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This article first appeared in The Edge Financial Daily on November 21, 2018

Lafarge Malaysia Bhd
(Nov 19, RM2)
Maintain hold with a lower target price (TP) of RM2:
Lafarge Malaysia Bhd posted a wider core net loss of RM104.7 million for the third financial quarter ended Sept 30, 2018 (3QFY18) (worsened by 27% quarter-on-quarter [q-o-q]) on a 7% q-o-q lower revenue given lower domestic sales and higher production costs due to increased energy prices, restructuring costs and lower clinker production.

We expect losses to continue into 4QFY18, partly compensated by lower coal costs compared with 3QFY18. On a year-on-year (y-o-y) basis, revenue was down by 6% due to lower revenue from both the concrete (-8% y-o-y) and cement (-5% y-o-y) segments.

Cumulative first nine months ended Sept 30, 2018 (9MFY18) core net loss widened 61% y-o-y to RM253.3 million, exceeding the concensus full FY18 net loss forecast of RM232.9 million and comprising 81% of our previous estimate of RM314.3 million. Apart from higher production costs and soft cement demand, 9MFY18 losses were higher partly due to a 53% y-o-y increase in interest expense on higher borrowings. The cement industry’s short- to medium-term prospects remain challenging, given the subdued property market and a slowdown in infrastructure activities. We expect losses to continue into FY19 before the group turns around in FY20. It will continue to focus on cost reduction and operational efficiency enhancement to weather the downturn in the industry.

The group achieved a significant reduction in sales and general administration expenses for 3QFY18, which partly mitigated higher production costs. We expect cost savings to continue over the next few years.

Given the higher-than-expected losses, we have increased our FY18-FY19 net loss estimates by 7%-12% and lowered our FY20 earnings per share forecast by 5%.

We believe Lafarge’s share price will be supported by the sector’s long-term positive prospects. — Affin Hwang Capital, Nov 19

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