MCement posted 3QFY21 core earnings of RM3.6m (vs. core net loss of - RM5.3m in 2QFY21 and -RM25.0m in 3QFY20) which is above our expectations largely from lower than expected interest costs. Despite the likely drop off in demand in 4QFY21, we are positive on the impending injection of YTL Cement which would further extraction of synergies. We revise FY21 forecast to narrower core loss of -RM2.5m and tweak FY22 earnings by -6%. Maintain BUY with unchanged TP of RM3.60 based on 1.3x P/B.

Slight beat. MCement reported 3QFY21 results with revenue of RM374.8m (7% QoQ, 5% YoY) and core earnings of RM3.6m (vs. core net loss of -RM5.3m in 2QFY21 and -RM25.0m in 3QFY20). This brings 9MFY21 performance to narrower core loss of -RM3.2m. The results beat our but missed consensus expectations (we projected core loss of -RM7.3m in FY21; while consensus forecasts core earnings of RM8.6m). We consider this a slight beat as capacity constraints imposed in 4QFY21 could render a weaker finish to the year.

Deviation. The slight beat was mainly due to lower than expected interest costs.

QoQ. 3QFY21 turned core earnings of RM3.6m (vs. core net loss of -RM5.3m in 2QFY21). This was attributed to higher sales volume for its cement and clinker domestically as well as exports resulting in higher revenue (+7%). According to the company, despite MCO2.0 restrictions, most construction works were permitted to operate which neutralised the impact. Further enhancing the impact to the bottom line was better cost efficiency resulting in stronger EBITDA margin (+2.5ppts)

YoY. MCement turned around from core loss of -RM25.0m in 3QFY20 driven by higher topline (+5%) aided by ongoing cost optimisation as evidenced by better EBITDA margins (+6.9ppts). Recall that 3QFY20 also reflected 2 weeks of strict lockdown under MCO1.0 during which no operations were carried out.

YTD. 9MFY21 recorded narrower core loss of -RM3.2m from -RM90.9m core loss in 9MFY20 on the back of various cost cutting strategies such as manpower rationalisation, shutdown of inefficient Rawang plant and operational streamlining which offset the lower topline resulting from lower construction productivity since various forms of MCO was imposed.

Outlook. Cement ASPs have shown uptick recently trending higher towards RM210- 220/tonne. Nonetheless, capacity constraint imposed on construction sites as well as manpower crunch in SG is likely to dampen topline performance in the near term. However, we are comforted by MCement’s continued efficiency gains as well as impending injection YTL Cement which would improve financials significantly. We have conservatively estimated a 15.7% EPS accretion to our forecasted FY22 EPS (assumes no ICPS dilution which we believe is unlikely). Beyond this, implementation of Budget 2021 is another key catalyst for cement demand.

Forecast. Revise FY21 to narrower core loss of -RM2.5m and tweak FY22 earnings by -6% after adjusting cost and volume assumptions.

Maintain BUY, TP: RM3.60. Maintain BUY with unchanged TP of RM3.60. Our TP is derived based on target P/B multiple of 1.3x based on c.20% discount to 10 year P/B average. Overall, we are positive on the stock especially since the injection of profitable assets should put MCement on a faster track to profitability with upside from further unlocking of synergies. While near term outlook remains opaque, we believe the stock presents an attractive long term value proposition. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal prices

Source: Hong Leong Investment Bank Research - 31 May 2021