MCement posted 2QFY21 core net loss of -RM5.3m (vs. core net loss of - RM1.5m in 1QFY21 and -RM33.3m in 2QFY20) which is below our and consensus expectations largely from weaker than expected cement demand. Resurgence of Covid-19 cases has hurt cement volume as well as ASPs. We revise FY21 forecast to core loss of -RM7.3m and slash FY22 earnings by -28%. Maintain HOLD with unchanged TP of RM2.49 based on 10% discount to current BVPS (i.e. 0.9x P/B).

Missed expectations. MCement reported 2QFY21 results with revenue of RM350.5m (-5% QoQ, -22% YoY) and core net loss of -RM5.3m (vs. core net loss of -RM1.5m in 1QFY21 and -RM33.3m in 2QFY20). This brings 1HFY21 performance to core loss of -RM6.8m. The results missed our and consensus expectations (we projected core earnings of RM2.9m in FY21; while consensus forecasts core earnings of RM27.2m).

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

QoQ. Core net loss widened from -RM1.5m in 1QFY21 to -RM5.3m. This can be attributed to weaker domestic cement sales volume as well as weaker ASPs resulting in topline declining by -5%. Reinstatement of CMCO in most states hurt construction productivity leading to volume and pricing weakness. Nonetheless, the extent of the decline was partly mitigated by increase in cement and clinker exports as well as sales from subsidiary in SG.

YoY. MCement’s core net loss narrowed substantially from -RM33.3m despite lower revenue achieved (-22%) 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.

YTD. 1HFY21 recorded core loss of -RM6.8m from -RM65.9m core loss in 1HFY20 on the back of various cost cutting strategies such as manpower rationalisation, shutdown of inefficient Rawang plant and operational streamlining which offset the topline impact of various forms of MCO.

Outlook. Cost cutting measures are making significant inroads as evidenced by it turning a profit before tax despite difficult operating conditions in this new normal. However, we gather that bulk cement ASPs continue have been sagging to the RM200-210/tonne range in 2021 so far as MCO2.0 disrupted construction productivity. Hence, with suboptimal productivity we anticipate weak sales volume to continue. Implementation of expansionary Budget 2021 remains a key catalyst for cement demand. However, budget execution remains uncertain given government’s focus on taming Covid-19, rollout of vaccination program and possible election in 2H21.

Forecast. Revise FY21 to core loss of -RM7.3m and cut FY22 earnings by -28% after slashing ASPs assumptions.

Maintain HOLD, TP: RM2.49. Maintain our HOLD rating with unchanged TP of RM2.49. Stock looks fairly valued at current price. Our implied target P/B is 0.90x (5 year mean: 1.18x).

Source: Hong Leong Investment Bank Research - 26 Feb 2021