9M18 CNL of RM257m missed expectation due to weaker- than-expected cement sales stemming from high rebates and higher-than expected production cost. No dividends declared as expected. Further widen FY18-19E CNL to RM401-271m after accounting for higher cement rebates and operating cost. Post earnings adjustments, maintain UP with lower TP of RM1.80 (from RM1.90) on unchanged Fwd. PBV of 0.7x on lowered FY19E BV/share of RM2.55 (from RM2.69).

9M18 disappoints. 9M18 Core Net Loss (CNL) of RM257m missed our FY18 CNL forecast of RM303m and consensus’ CNL estimate of RM233m. That aside, its 3Q18 net loss of RM109m was higher than our projections during our recent results preview (CNL: RM90m). The negative deviation stemmed from weaker-than-expected cement sales and higher-than-expected production cost, which subsequently led to higher-than-expected losses. We derived our 9M18 CNL after reversing out unrealized foreign exchange loss of RM5.1m. No dividend was announced as expected.

Results highlight. 9M18 CNL worsened to RM257m YoY (from RM135m) as revenue decreased (-6%) weighed by lower cement sales and higher rebates dished out. This was due to weaker demand and intense pricing competition as a result of slower construction jobs coupled with continued overcapacity in the market. QoQ, 3Q18 CNL of RM109m was worse compared to RM84m in 2Q18 due to lower cement sales owing to weaker-than expected cement production and higher rebates dished out, exacerbated by higher-than-expected production cost, which led to further erosion of EBIT margin (-6ppt).

Rebates remain high. Based on channel checks, cement rebates in 3Q18 for bulk cement represented 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 continue amidst an overall subdued cement demand outlook and exacerbated by industry overcapacity.

Expect widening losses for the remainder of FY18. Post results, we widen our FY18-19E CNLs further to RM401-RM271m (from RM303- 247m) after accounting for higher cement rebates and in view of the subdued property and construction sector outlook as well as higher operating cost due to higher coal prices.

Maintain UNDERPERFORM with lower TP of RM1.80 (from RM1.90) post adjustment in earnings based on unchanged Fwd. PBV valuation of 0.7x on lowered FY19E BV/share of RM2.55 (from 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 7th quarterly loss registered by LAFMSIA since listing, (ii) the 9th 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.

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 - 19 Nov 2018