INVESTMENT HIGHLIGHTS

• Negative earnings came above our target

• Change assumptions to reflect negative earnings

• Influenced adversely by uptrend in coal prices

• We maintain our SELL stance with an adjusted TP of RM3.24 per share.

3MFY19 earnings above our expectation. Lafarge’s 3MFY18 registered a loss of RM68.7m (-40.5%) influenced by unwavering cost of sales amounting to RM492.4m (+17.9YoY). Although cost structure seems to taper we believe its Opex/cost of sales would remain unwavered as the cement business is facing price wars and oversupply glut. The results lagged consensus’s forecast by - 687.7% but went above our new estimates by -28.6% for our full year forecast.

Change assumptions to reflect negative earnings. Concurrently, we would like to introduce our assumptions for FYE18/FYE19, reducing our previous earnings target of RM118m to a loss of -RM240m by imputing that the ECRL project may be reviewed and any positive accretion to LMC’s bottom line would be delayed. Our changes are in-line with the sector views that we’ve posit – cement demand/supply dynamics is widening. Hence, we reckon that delaying any earning cuts would be digressive to our sector stance.

Influenced by an uptrend in coal prices. Moving forward, we doubt that the situation may change. The Australian Thermal Coal price has been on an uptrend since April 2017 consequently its current price per metric tonne is USD94.2 (+26.4%YoY). The similar trend is observed in ICE Newcastle Coal Futures where; a) June futures is USD95.93 per mt. tonne and b) year-to-date advancement of +12.8%. Looking at the increase in raw materials and unwavering cost we turn to changes in our valuation methodology in relations to our negative earnings projection. Subsequently, we trim the dividend forecasts to nil in FYE18/FYE19 echoing our pessimistic view and its current cash level have dropped to RM36.0m (-59.7%YoY).

Recommendation. Based on our steep trimming of FYE18 and FYE19 earnings projection we surmise that the previous methodology of price-to-earnings is no longer applicable to infer our target price. Thus, price-to-book methodology is more suitable considering negative earnings plaguing LMC for the past few quarters. Hence, we maintain our SELL recommendation with a TP of RM3.24

per share. We peg our TP to FYE18’s 1.2x price-to-book assumption implying a - 16.9% downside.

Source: MIDF Research - 23 May 2018