Investment Highlights

• We maintain our BUY recommendation and forecasts, but slightly reduce our fair value (FV) to RM3.29/share (from RM3.36/share previously) 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 RM4.05:US$1 minus RM833mil net debt), at a 10% discount to the replacement cost of US$120 to reflect the still changing cement sector outlook in Peninsular Malaysia.

• We deem Malayan Cement’s 1HFY21 core net loss of RM6.2mil within expectations based our full-year forecast of a net profit of RM68.2mil and full-year consensus estimates of RM24.4mil respectively. We expect a better 2HFY21 on a pick-up in demand for cement as construction activities gather momentum with more contractors adapting better to operating under the new norms.

• Its 1HFY21 core net loss of RM6.2mil narrowed significantly from a net loss of RM72.8mil during the same period a year ago thanks largely to: (1) a higher cement ASP, which we estimated at RM240/tonne 1HFY21 (vs. about RM215/tonne during the same period a year ago); (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 sector continued to languish.

• We maintain our ASP assumptions of cement per tonne at RM260, RM270 and RM280 in FY21–23F. For sales volumes, 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.

• We now see 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 turnaround, followed with sustained profitability.

• At its current share price, the market is effectively valuing Malayan Cement at a 30% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120/tonne). We believe this is unjustified. For now, we value Malayan Cement at a 10% discount to replacement cost, which we believe is appropriate.

Source: AmInvest Research - 26 Feb 2021