INVESTMENT HIGHLIGHTS

• 9MFY16 earnings disappointing

• Pricing rivalry and narrower distribution channel swayed results

• Maintain our estimates as we have trimmed our forecast earlier

• We maintain our SELL stance with an unchanged TP of RM5.50 per share

9MFY15 earnings below our expectation. Lafarge’s 9MFY16 PATAMI was lower at RM42.7m (-78.9%YoY) influenced by lower revenue and operational expenditure. Registering a dismal 23% of ours and 30% of consensus’ full-year forecast respectively.

Insipid results results influenced by intense competition and higher tax bracket. We reckon the bland earnings is contributed by the following:

1. Pricing rivalry from others cement manufacturers such as Hume, YTL and Tasek. LFMB commands a brand premium but price is a significant sales parameter to cement, aggregates and premix concrete as it is a homogenous product.
2. Ordinary Portland Cement (OPC) product such as Phoenix and pre mixture concrete products are competing in a landscape of narrower distribution channel with rebates and longer credit facilities by other cement manufacturers. Furthermore, shifts in industrial consumption especially from pre-casted concrete materials, lightweight concrete panel and flat slabs impacts the demand dynamics of cement products

Impact on earnings. Overall, we maintain our FYE16 earnings forecast as we have revised our estimates earlier. We also expect cement sales will remain sluggish in the coming quarters due to oversupply.

Recommendation. We maintain Sell recommendation with a lower TP of RM5.50 per share by pegging our revised FY17 EPS of 20.0 sen to PER multiple of 27.5x reflecting its 3-year historical average.

Source: MIDF Research - 30 Nov 2016