30 November 2016

A plunging quarter
Lafarges 9M16 net profit of RM43m (-79% yoy) was below consensus
and our estimates. Lower cement sales and stiff pricing pressure has
squeezed profit margin. We cut our FY16E EPS by 47% to reflect weak
cement demand, stiff pricing competition, higher one-off costs, higher
depreciation expense and rising coal prices. For the first time in five
years, Lafarge did not declare any dividend this quarter. Maintain SELL
with a lower DDM-based TP of RM6.40.

Results Note

Lafarge
Malaysia

Disappointing result
Lafarges 9M16 net profit of RM43m (-79% yoy) only accounted for 25% of
full-year consensus forecast of RM173m and 40% of our previous estimate of
RM108m. The shortfall is attributable to lower-than-expected cement sales
amid sluggish domestic demand and stiff pricing pressure due to oversupply
of cement. Lafarge did not declare a dividend this quarter, bringing cumulative
dividend declared to just 5 sen in 9M16 versus 24 sen in 9M15.

LMC MK
Sector: Building Materials

EBITDA contraction due to lower revenue and rising coal prices

EBITDA plunged 43% yoy to RM232m in 9M16 due to lower cement revenue,
arising from weak demand and pricing pressure. This was partially mitigated
by higher sales contribution from its concrete segment. Hence, overall
revenue declined 5.7% yoy to RM1.9bn in 9M16. Sequentially, EBITDA
margin contracted 3ppts qoq, as Lafarge is partially exposed to rising coal
prices, which jumped 105% yoy to US$100/T. Note that Lafarge has to
purchase the remaining of 15-20% of coal requirement at the current high spot
prices. Overall, operating cost has edged up slightly by 3.3% yoy to RM 1.7bn
in 9M16, partly due to the rise in coal prices.

Price Target: RM 6.40

Earnings bogged down by higher depreciation and integration costs

EBIT fell 69% yoy to RM90m in 9M16 due to a 20% increase in depreciation
expense to RM143m as one of its expanded plant became fully operational in
3Q16. PBT shrank 75% yoy to RM70.6m in 9M16 due to (1) lower cement
revenue contribution; (2) one-off insurance claim in the previous year; (3)
Holcim integration costs; (4) higher interest expense due to RM340m
borrowings raised to acquire Holcim; and (5) lower interest income.

Price Performance

RM 7.30 @ 29 November 2016

SELL (downgrade)
Downside 12%

Previous Target: RM 7.00

(RM)
10.50

10.00
9.50

9.00
8.50
8.00
7.50
7.00

6.50
6.00
Nov-13 Mar-14

Jul-14

Nov-14 Mar-15

1M
-8.9%
-6.4%

Absolute
Rel to KLCI

Jul-15

Nov-15 Mar-16

3M
-8.8%
-5.7%

Jul-16

Nov-16

12M
-19.6%
-16.9%

Stock Data

Cut earnings and maintain SELL with a lower TP of RM6.40

We cut our FY16E and FY17E by 47% and 26% respectively after imputing
lower domestic average selling prices (ASP), lower domestic sales volume,
higher coal prices and higher depreciation expense. We revise down our TP to
RM6.40 from RM7.00. Maintain SELL. We are concerned with the earnings
volatility and Lafarges decision not to declare any dividend this quarter. Key
upside risk is a faster-than-expected rebound in sales volume and ASP.

849.7
Issued shares (m)
6202.8/1388.6
Mkt cap (RMm)/(US$m)
0.2
Avg daily vol - 6mth (m)
7.3-9.51
52-wk range (RM)
22.1%
Est free float
3.58
BV per share (RM)
2.04
P/BV (x)
Net cash/(debt) (RMm) (2Q16)
(188.2)
ROE (2016F)
3.5%
Derivatives
Nil
Shariah Compliant
Yes

Earnings & Valuation Summary

Key Shareholders

FYE 31 Dec (RMm)

Revenue
EBITDA
Pretax profit
Net profit
EPS (sen)
PER
Core net profit
Core EPS (sen)
Core EPS growth (%)
Core PER
Net DPS (sen)
Dividend Yield (%)
EV/EBITDA

2014
2,743.1
494.0
345.2
256.0
30.1
24.2
254.4
29.9
(31.9)
24.4
43.0
5.9
11.6

2015
2,750.8
509.4
345.2
251.0
29.5
24.7
267.6
31.5
5.2
23.2
32.0
4.4
12.2

Chg in EPS (%)

Affin/Consensus (x)

