MCement posted 1QFY21 core net loss of -RM1.5m (vs. core net loss of - RM32.7m in 1QFY20 and -RM35.8m in 4QFY20) which is below our (but above consensus) expectations largely from weaker than expected cement demand. 1QFY21 marks the first PBT chalked up since 2017 as cost cutting measure s continue to make inroads. We slash FY21-22 earnings by 56-87% due to our overly bullish initial expectations. Downgrade to HOLD with higher TP of RM2.49 based on a narrower 10% discount to current BVPS (i.e. 0.9x P/B).

Missed expectations. MCement reported 1QFY21 results with revenue of RM367.9 (+192% QoQ, -21% YoY) and core net loss of –RM1.5m (vs. core net loss of - RM32.7m in 1QFY20 and -RM35.8m in 4QFY20). The results missed our expectations but came in above consensus (we projected core earnings of RM23.1m in FY21; while consensus forecasts core loss of -RM8.5m).

Deviation. The results shortfall was largely on the back of lower-than-expected cement demand.

QoQ. Core net loss narrowed significantly from -RM35.8m in 4QFY20 to -RM1.5m. This can be attributed to implementation of various stages of MCO (virtually no revenue for April and May) which created a low base in 4QFY20. Compounding the improvement were materialisation of operational, distribution and logistical synergies with YTL Cement. As a result, MCement turned in a PBT of RM1.3m this quarter, a first since 2017.

YoY. MCement’s core net loss narrowed substantially from -RM32.7m despite lower revenue achieved (-21%) due to weaker construction activities. The markedly improved bottom-line was driven various cost cutting strategies such as manpower rationalisation, shutdown of inefficient Rawang plant and operational streamlining.

Outlook. Its cost cutting measures are making significant inroads as evidenced by it turning a profit before tax despite difficult operating conditions in this ne w normal. Bulk cement ASPs continue to hover at the RM220/tonne range with upside likely limited in the near term given that broad construction activity remains constrained by SOP compliance. Nonetheless, an expansionary Budget 2021 could lead to stronger cement demand over the medium term with implementation of mega projects giving the sector a much needed boost.

Forecast. Revise FY21/22 earnings by -87% and -56% as our earlier assumptions for cement demand were too optimistic in-light of low construction productivity.

Downgrade to HOLD, TP: RM2.49. Post-rebound in share price, we downgrade the stock to a HOLD but with a higher TP of RM2.49 (from RM2.07). Despite the earnings cut, our TP rises to RM2.49 after reducing our current BVPS discount from 25% to 10% given the accommodative budget announcement. Our implied target P/B is 0.90x (5 year mean: 1.18x).

Source: Hong Leong Investment Bank Research - 27 Nov 2020