INVESTMENT HIGHLIGHTS

• FY16 earnings disappointing

• Unwavering operational expenditure, pricing rivalry and narrower distribution channel swayed results

• Trimmed our FYE17/FYE18 forecast by 40.0%/30.5%

• We maintain our SELL recommendation with an adjusted TP of RM3.80 per share

FY16 earnings disappointing. Lafarge’s booked its FY16 PATAMI lower at RM76.6m (-69.6%YoY) influenced by lower revenue of RM2.55bn (7.2% YoY) and an unwavering operational expenditure of RM2.2b (1.1%) (Figure 1). Consequently, Lafarge’s FY16 PATAMI came in lower than expected registering a dismal 42.5% of ours and 85.7% of consensus’ full-year forecast respectively.

Weak results impacted by operational expenditure and demand-supply gap. We maintain our view that its earnings dipped due to the following: i. Price competition from other cement manufacturers such as Hume, YTL and Tasek remains a major obstacle. Even though Lafarge commands a brand premium but pricing of its product is a significant barometer to revenue as it is a homogenous product. We reiterate that the sales and distribution channels for cements in Peninsular Malaysia are facing a period of oversupply. ii. Additionally, policy shifts from the government encourages the application of pre-casted concrete materials, lightweight concrete panel and flat slabs sways the demand dynamics of cement products. Lafarge’s Ordinary Portland Cement (OPC) product such as Phoenix and its pre mixture concrete products are competing in a landscape of narrower distribution channel with rebates and longer credit facilities by other cement manufacturers such as YTL and Hume.

Impact on earnings. Overall, we trimmed our FYE17/FYE18 earnings forecast by 40%/30.5%. We also expect cement sales will remain weak in the coming quarters from oversupply.

Recommendation. We maintain our Sell recommendation with an adjusted lower TP of RM3.80 per share by pegging our revised FYE18 EPS of 13.8 sen to PER multiple of 27.5x reflecting its 3-year historical average.

Source: MIDF Research - 23 Feb 2017