Investment Highlights

• We are keeping a HOLD on Malayan Cement (previously known as Lafarge Malaysia) and maintain our FV of RM3.33 based on US$96 per clinker tonne (9.2mil clinker capacity x US$96 x RM4.22:US$1 minus RM895mil net debt), at 20% discount to the replacement cost of US$120 to reflect the still challenging cement sector outlook in Peninsular Malaysia. We now project a net loss of RM219.8mil for FY20F (18M ending June 2020), and net losses of RM36.6mil and RM3.7mil for FY21–22F, in line with the change in Malayan Cement’s FY to June from Dec.

• Malayan Cement’s Jan–Sep 2019 results came in within our previous forecast based on FYE Dec, but missed consensus estimates. It reported a net loss of RM132.6mil, vs. our previous FY Dec (12M) net loss forecast of RM175.2mil and FY Dec full-year consensus net loss of RM148.8mil.

• The company’s core net loss for Jan–Sep 2019 narrowed by 49% to RM132.6mil (from RM261.8mil a year ago) thanks to cost-cutting initiatives by the new controlling shareholder, i.e. YTL Cement, partially offset by weak sales volume amidst the prolonged slowdown in the property sector, coupled with higher energy cost.

• We assume cement average selling prices (ASPs) of RM195/tonne in FY20 and RM205/tonne in FY21–22F. Our sales volume assumptions for FY20–22F are 9.3mil (18M), 7mil and 7.2mil tonnes respectively.

• The outlook for the cement sector in Peninsular Malaysia remains challenging over the medium term due to the wide gap between local demand and 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 15mil tonnes in 2019 and 16mil tonnes in 2020 (Exhibit 2). However, the takeover of the company by YTL Cement resulting in the merged entity’s control of about 60% of the cement market in Peninsular Malaysia (Exhibit 1), should bring about reduced competition and hence greater pricing power for the producer over time.

Source: AmInvest Research - 27 Nov 2019