Investment Highlights

• We raise our FY21–22F net profit forecasts by 70% and 63% respectively (to reflect slight changes in our cement price assumptions) and adjust up our fair value (FV) by 2% to RM3.37 (from RM3.30) after updating Malayan Cement’s net debt. Our FV is based on US$108 per clinker tonne (8.2mil clinker capacity x US$108 x RM4.20:US$1 minus RM852mil net debt), at 10% discount to the replacement cost of US$120 to reflect the still changing cement sector outlook in Peninsular Malaysia. Maintain BUY.

• Malayan Cement’s core net loss for 18 months ended 30 June 2020 came in at RM262.9mil, which was fairly in line with our net loss forecast of RM253.9mil. The consensus estimates are not meaningful due to the distortion arising from the change in financial year-end from December to June.

• Its core net loss for 18 months ended 30 June 2020 of RM262.9mil narrowed significantly from RM319.4mil net loss for 12 months ended 31 Dec 2018 thanks largely to: (1) higher cement ASP which we estimated at RM230/tonne for 18 months ended 30 June 2020,(vs. about RM200/tonne for 12 months ended 31 Dec 2018; (2) lower coal cost and cost-cutting initiatives by the new controlling shareholder i.e. YTL Cement. These were partially offset by lower sales volume (on an annualised basis) as the local property and construction sectors continued to languish, coupled with the impact from the movement control order (MCO) at the peak of the pandemic in Mar–May 2020 that hurt demand as well as disrupted production.

• We now assume cement per tonne ASPs of RM260, RM270 and RM280 in FY21-23F (vs. RM260 for FY21–22F previously) largely to reflect price increases driven by cost inflation. For sales volume, we assume 4.2mil tonnes, 4.4mil tonnes and 4.5 tonnes respectively during the same period. While we believe the worst is behind the cement sector in Peninsular Malaysia (thanks largely to the sector consolidation), the recovery will be gradual given the still weak outlook for its two main consuming industries, i.e. property and construction.

• While Malayan Cement’s earnings prospects are still unexciting, we take comfort that it is likely to return to the black in FY21F. In the absence of more losses, there will not be further erosion to its asset value, which ties in our asset-based valuation method for Malayan Cement.
   
• At its current share price, the market is effectively valuing Malayan Cement at a 40% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120/tonne). We believe this is unjustified as we are now seeing more rational competition amongst players in the cement sector in Peninsular Malaysia, following the industry consolidation with the takeover of the company by YTL Cement. The industry players (Malayan Cement included), are on the verge of a turnover, followed with sustained profitability. We believe our valuations for Malayan Cement based on a 10% discount to replacement cost are appropriate. Maintain BUY.

Source: AmInvest Research - 1 Sept 2020