1Q18 CNL of RM69m is worse than expected due to higher- than-expected cement rebates stemming from the weak cement demand. No dividends declared as expected. Further slash FY18-19E CNL to RM238-207m after accounting for lower plant utilisation and higher rebates. Maintain UP with lower TP of RM3.05 with further quarterly losses being a strong de-rating catalyst.

1Q18 disappoints. 1Q18 core net loss (CNL) of RM69m missed our FY18 CNL estimate of RM61m and consensus’ CNP estimate of RM12m. The negative deviation stemmed from higher–than-expected cement rebates leading to weaker-than-expected revenue and subsequently higher-than-expected losses. No dividends as expected.

Results highlight. 1Q18 CNL worsened to RM69m YoY (from RM58m) on the back of a weaker top-line (-3%) due to poorer cement demand and higher rebates. While 1Q18 headline CNL improved to RM69m QoQ (from CNL of RM80m), we note that it was due to an undisclosed one-off separation cost which had dragged 4Q17 earnings. Top-line wise, we note that 1Q18 came off by 5% QoQ from poorer cement demand and higher rebates.

Losses in 2Q18 inevitable. Based on channel checks, current cement rebates of c.50% are higher than 1Q18 cement rebates of 30-40%. The high rebates are due to: (i) weak demand from residential and commercial property segment, and (ii) slow infrastructure construction progress exacerbated by on-going overcapacity issue. Based on the current rebates trend, we expect LAFMSIA to remain in the red in 2Q18.

Troubled outlook likely to linger throughout FY18. Back in March, LAFMSIA was awarded a contract to supply cement to ECRL. However, as the new government reviews major infrastructure projects such as ECRL, the least we can expect are delays in project execution or even potentially a termination. Hence, negative for LAFMSIA as the ECRL contract would be a good recurring source of income amidst the weak sector backdrop. All in, we anticipate the price war to continue due to the overall subdued cement demand outlook on the back of industry overcapacity.

Widen loss estimates. Post results, we widen our FY18 CNL estimate further to RM238m (from CNL of RM61m) and reverse FY19E CNP of RM9m to CNL of RM207m after accounting for lower plant utilisation and higher cement rebates in view of the weak sector outlook.

Maintain UNDERPERFORM with lower TP of RM3.05 (from RM3.90) post adjustment in earnings based on a lowered Fwd. PBV valuation of 1.0x (from 1.2x). Our 1.0x PBV valuation is pegged to the lower end of 1999-2005 period’s 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 5th quarterly loss LAFMSIA had registered since listing, (ii) this is the 7th consecutive quarter LAFMSIA stopped dividends, which had been consistently paid out every quarter since FY10, (iii) deteriorating balance sheet, and (iv) we are expecting FY18 losses to be worse than 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 - 23 May 2018