INVESTMENT HIGHLIGHTS

• 1HFY17 earnings eluded our expectations

• Bland earnings influenced by convergence of lower sales and persistent OPEX

• Tenacious OPEX influences earnings negatively

• Nonetheless, we reaffirm our SELL recommendation with a TP of RM3.80 per share

1HFY17 earnings eluded our expectations. LMFB’s 1HFY17 normalised PATAMI registered lower at -RM93.0m (-84.5%YoY) comparably. Nonetheless, its 1HFY17 earnings came in below our expectations, registering for only -84.5% of ours and -186% of consensus’ full-year forecasts respectively.

Bland earnings influenced by convergence of lower sales and persistent OPEX. We submit that its bland earnings of RM1.09bn (- 17.7%YoY) was accentuated significantly to the following: i. Shift in patterns for construction building materials application and demand due to changes in construction methodology using alternative formworks such as precast flat panel, tunnel form, flat slabs, insulating concrete, lightweight concrete panel and polyurethane wall panels. The changes affects demand by disrupting the distribution channel and demand of ready mix concrete and ordinary portland concrete (OPC). ii. Substitute products especially OPC product line supply from rivals such as Panda (Hume), Castle (YTL Cement).

Tenacious OPEX influences earnings negatively. Overall, we maintain our earnings forecasts at this point on the account of its dismal performance and narrowing distribution channel to increase sales especially in concrete mix segment. Furthermore, we expect that tenacious OPEX will skew LMFB earnings’ negative and we believe the trends will persist. (Figure 1)

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 - 30 Aug 2017