has shrunk from slower construction activities, while supply capacity from the cement manufacturers increased by 16% from additional new plants in FY16. QoQ, 2Q17 loss position of RM44.1m improved from 1Q17’s loss position of RM57.9m despite the lower revenue recorded (-5%) due to lower depreciation charges (-14%) and lower rebates being dished out from their cement division leading to a narrowing loss position.

On a more positive mode but still not enough. Based on channel checks, we note that cement rebates have been relatively better and more stable at c.20-25% since the beginning of July compared to 1H17 when rebates were relatively more volatile in the 30-50% range. The previous high rebates were likely due to the weak demand on top of an enlarged capacity (+16%) of cement manufacturers in FY16. Moving forward, we expect 2H17 to register better results on the back of more stable demand and rebates from the gradual pick-up in demand from increased infrastructure works as major projects dished out last year enter into more advanced stages. That said, we believe the recovery in earnings could still be insufficient to reverse out the losses registered in 1H17.

Maintain FY17-18E estimates. Post results, we maintain our earnings estimates; FY17E to record a loss of RM10m and FY18E to return into the black at RM107m. Our estimate in FY17E is based on average cement rebates of 32% with utilization capacity of 51% while FY18E is driven by utilization of 53% with average rebates of 26%.

Maintain UNDERPERFORM with unchanged TP of RM4.33 based on FY18E PBV valuations of 1.2x. We derive our 1.2x PBV valuation from 1999-2005’s average Fwd. PBV range of 0.9x-1.5x in when profits were relatively volatile - ranging from a loss position of RM8.8m to earnings of RM118m. We believe our UNDERPERFORM call is fair given; (i) this is the 2nd quarterly loss LAFMSIA has registered since listing, (ii) this is the 4th 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 FY17. 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 - 30 Aug 2017