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Tuesday, May 23, 2017

Lafarge - A Disappointing Start

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  • 1QFY17 earnings disappointing
  • Results swayed by headstrong OPEX and weak demand
  • Earnings expected to remain weak in FYE17 to FYE19
  • We maintain our SELL recommendation with a TP of RM3.80 per share
1QFY17 earnings disappointing. Lafarge’s registered its 1QFY17 PATAMI lower at –RM48.8m (-179.8%YoY) weighted by lower sales of RM561.8m (-15.6%YoY) and an unswerving operational expenditure of RM573.7b (4.1%YoY) (Figure 1). As a result, Lafarge’s 1QFY17 PATAMI came in lower than expected registering a disappointing -44.3% of ours and 20% of consensus’ full-year forecast respectively.
Results swayed by headstrong OPEX and weak demand. We reaffirm our view that Lafarge’s earnings slipped to red due to the following: i. Price competition and persisting production from other cement manufacturers such as Hume, YTL and Tasek leads to oversupply of cement which muted demand. Hence, building materials sector is inundated with excess supply of cement especially for Ordinary Portland Cement (OPC) where it is competing in a homogenous market. Continued insipid sales (Figure 1) are leading telltale signs of weak earnings underway. Recovery will not be swift unless Lafarge manages to obtain concessions of cement supply to the High Speed Rail and East Coast Railway Link. ii. OPEX remains a blot on Lafarge cost structure – influencing a negative bottom line. For the past 9 quarters, revenue struggled to breach RM700m but opex remains at a median of RM564.4m (Figure 2). The impact of unwavering opex determines the direction of Lafarge’s earnings – at this juncture we reckon that it will not dissipate easily due to production capacity operating at FY14/15 levels which is above 60%. For 1QFY17, Opex increased from RM551.0m to RM573.7m (4.1%YoY) implying inelastic pricing and cost structure.
Impact on earnings. As we have trimmed our FYE17/FYE18 earnings forecast by 40% and 30.5% earlier, we will make no further adjustments. Furthermore, we are expecting subdued cement sales to prolong to FYE19. Even if sales improve, recouping past quarterly losses will be an arduous task.
Recommendation. We maintain our Sell recommendation with 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 May 2017

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