MCement posted 6QFY06/20 core net loss of -RM35.8m (vs. core net loss of - RM25.0m in 5QFY06/20 and –RM47.7m SPLY) 18MFY06/20 core net loss to - RM207m (vs a net loss of -RM315.5m in SPLY) which is within our but below consensus expectations largely due to the MCO. We slash FY21-22 earnings by 55-18% in light of weaker than expected ASPs as well as bleaker than expected outlook for private construction jobs. Maintain BUY with lower TP of RM2.07.

Within expectations. MCement’s 6QFY06/20 core net loss of –RM35.8m (vs. core net loss of -RM25.0m in 5QFY06/20 and –RM47.7m SPLY) brings 18MFY06/20 core net loss to -RM207m (vs a net loss of -RM315.5m in SPLY). We deem the results to be within our but below consensus expectations (we projected a core net loss of - RM202m in 18MFY06/20; while consensus loss is at -RM115.6m).

QoQ. Revenue declined by -64.8% to RM126.0m mainly due to implementation of various stages of MCO (virtually no revenue for April and May). Consequently, core net loss widened from -RM25.0m to RM35.8m QoQ. Nonetheless, the loss of revenue was partially compensated by vigorous cost cutting measures and manpower rationalisation on the quarter under review.

YoY. For this purpose, we are comparing 6QFY06/20 to Apr-June 2019 (i.e. SPLY). Despite lower revenue declining by 73% due to the MCO, core net loss narrowed to - RM35.8m (from a core net loss of -RM47.7m last year), arising from trimmer cost structure as ongoing cost cutting measures and manpower rationalisation continued. Its shutdown of Rawang plant in February also helped to bring costs down steeply.

YTD. For this purpose, we are comparing 18MFY06/20 to 18MFY06/19. Despite a 23.2% decline in revenue (to RM2.4bn, largely from lower cement sales on the back of weak domestic demand for most of the period as well as MCO implementation), core loss narrowed to -RM207m (against core net loss of -RM315.5m in 18MFY06/19). The key reason was better cost management arising from lower distribution cost, various cost cutting measures as well as closing the inefficient Rawang plant for refurbishment.

Outlook. The implementation of various cost cutting measures (since 2018) have resulted in a significant improvement in MCement’s cost structure, as evidenced by its narrowing losses. However, bulk cement ASPs have come down to RM220 currently from RM250 (pre-MCO) as ramp up of construction activities have been gradual. While we anticipate stronger performance into FY21, absent of pump priming and demand pickup from the private sector, operational improvements remain hinged on continued cost cutting measures.

Forecast. Despite inline earnings, we slash FY21-22 earnings by 55-18% in light of weaker than expected ASPs and dim outlook for private construction jobs.

Maintain BUY, TP: RM2.07. In tandem with slashing our earnings expectations, we reduce our TP to RM2.07 (from RM2.90) after applying a 25% discount to FY21f BVPS of RM2.77. Our implied target P/B is 0.75x (5 year mean: 1.18) which we reckon is fairly reflective of our revised earnings expectations. Maintain BUY.

Source: Hong Leong Investment Bank Research - 1 Sept 2020