9M17 CNL of RM144m missed our/consensus estimates due to weaker-than-expected cement demand coupled with higher–than-expected cement rebates. No dividends declared as expected. Widen our FY17E CNL to RM159m and reduced our FY18E CNP to RM59m. UP maintained with lower TP of RM4.10 based on 1.2x PBV.

Below expectations. 9M17 core net loss (CNL) of RM144m missed our CNL estimate of RM10m and consensus CNP of RM18.5m. The negative deviation stemmed from lower-than-expected cement demand and higher-than-expected cement rebates. No dividends as expected.

Results highlight. 9M17 CNL of RM144m deteriorated from a profit of RM45.8m YoY due to: (i) lower revenue (-13%) from weaker cement demand and higher rebates dished out. 3Q17 CNL of RM42m was marginally better than 2Q17’s CNL of RM44m due to higher sales contributions from their concrete segment (+12%) coupled with better concrete EBIT margins of 5% (+3ppt).

One more round of losses? Based on channel checks, cement rebates dished out since October till now has not subsided and is fairly similar to rebates dished out in 1H17, at c.30% level. Based on the current rebates trend, we expect weak earnings trend for cement players to persist in 4Q17 results. Meanwhile, as regards the recent fuel tank fire at their Rawang Plant, we believe damages are negligible and would be compensated by insurance. Operationally, we believe the production line for clinker and cement production is unaffected.

Is the worst over? We believe FY17 should be the lowest point for cement players and FY18 demand should at least pick up, driven by the ongoing mega infrastructure jobs. However, we still feel FY18E cement demand will not be sufficient to absorb the additional capacity (+15%) added by cement players in FY16. Hence, we opine that the high rebates are here to stay at 20-30% level from stiff price competition and LAFMSIA will not see a repeat of its heydays like in FY09-15 – displaying profits of RM200m-400m (refer to previous sector report dated 6/10/17 for more details). At current Fwd. PBV valuation of 1.85x which is at a -0.5SD (7-year average) and recent recovery of LAFMSIA’s share price of over +30% from a low of RM5.20 in early Sept 2017, we believe market might have been overly optimistic on a FY18E recovery story and banking on a serious pickup in cement demand. However, we are less convinced on such expectations.

Earnings estimates revised. Post results, we widen our FY17E CNL to RM160m (from CNL of RM10m) after increasing rebates assumptions and lowering utilisation. That said, we also cut our FY18 estimates by 45% to RM59m on the back of a lower utilisation rate assumption.

Maintain UNDERPERFORM with lower TP of RM4.10 (from RM4.33) post adjustment in earnings based on unchanged Fwd PBV valuations of 1.2x (7 -year -2SD). We derive our 1.2x PBV valuation from 1999- 2005 period’s average Fwd. PBV range of 0.9x-1.5x when profits were relatively volatile - ranging from a loss position of RM8.8m to earnings of RM118m. We believe our UNDERPERFORM call is justified given; (i) this is the 3rd quarterly loss LAFMSIA has registered since listing, (ii) this is the 5th 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-than-expected raw material and energy costs, and stronger-than- expected cement demand.

Source: Kenanga Research - 04 Dec 2017