Announcements

Lafarge earnings expected to rebound in 2H17
Published on The Edge Markets (http://www.theedgemarkets.com)
Feb 15, 2017 | Written by Affin Hwang Capital | 0
This article first appeared in The Edge Financial Daily, on February 15, 2017.

We gather that domestic
cement demand fell another 6% year-on-year (y-o-y) in 2016, after posting a 3% y-o-y decline in
2015. As a result, domestic cement production fell 10% y-o-y to 20 million tonnes.
We believe the weak demand is due to ongoing large-scale infrastructure projects such as the mass
rapid transit (MRT) Line 1 being at the tail end; new projects awarded in 2016 such as the MRT Line
2, Sungai Besi-Ulu Kelang Elevated Expressway and Damansara-Shah Alam Highway, being still at a
preliminary stage of implementation; and fewer new property launches as the market remains
lethargic.
We gather that cement-selling prices have stabilised recently after stiff price competition was seen
last year due to the oversupply situation. Installed cement production capacity grew 15% in 2016
while demand declined by 6% y-o-y. New cement players were aggressive in lowering effective
selling prices by offering higher rebates to expand their market share.
We maintain our earnings forecast at this juncture, pending the release of fourth quarter of financial
year 2016 (4QFY16) results on Feb 22. We expect the upcoming 4QFY16 results to disappoint the
market.
Our FY16 net profit forecast of RM57.5 million is 38% below consensus estimate of RM92.8 million.
We expect core earnings per share to decline 77% y-o-y in FY16 due to subdued cement demand
and stiff pricing pressure.
We maintain our “sell” call with a dividend discount model-derived TP of RM6.40. We are concerned
with the earnings volatility in the near term and FY17 price-earnings ratio remains expensive at 45
times.
There is also the risk that no dividends are declared in 4QFY16 if earnings remain depressed. Hence,
actual FY16 dividend per share (DPS) could come in below our net DPS forecast of 6.6 sen and
consensus estimate of eight sen (DPS of five sen in the nine months of FY16).
However, we expect earnings to rebound in the second half of 2017 (2H17) when work progress on
large-scale infrastructure projects accelerate since this segment contributes a third to Lafarge’s
revenue. With the recovery in cement demand, we expect price competition to ease in 2H17. — Affin