INVESTMENT HIGHLIGHTS

• Net profitability remains red

• Gushing OPEX results to continuous losses

• Earnings forecast

• Nonetheless we reaffirm our NEUTRAL stance with an adjusted TP of RM2.17

Expanded losses. The group’s 3QFY18 earnings remain in the red. Its losses of –RM109.3m was +>100.0%yoy higher, in comparison to the same period last year. Cumulatively, it extended previous quarterly losses to the tune of –RM-261.8m in 9MFY18. In reference to our FY18 estimates, the quantum accounted for ->100.0% of ours and consensus’ respectively.

Higher operating costs and price competition. The on-year decline in 9MFY18 was attributable to weaker revenue (-5.9%yoy) and expanded cost structure. During the period, we noted that cost of sales climbed +3.9%yoy, due to higher energy prices coupled with lower production output. On revenue, the decline was derived from lower domestic average selling price (ASP), as a result of strong competitive environment and oversupply in the market. Moving forward, we opine overcapacity of cement production in Peninsular, to continue impacting ASP of cement.

Pressure on margin likely to continue. Supply and demand environment may not be favourable in the short-term due to intensity in competition and over-supply in the market. We opine the deferment and cancellation of mega projects is another dampener to short-term demand, which is putting the business in negative light.

Earnings adjusted. The weakness in demand prompts us to revise our fiscal assumptions. Accordingly, we adjust the forecast of the group’s losses upwards by +36.4% and +26.8% for FY18 and FY19 respectively. A revision to our estimates arrived after we take into account the likelihood of revenue maintaining its downtrend movement.

Recommendation. Altogether, we maintain our NEUTRAL recommendation with an adjusted TP of RM2.17. Our target price was adjusted lower as we ascribe the FY19 BVPS to PBV of 0.8 times. The multiples represent -1SD below the group’s 1-year PBV.

Source: MIDF Research - 19 Nov 2018