MCement posted 4QFY06/20 core net loss of RM33.3m (vs. core net loss of RM32.1m last quarter and RM81.2m SPLY), this brings 12MFY06/20 core net loss to RM153m. We deem the results better than our expectations vs. core net loss of RM170m in 18MFY06/20) due to earlier-than-expected recovery in cement selling prices. We narrow our 18MFY06/20 core net loss forecast to RM125m (from core net loss forecast of RM170m), and reverse our FY21-22 forecast to core net profits of RM55-73m (from core net loss forecasts of RM27.8m and RM5.7m earlier), to account for higher cement selling prices. Maintain our forecast and HOLD rating with TP of RM3.28. Our TP of RM3.28 is based on replacement cost of USD100/tonne of MCement’s clinker capacity.

Above expectations. MCement’s 4QFY06/20 core net loss of RM33.3m (vs. core net loss of RM32.1m in 3QFY06/20 and RM81.2m SPLY) brings 12MFY06/20 core net loss to RM153m (vs a net loss of RM319.4m in SPLY). We deem the results above expectations (we projected a core net loss of RM170m in 18MFY06/20; while consensus loss is at RM69m), due to earlier-than-expected recovery in cement selling prices.

QoQ. Revenue declined by 4.1% to RM446m as improved cement sales (arising from improved domestic ASP, we believe) was more than negated by lower exports and the scale down in sale of special products. Core net loss widened marginally to RM33.3m (from a core net loss of RM32.1m in previous quarter) due to lower revenue, but partly compensated by lower production cost.

YoY. For this purpose, we are comparing 4QFY06/20 to Oct-Dec 2018 (i.e. SPLY). Despite lower revenue (due to weaker domestic demand, but mitigated by higher export sales), core net loss narrowed to RM33.3m (from a core net loss of RM81.2m last year), mainly driven from lower operating cost arising from improved distribution cost, savings from headcount reduction and various cost cutting measures.

YTD. Despite a 9.4% decline in revenue (to RM1.92bn, largely from lower cement sales on the back of weak domestic demand), core loss narrowed to RM153m (against core net loss of RM319.4m in 12MFY18). The key reason was better cost management arising from lower distribution cost and various cost cutting measures.

Outlook. While we are cognizant that the implementation of various cost cutting measures (since 2018) have resulted in a significant improvement in MCement’s cost structure, we believe further improvement in financial performance would only happen if construction activities pick up significantly.

Forecast. We narrow our 18MFY06/20 core net loss forecast to RM124.6m (from core net loss forecast of RM170m earlier), and reverse our FY21-22 forecast to core net profits of RM57-76m (from core net loss forecasts of RM27.8m and RM5.7m earlier), to account for higher cement selling prices.

Maintain HOLD, TP: RM3.28. We maintain our TP of RM3.28 based on replacement cost of USD100/tonne of clinker capacity. While we opine that Lafarge is a good proxy to the impending construction revival, timing of a significant pickup in construction activities remains the key issue. Hence, we are retaining our HOLD rating on the stock

Source: Hong Leong Investment Bank Research - 21 Feb 2020