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HLBank Research Highlights

Author: HLInvest   |   Latest post: Thu, 3 Dec 2020, 8:54 AM

 

Malayan Cement - Improvement in Cost Structure

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MCement posted 5QFY06/20 core net loss of -RM25.0m (vs. core net loss of - RM33.3m in 4QFY06/20 and -RM32.5m SPLY) brings 15MFY06/20 core net loss to -RM182m (vs a net loss of -RM351.4m in SPLY) which fall below expectations largely due to the MCO. Successful cost cutting measures, firm cement ASPs and gradual ramp of construction works are likely to serve as tailwinds moving forward. We widen our 18MFY06/20 core net loss forecast to -RM202.4m but Upgrade to BUY with TP of RM2.90. We reckon at 0.9x P/BV (against long term mean of 1.18x) valuations look compelling. Our TP of RM2.90 is based on replacement cost of USD100/tonne of MCement’s clinker capacity.

Below expectations. MCement’s 5QFY06/20 core net loss of -RM25.0m (vs. core net loss of -RM33.3m in 4QFY06/20 and -RM32.5m SPLY) brings 15MFY06/20 core net loss to -RM182m (vs a net loss of -RM351.4m in SPLY). We deem the results to be below expectations (we projected a core net loss of -RM124m in 18MFY06/20; while consensus loss is at -RM23.8m), as a result of the 2 week shutdown due to the MCO.

QoQ. Revenue declined by -19.9% to RM357.9m as Rawang plant (20% of capacity) was shut down for the duration of the quarter before deciding on a refurbishment plan as well as implementation of the MCO. Core net loss narrowed to -RM25.0m (from core net loss of -RM33.3 in the previous quarter) as cost cutting measures were able to more than compensate for the loss of revenue.

YoY. For this purpose, we are comparing 5QFY06/20 to Jan-March 2019 (i.e. SPLY). Despite lower revenue (due to refurbishment of its Rawang plant and MCO), core net loss narrowed to -RM25.0m (from a core net loss of -RM32.5m last year), mainly driven from lower operating cost (-35% YoY) arising from improved distribution cost, savings from headcount reduction and various cost cutting measures. This was achieved amid paying fixed overheads at its Rawang plant for the full quarter as refurbishment plans only came about in February.

YTD. For this purpose, we are comparing 15MFY06/20 to 15MFY06/19. Despite a 14.3% decline in revenue (to RM2.28bn, largely from lower cement sales on the back of weak domestic demand for most of the period as well as MCO implementation), core loss narrowed to -RM182m (against core net loss of -RM351.4m in 15MFY06/19). The key reason was better cost management arising from lower distribution cost and various cost cutting measures.

Outlook. The implementation of various cost cutting measures (since 2018) have resulted in a significant improvement in MCement’s cost structure, as evidenced by its narrowing losses amidst revenue headwinds. Bulk cement ASPs have stayed firm hovering around RM250 post-MCO as a result of sector consolidation exercise. With the gradual ramp up of construction activities, we anticipate stronger performance into FY21.

Forecast. We widen our 18MFY06/20 core net loss forecast to RM 202.4m (from core net loss forecast of RM124m earlier), and maintain our FY21-22 forecast as we anticipate operations to normalise by then.

Upgrade to BUY, TP: RM2.90. Upon recalibrating exchange rate assumptions and net debt, our TP falls to RM2.90 based on an unchanged replacement cost of USD100/tonne of clinker capacity. We reckon at current levels (0.9x P/BV), valuations have baked in the negatives trading at 24% discount to its long term mean P/BV of 1.18x. Our TP of RM2.90 implies a P/BV of 1.04x.

 

Source: Hong Leong Investment Bank Research - 17 Jun 2020

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