• Revenue revival prospect still in dark

• Impacted by tenacious OPEX

• Compressed earnings expected

• Nonetheless, maintain SELL recommendation with a TP of RM3.80

Revenue revival prospect still in dark. Despite the resumption in construction news inflow i.e. ECRL and LRT3 we do not forecast any sign of revenue revival for LFMB. In fact, its 5-year median the revenue mix comprises of 20% pre-mix and 80% ordinary portland cement (OPC) (Figure 1) will persist for FYE18/FYE19. We reckon that the revenue increase in pre-mix concrete is a better proxy to indicate any early signs of improvement in LHMB. So far, the premix concrete revenue growth is sluggish registering only +2.06% QoQ. (Figure 3).Notably, LFMB share price has come down -20.02% year-to-date.

Impacted by tenacious OPEX. As a result, we believe that the operating income will deteriorate further inundated by unchanged revenue segments against; (i) unwavering operating expenses (5-y median of RM600m), (ii) oversupply of cements including premix concrete and clinkers coupled with the sharp drop of conventional infrastructure award and (iii) the possibility of electricity tariff revised higher in Jan-18 due to – a. rising coal prices; Indonesia coal thermal price (USD83.47, +43.9%YoY), and b. Australia Newcastle coal price of USD85.6 (+32.9%YoY) at writing. Energy and electricity consists of > 50% of LHMB’s OPEX thus changes in electrity tariff and commodities prices bear significant impact to LFMB’s operating income.

Compressed earnings expected. With reference to Figures 4 and 5, volatile earnings since Q3FY16 beckon tougher times ahead therefore we see no adjustment for our FYE17/FYE18 earnings forecast. We are not expecting any lift in earnings to prompt us to change our view as the industry dynamics have shown otherwise (Figure 6). The sharp drop in conventional infrastructure projects for Q1FY17 will potentially drag LFMB’s earnings further. Other big-cap cement manufacturers have also shown weakness in revenue growth, marginal compression and lofty valuation which demonstrate shifts in industry competitiveness especially production cost. (Refer: Peers Comparison)

Recommendation. Based on that, we maintain our SELL recommendation with a TP of RM3.80 per share by pegging our FYE18 EPS of 13.8 sen to PER multiple of 27.5x reflecting its 3-year historical average.

Source: MIDF Research - 8 Aug 2017