FY17 CNL of RM224m missed our/consensus estimates due to higher–than-expected cement rebates leading to weaker- than-expected margins. No dividends declared as expected. Reverse FY18E CNP of RM59m to CNL of RM61m and introduce FY19E CNP of RM9m. UP maintained with lower TP of RM3.90 based on 1.2x PBV.

Below expectations. FY17 core net loss (CNL) of RM224m missed our/consensus CNL estimates of RM159m/RM166m. We believe the negative deviation stemmed from higher–than-expected cement rebates leading to weaker-than-expected margins. No dividends as expected.

Results highlight. FY17 CNL of RM224m deteriorated from a profit of RM87m YoY due to lower revenue (-12%) from weaker cement demand and higher rebates dished out. 4Q17 CNL of RM80m was worst off compared to 3Q17’s CNL of RM44m due to higher rebates from cement segment, which led to further deterioration of EBIT margins (-10ppt).

Losses likely to persist into 1Q18. Based on channel checks, YTD cement rebates dished out are fairly similar to rebates dished out in 2H17, at c.30-40% level. Based on the current rebates trend, we expect weak earnings trend for cement players to persist in 1Q18 results.

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 back in 2016. Hence, we opine that the high rebates are here to stay at 20-40% level from stiff price competition and LAFMSIA will not see a repeat of its heydays in FY09-15 – displaying profits of RM200m-400m (refer to previous sector report dated 5/01/18 for more details).

Earnings estimates revised. Post results, we slash our FY18E CNP of RM59m to a CNL position of RM61m after increasing rebates assumptions by 5% (to 32%). Subsequently, we introduce our FY19E CNP of RM9m on the back of cement rebates assumption of 27%.

Maintain UNDERPERFORM with lower TP of RM3.90 (from RM4.10) 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 4th quarterly loss LAFMSIA has registered since listing, (ii) this is the 6th consecutive quarter LAFMSIA stopped dividends which they had been consistently paying our every quarter since FY10, and (iii) we do not expect any dividends for the rest of FY18.

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 - 26 Feb 2018