Investment Highlights

• We now project an FY20F (18M ending June 2020) net loss of RM184.7mil (vs. a net loss of RM219.8mil previously), and net profits of RM44.7mil and RM58.6mil in FY21–22F respectively (vs. net losses of RM36.6mil and RM3.7mil previously). We keep our FV relatively unchanged at RM3.30, based on US$96 per clinker tonne (9.2mil clinker capacity x US$96 x RM4.20:US$1 minus RM909mil net debt), at 20% discount to the replacement cost of US$120 to reflect the still challenging cement sector outlook in Peninsular Malaysia. Maintain HOLD.

• We consider Malayan Cement’s Jan–Dec 2019 results above our forecast as we now believe it is likely to break even in the next two quarters (due to firmer cement prices). The consensus estimates are not meaningful due to the complication arising from the change in financial year-end from December to June.

• The company’s core net loss for Jan–Dec 2019 narrowed by 47% to RM168.1mil (from RM319.4mil a year ago) thanks to cost-cutting initiatives by the new controlling shareholder, i.e. YTL Cement, partially offset by weak sales volume in the Oct–Dec quarter amidst the prolonged slowdown in the property sector, coupled with higher energy cost.

• Our earnings upgrade is to reflect higher cement average selling prices (ASP) from Jan 2020, coupled with the potential synergies derived following the approval of the related party transaction (RPT) between Malayan Cement and YTL Cement recently.

• We now assume cement ASP of RM210/tonne in FY20F and RM250/tonne in FY21–22F (from RM195/tonne in FY20F and RM205/tonne in FY21–22F previously). Our sales volume assumptions for FY20–22F are unchanged at 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 substantial gap between local demand and installed capacity. We estimate that the local clinker capacity in Peninsular Malaysia now stands at RM26mil tonnes, as compared with our estimated local demand at only 15mil tonnes in 2019 and 14.6mil tonnes in 2020 (Exhibit 2). However, the industry consolidation following the takeover of the company by YTL Cement should bring about more rational competition and hence improved pricing power for players over time.

Source: AmInvest Research - 21 Feb 2020