We anticipate 3Q18 results to track 2Q18 performance with a CNL of RM90.0m bringing 9M18 CNL to RM247.5m which accounts for 82%/106% of our/consensus full-year net loss forecasts of RM303.1m/RM232.9m. In view of still high current rebates trend, we anticipate continuous intense price war amidst a subdued industry outlook and overcapacity. Maintain UNDERPERFORM with lower TP of RM1.90 (from RM2.40) on lower Fwd. PBV of 0.7x (0.8x previously) based on FY19E BV/share of RM2.69.

Cement demand remains weak. We observed that domestic cement demand remains weak on a YoY basis as 3Q18 (July-September) apparent cement consumption plunged to 4.3m MT (-19% YoY), bringing 9M18 cement consumption down to 12.2m MT (-10% YoY). Hence, we are expecting FY18E apparent cement consumption to be worse off than FY17, largely on weaker demand dragged by soft residential projects and slowdown in infrastructure activities. For FY18, we expect apparent cement consumption (production+ imports – exports) to decline to 16.0m MT, (-10%, YoY) against FY17 consumption of 17.6m MT. As for LAFMSIA, we are forecasting full- year cement production of 5.8m MT (-16%, YoY), representing 36% of our expected domestic consumption of 16.0m MT for the year. For the coming quarter, we expect to see improvements in LAFMSIA’s cement production estimated at 1.9m MT cement production which is (vs. 1.8m MT in 2Q18).

Rebates remain high. Based on channel checks, cement rebates dished out in 3Q18 for bulk cement represents 44% discount to the market price of RM370/MT, whilst bag cements are priced at a lower discount of 22% to the market price of RM19.25/bag. We note the prevailing high rebates are due to: (i) weak demand from residential and commercial property segments, and (ii) slow infrastructure construction progress coupled with on-going overcapacity issue. Based on the current rebates trend, we anticipate the price war to further intensify amidst an overall subdued cement demand outlook and exacerbated by industry overcapacity.

Results preview, 9M18. LAFMSIA’s 9M18 interim financial results are expected to be released on 16 November 2018. We expect 3Q18 results to track 2Q18 performance with a CNL of RM90.0m bringing 9M18 CNL to RM247.5m which accounts for 82%/106% of our/consensus full-year net loss forecasts of RM303.1m/RM232.9m, respectively. Hence, we maintain our FY18-19E forecast at this juncture. Although production may be slightly better in 3Q18, we note that cost escalations had eroded that effect; thus we project 3Q18 CNL of RM90.0m premised on an ASP of RM233/MT, total apparent cement consumption of 4.3m MT in 3Q18, and an assumed cost structure similar to 2Q18.

Maintain UNDERPERFORM with lower TP of RM1.90 (from RM2.40) on lower Fwd. PBV valuation of 0.7x (0.8x previously) as we roll forward our valuation base year to FY19E BV/share of RM2.69. Our 0.7x 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) the 6th quarterly loss registered by LAFMSIA since listing, (ii) the 8th consecutive quarter LAFMSIA stopped dividends, which had been consistently paid out every quarter since FY10, (iii) deteriorating balance sheet, and (iv) FY18E losses to be worse than FY17.

Source: Kenanga Research - 15 Nov 2018