MCement is looking to raise about RM227m from a private placement to repay borrowings and finance working capital. Placement size would amount to 10% of current issued share capital. MCement would increase their public shareholding spread to 30% post-exercise. Near term financial performance should remain challenging with the declining ASPs. On the brighter side, rollout of MRT3 and various projects under Budget-21 should spur cement demand. Maintain forecasts and HOLD but with higher TP of RM3.04 (1.1x FY21 BVPS).

NEWSBREAK

Placement. MCement is looking to raise about RM227m from a private placement to repay borrowings and finance working capital. The group would be issuing up to 85m new shares, representing 10% of its issued share capital of 850m shares. The estimated proceeds of RM227m is based on an illustrative price of RM2.67 per share (15.2% discount to its last closing price). The estimated proceeds are expected to be utilised in the following manner: (i) partial repayment of bank borrowings: RM170m, (ii) working capital needs: RM54m and (iii) private placement expenses: RM3m. The exercise should be completed by 30 June 2021.

HLIB’s VIEW

Meeting shareholding spread. The placement exercise should increase MCement’s public shareholding spread from 22.95% to 29.96% complying with Bursa’s requirement of 25%. We are not too surprised by the proposal given that MCement has not complied with the shareholding spread since 2019.

Outlook. Near term financial performance should remain challenging as we gather that cement ASPs have continued to decline to RM200/tonne from RM210/tonne at the start of 2021 resulting from weak construction activities in 1QCY21. Nonetheless, things should improve in the medium term should MRT3 kick off as the mega project would aid in spurring cement demand from stronger construction activity. MRT Corp is expecting to call for tenders in August where we believe construction works could start as early as late-2021. Beyond MRT3, we note that implementation of expansionary Budget 2021 could lift cement demand further. However, despite the positive news flow, rollout risk remains a concern with political fluidity still at play in our view.

Forecast. Maintain forecasts. The placement exercise is expected to reduce proforma net gearing from 36% (as of Dec-2020) to 23%.

Maintain HOLD, TP: RM3.04. Maintain our HOLD rating with higher TP of RM3.04. We raise our target P/B multiple to 1.1x on FY21 BVPS (from 0.9x) to reflect potential stronger sentiment on the back of MRT3 news flow (5 year mean: 1.18x) but reckon that valuation seems fair at current levels.

Source: Hong Leong Investment Bank Research - 22 Apr 2021