Post a briefing, we came away feeling slightly more assured on better clarity over the group’s overall prospects. Key highlights include: (i) a recap for 4Q18 results, (ii) increasing plant efficiency to combat sluggish domestic demand, and (iii) cost optimisation efforts remaining a priority. However, we downgrade it to UNDERPERFORM with an unchanged TP of RM1.85 following the recent rally in share price.

Recap on 4Q18. The group saw improved sales in 4Q18 on higher export volume. Its CNL narrowed to RM62m compared to 3Q18 CNL of RM109m on lower operating cost attributed to lower energy prices, distribution costs and absence of plant maintenance. We gather that other segments namely ready mix (RMX), Drymix and aggregates all managed to register profits in FY18 at EBITDA level, partially offsetting the losses from cement segment due to lower-than expected market demand exacerbated by overcapacity that led to lower selling prices. We gather that its RMX segment’s earnings contribution was weaker YoY (-17%) due to the nearing completion of RAPID Pengerang Project of which it supplied >40k tonnes of asphalt. However, management noted that it will continue growing its RMX division backed by new projects in the pipeline; among others are the Star residence, TRX lifestyle quarter and Sky Suites.

Increasing plant efficiency. Going forward, management intends to lower its cost base by improving its plants efficiency. We gather the company has completed the upgrades of its Langkawi plant’s shiploader 2 in 2017, which was initially meant for cement production. However, in view of the weaker domestic demand, LAFMSIA is widening its export market reach by exporting clinkers globally with Bangladesh as a target market. This is also to leverage on its Langkawi plant’s strategic location for exports business potentially reducing distribution costs. We understand clinker demand from Bangladesh remains strong with total annual clinker demand approximately at 30m MT with price level remaining favourable. We believe by increasing its export sales, it will help to cushion the weak local demand as well as to maintain its capacity utilization at an optimal level. In addition, the company has also completed the installation of new coal mill system potentially leading to cost-cutting as it no longer requires buying costly type of coal going forward.

Cost rationalisation still a priority. Apart from diversifying its revenue stream to export market and improving plant efficiency, management is also focusing on a flattened organization structure. Recall that in 2H18, the company has implemented a Voluntary Separation Scheme (VSS), which is expected to fully come into effect in FY19 with c.RM45m reduction in SG&A cost expected. The company is also looking forward to minimise unscheduled major plant maintenance shut-down as it may cause a surge in variable cost due to higher inputs and utilities cost required to reheat the plants.

FY19 outlook. We remain cautious over the overall group’s 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’s export strategy may partially help to drive revenue but given generally 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.

Downgrade to UNDERPERFORM (from MARKET PERFORM with an unchanged Target Price of RM1.85 following YTD rally in share price by 24% since the released of our latest Results Review report dated 28 February 2019. Our Fwd. PBV is based on an unchanged Fwd. PBV valuation of 0.70x on unchanged FY19E BV/share of RM2.66. Our 0.70x PBV valuation is pegged below 1999-2005’s Fwd. PBV range of 0.90-1.5x when earnings were relatively volatile ranging from a loss position of RM8.8m to profit of RM118m. Our 0.70x Fwd.PBV (lower than 0.90-1.5x) is justified 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 firm earnings recovery to the black.

Source: Kenanga Research - 8 Mar 2019