2016E
2,497.9
287.4
82.5
57.5
6.8
107.9
61.1
7.2
(77.2)
101.5
6.6
0.9
22.2

2017E
2,702.6
401.1
186.8
130.5
15.4
47.52
130.5
15.4
113.6
47.5
15.1
2.1
15.7

2018E
2,895.7
557.8
340.9
248.6
29.3
24.9
248.6
29.3
90.5
24.9
28.7
3.9
11.2

(46.7)
0.3

(25.6)
0.5

(17.3)
0.9

Lafarge Cement UK
EPF
Skim Amanah Saham

51.0%
10.1%
8.2%

Source: Affin, Bloomberg

Loong Chee Wei, CFA

(603) 2146 7548
cheewei.loong@affinhwang.com
Cassandra Ooi
(603) 2146 7481
cassandra.ooi@affinhwang.com

Source: Company, Bloomberg, Affin Hwang forecasts

Affin Hwang Investment Bank Bhd (14389-U)

Page 1 of 3

30 November 2016

Risk to call
Upside risks to our SELL call include; (1) a decline/reversal in coal prices; (2)
decreased price competition; (3) stronger-than-expected demand; and (4)
higher-than-expected dividend payout ratio.
Lafarge Holcim
Financials
FYE 31 Dec (RMm)

3QFY16

Qoq
% chg

Revenue

587.2

(10.9)

Op costs
EBITDA
EBITDA margin (%)
Depn and amort
EBIT
EBIT margin (%)

525.2
62.0
10.6
(52.6)
9.5
1.6

(7.9)
(30.0)
-2.9ppt
15.5
(78.0)
-4.9ppt

Int expense

(4.6)

Yoy
% chg

9MFY16

Yoy
% chg

(12.5)

1,915.8

(5.7)

(1.9)
(54.2)
-9.6ppt
34.0
(90.2)
-12.7ppt

1,683.6
232.3
12.1
(142.7)
89.6
4.7

3.3
(42.2)
-7.7ppt
20.0
(68.4)
-9.3ppt

10.2

2,482.6

(12.2)

>100

Int and other inc

0.4

997.1

(61.6)

1.0

(78.0)

EI

0.4

(88.1)

(21.3)

(2.7)

>100

Pretax profit

5.3

(84.7)

(94.4)

70.6

(74.8)

Tax

(1.2)

(92.6)

(95.2)

(27.1)

(62.6)

Tax rate (%)

MI

22.4
(0.4)

-23.7ppt
37.9

-3.4ppt
(478.8)

38.3
(0.8)

12.5ppt
430.5

Net profit

3.7

(79.7)

(94.7)

42.7

(79.4)

EPS (sen)
Core net profit

0.4
3.3

(79.7)
(77.7)

(94.7)
(95.3)

5.0
45.4

(79.4)
(78.2)

Comment
Drop is mainly attributable to lower cement sales due to soft
market demand (slowdown of property market and delays in
mega infrastructure projects). But mitigated by higher sales
contribution from concrete segment.
Exposure to rising coal prices.
Due to lower cement sales and lower ASP.
Higher as one of its plant became fully operational in 3Q16.

Higher due to interest expense on new RM340m borrowings

to acquire Holcim.
Higher due to one-off insurance claim in 2Q15 and one-off
integration costs in 9M16.
Lower due to one-off costs, higher depreciation and interest
expenses, and weak cement demand.
Increase mainly due to non-tax deductible expenses in
certain subsidiaries.

Lower top-line contributed to lower earnings mainly due to

declining cement demand and lower ASP coupled with
higher expenses from coal prices, depreciation, interest
expense and other one-off costs.

Source: Affin Hwang, Company

Affin Hwang Investment Bank Bhd (14389-U)

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30 November 2016

Equity Rating Structure and Definitions

BUY

Total return is expected to exceed +10% over a 12-month period

HOLD

Total return is expected to be between -5% and +10% over a 12-month period

SELL

Total return is expected to be below -5% over a 12-month period

NOT RATED

Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a
recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.
OVERWEIGHT

Industry, as defined by the analysts coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL

Industry, as defined by the analysts coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT

Industry, as defined by the analysts coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank
Berhad) (the Company) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does
not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or
rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing
view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the
Companys policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its
associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss
of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the
Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any
securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or
take proprietary positions that are inconsistent with the recommendations or views in this report.
Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial
status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to
seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment
strategies or transactions discussed in this report.
Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability
for any damages of any kind relating to such data.
The Companys research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company.
The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation.
This report is printed and published by:
Affin Hwang Investment Bank Berhad (14389-U)
(formerly known as HwangDBS Investment Bank Berhad)
A Participating Organisation of Bursa Malaysia Securities Bhd
Chulan Tower Branch,
3rd Floor, Chulan Tower,
No 3, Jalan Conlay,
50450 Kuala Lumpur.
www.affinhwang.com
Email : affin.research@affinhwang.com
Tel : + 603 2143 8668
Fax : + 603 2145 3005

Affin Hwang Investment Bank Bhd (14389-U)

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