1H18 CNL of RM158m is worse than expected due to higher- than-expected cement rebates stemming from the weak cement demand. No dividends declared as expected. Further widen FY18-19E CNL to RM303-247m after accounting for lower plant utilisation and higher rebates. Maintain UP with lower TP of RM2.40 (from RM2.45).

1H18 disappoints. 1H18 Core Net Loss (CNL) of RM158m missed our FY18 CNL forecast of RM238m and consensus’ CNL estimate of RM182m. The negative deviation stemmed from higher–than-expected cement rebates leading to weaker-than-expected revenue and subsequently higher-than-expected losses. We derived our 1H18 CNL after reversing out unrealized foreign exchange loss of RM5.0m. No dividend was announced as expected.

Results highlight. 1H18 CNL worsened to RM158m YoY (from RM95m) as revenue decreased (-1%) weighed by lower cement sales and higher rebates dished out. This was due to weaker demand and intense pricing competition as results of slower construction jobs coupled with continued overcapacity in the market. QoQ, 2Q18 loss position of RM84m was worse compared to RM74m in 1Q18 due to higher rebates from cement segment, which led to further erosion of EBIT margin (-6ppt).

FY18 to remain in the red. Based on channel checks, current cement rebates of c.50% are higher than cement rebates of 30-40% in 1Q18. The high rebates are due to: (i) weak demand from residential and commercial property segment, and (ii) slow infrastructure construction progress coupled with on-going overcapacity issue. Based on the current rebates trend, we anticipate the price war to continue backed by overall subdued cement demand outlook and exacerbated by industry overcapacity. We also expect widening losses for LAFMSIA for the remainder of FY18.

Widen loss estimates. Post results, we widen our FY18-19E CNL estimate further to RM303-RM247m (from CNL of RM238-207m) after accounting for lower plant utilisation and higher cement rebates in view of the subdued property and construction sector outlook.

Maintain UNDERPERFORM with lower TP of RM2.40 (from RM2.45) post adjustment in earnings based on unchanged Fwd. PBV valuation of 0.8x on FY18E BV/share of RM2.98. Our 0.8x PBV valuation is pegged below 1999-2005’s Fwd. PBV range of 0.9-1.5x when earnings were relatively volatile ranging from a loss position of RM8.8m to profit of RM118m. We believe our UNDERPERFORM call is justified given; (i) this is the 6th quarterly loss LAFMSIA had registered since listing, (ii) this is the 8th 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 - 03 Sep 2018