FY18 CNL of RM318m is within our CNL estimate of RM333m but missed consensus CNL forecast of RM292m. No dividends declared as expected. Post results, we narrowed our FY19E CNL to RM241m (from RM251m) after increasing utilisation rate on higher export cement sales. We also introduce our FY20E CNL of RM204m. Upgrade to MARKET PERFORM (from UNDERPERFORM) on LAFMSIA with unchanged TP of RM1.85.

Within expectations. FY18 core net loss (CNL) of RM318m is within our CNL estimates of RM333m but missed consensus CNL forecast of RM292m. No dividends declared as expected.

Results highlight. FY18 CNL of RM318m deteriorated from a CNL of RM210m YoY due to lower revenue (-6%) from weaker cement demand and higher rebates dished out as a result of the softer market condition owing to persistent overcapacity exacerbated by the slowdown in infrastructure jobs. QoQ, 4Q18 CNL of RM62m narrowed compared to 3Q18’s CNL of RM109m on lower operating cost attributed to lower energy prices, distribution costs and absence of plant maintenance. Recall that the 3Q18 CNL was exceptionally high due to the timing of annual shutting down of major plants in Langkawi and Kantan for maintenance. Based on channel checks, cement rebates in 4Q18 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.

FY19 outlook. We understand that management intends to offset the weaker domestic demand by widening its export market reach primarily to Bangladesh, leveraging on its Langkawi plant. We believe that by increasing export, it helps to cushion the weak local demand as well as to maintain capacity utilization at an optimal level. However, we remain cautious over the overall group outlook in 2019 due to weak domestic demand woes and continuous overcapacity in the market leading to stiff competition and cement rebates wars. The group export strategy may partially help to drive the revenue figures but given low margins from export sales, we do not expect any immediate significant bottom-line improvements. Nonetheless, our FY19 forecast implies better performance with net loss narrowing to RM241m from RM318m net loss in FY18.

Narrowed FY19E estimates by 4%. Post results, we narrowed our FY19E CNL to record RM241m (from RM251m) after increasing cement utilisation rate from 40% to 45% on higher export cement sales. Subsequently, we introduce our FY20E CNL of RM204m.

Upgrade to MARKET PERFORM (from UNDERPERFORM) with unchanged Target Price of RM1.85 following recent share prices corrections. YTD, share price has corrected by 5% since our last report published in January 2019. Our Fwd. PBV is based on an unchanged Fwd. PBV valuation of 0.7x on unchanged FY19E BV/share of RM2.66. 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. Our 0.7x Fwd.PBV (lower than 0.9-1.5x) is justified given given large quantum of losses currently as compared to 1991-2005. With narrowing losses, we expect our valuation basis to hold for now and will only re-rate upon firmer earnings recovery to the black.

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 - 28 Feb 2019