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Monday, September 18, 2017

LAFMSIA: Next Upleg Has Begun?

Background

Lafarge Malaysia Bhd (“LAFMSIA”) is involved in the manufacture, sales & distribution of cement and clinker. LAFMSIA is also involved in the production & sales of ready-mixed concrete and trading in building material.

LAFMSIA has the largest installed cement capacity of 14.14 million metric tonnes (MT) and the most comprehensive network of facilities in Malaysia. The group owns integrated cement plants, two grinding stations, over 40 ready-mix concrete batching plants and six aggregate quarries.

Historical Financial Performance

LAFMSIA's revenue & profits have been in a steady uptrend until FY2014. Since then both revenue and profits have been sliding, with sharper decline in profits.


 Graph 1: LAFMSIAs last 19 years revenue & profits

These are two things that I had noted:

1) LAFMSIA's profits slumped during periods of economic downturn like in FY1997 and FY2008, though the profits slump would actually come 2 years later in FY1999 and FY2010.
2) After that, LAFMSIA's profits would recover strongly but that recovery would fizzle out in  5-6 years time and the profits would drop again, like in FY2004-2004 and FY2014-2015.

If the profit slump in FY2005 can be a guide, LAFMSIA should manage to avoid going into the red now despite incurring net losses totaling RM93 million incurred in 1H2017. For that to happen, LAFMSIA must report net profit totaling more than RM93 million in 2H2017. Is that possible? We will have to wait and see. FYI, LAFMSIA's net profit in a good quarter in FY2014 touched RM70 million. SO it is not impossible that it might avoid a loss-making year in FY2017.

Recent Financial Results

In QE30/6/2017, LAFMSIA's net profit dropped 10% q-o-q to RM44 million on the back of a 5%-decline in revenue to RM532 million. The decline in revenue exceeds 19% y-o-y which caused the group to fall into the red, like in QE31/3/2017.

Revenue dropped q-o-q mainly due to lower sales contribution from the domestic Cement and Concrete segments from a weaker market demand attributed to the competitive environment. Despite the lower revenue, the Group’s loss before tax for the current quarter of RM57.9 million has improved slightly compared to RM63.4 million in preceding quarter, mainly due to the lower depreciation charges and improved operating cost as compared with preceding quarter partially offset by lower gain on disposal of property, plant and equipment.

Like the other players in the cement industry, LAFMSIA is hit by the excess capacity and the slowdown in demand due to weakness in property development. The situation may change when the major infrastructure projects, such as LRT3 or MRT2 or ECRL, are expected to take off in 2018.


Table 1: LAFMSIA’s last 8 quarters’ P&L


Graph 2: LAFMSIA’s last 42 quarters revenue & profits

Latest Financial Position

As at 30/6/2017, LAFMSIA's financial position is deemed fair with current ratio at 1.13x and total liabilities to total equity at 0.44x.

Valuation

We are unable to rely on the PER as a valuation model as LAFMSIA has a net loss of RM55 million in the past 4 quarters. Instead we have to rely on the Price to Book valuation model. What I did was to compare LAFMSIA prices during the 3 troughs with its Net Assets & Net Tangible Assets per share. You can see that LAFMSIA was trading fairly close to similar Price/Net Assets or Price/Net Tangible Assets in the previous trough in 2005.


Table 2: LAFMSIA's Price to Book Valuation in last 3 troughs

However LAFMSIA has run up 30% from its recent low without any improvement in earning yet. In that sense, LAFMSIA could be running ahead of its earning and that can be a recipe for a big drawback in price if disappointment ensued.

Technical Outlook

We can see from the weekly chart that LAFMSIA has broken above its immediate downtrend line, S2-S2 at RM6.00 as well as the "horizontal lie" AB at RM5.90. This double breakout has signaled the end of the downtrend and possibly the beginning of the next upleg.


Chart 1: LAFMSIA’s weekly chart as at Sep 15, 2017 (Source: Shareinvestor.com)

Below, you can see LAFMSIA was still in a long-term uptrend line with support at RM5.00.


Chart 2: LAFMSIA’s monthly chart as at Sep 15, 2017 (Source: Shareinvestor.com)

Conclusion

Based on technical breakout, LAFMSIA could be on the path of price recovery. If that panned out, the stock could be a BUY on weakness (at prices closer to RM6.00). However, any price recovery cannot sustain without earning recovery. Thus we should not take too large a position in this stock until we have seen an earning recovery in the quarters ahead. Good luck!

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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