Investment Highlights

• We reduce our FY19–21F loss forecasts by 2%, 9% and 17% respectively, but maintain our UNDERWEIGHT recommendation and FV of RM1.50 based on 0.5x its book value, in line with its price-to-book ratio of 0.5x during the last trough cycle of the cement sector in Peninsular Malaysia (Exhibit 1).

• The government has revived the East Coast Rail Link (ECRL) project via a supplementary agreement signed with main contractor China Communications Construction Company Ltd (CCCC) at a cost of RM44bil, which represents a reduction of RM21.5bil from RM65.5bil previously.

• We believe CCCC is also likely to revive the cement supply contract signed with Lafarge in 2016 (with a contract value of RM270mil then), but subsequently cancelled in 2018 following the suspension of the project.

• We estimate that the project will require about 1–1.3mil tonnes of cement. As the construction period for the project has now been extended by two years to 2026 (from 2024), this translates to an annual requirement of about 200,000 tonnes.

• We raise our FY19–21F annual cement sales volume assumptions to 6.6mil (half-year impact), 7.2mil and 7.6mil tonnes (vs. 6.5mil, 7mil and 7.4mil tonnes previously). We maintain our FY19–21F average selling price (ASP) assumptions of RM190, RM200 and RM210/tonne respectively.

• The outlook for the cement sector in Peninsular Malaysia will remain challenging over the medium term due to the wide gap between the local demand vs. installed capacity. We estimate that the local clinker capacity in Peninsular Malaysia now stands at 26mil tonnes, as compared with our projected local demand at only 16mil tonnes in 2019 and 17mil tonnes in 2020. Apart from the hefty capacity cost (depreciation), the absence of pricing power in a glut means players are also unable to pass on higher production cost to end users. Based on historical statistics, we estimated that in general, players could only turn profitable when the local demand recover to 20mil and above annually.

Source: AmInvest Research - 15 Apr 2019