MCement posted FY21 core earnings of RM5.0m beating both our and consensus expectations largely driven by better operational margins. Notably MCement saw 4 consecutive quarters of sequential bottom-line improvements arising from cost optimisation, negating Covid-19 headwinds. We reckon there is still margin upside from further synergies. Increase FY22-23 PATAMI by 10.7% and 5.0%. Maintain BUY with unchanged TP of RM3.60 based on 1.3x target P/B. Injection of profitable assets should rerate the stock given shift in earnings profile with upside from further unlocking of synergies.

Beat expectations. MCement reported 4QFY21 results with revenue of RM276.3m (- 26% QoQ, +119% YoY) and core PATAMI of RM8.2m (+125% QoQ; vs. core net loss of -RM35.8m in 4QFY20). This brings FY21 performance to core PATAMI of RM5.0m (FY20: -RM127m loss). The results beat both our and consensus expectations (we projected core loss of -RM2.5m in FY21; while consensus forecasts core loss of - RM1.0m). We consider this a beat as restrictions in June did little to dent its operational improvements.

Deviation. The beat was mainly due to better operational margins and lower depreciation.

QoQ. 4QFY21 turned in core PATAMI of RM8.2m (+125%) attributed to higher EBITDA margin (+5.1 ppts) which more than negated revenue decline of -26% brought about by the re-imposition of restrictions in June. According to management, enhanced margins came on the back of efficient cost management which has continued since the takeover.

YoY. MCement turned around from core loss of -RM35.8m in 4QFY20 mainly driven by low base effect. Recall that 4QFY20 saw virtually no revenue in April and May resulting from MCO1.0.

YTD. FY21 posted core PATAMI of RM5.0m (vs. core loss of -RM126.7m FY20) despite flattish revenue (-1.9%) riding on various cost cutting strategies such as manpower rationalisation, shutdown of inefficient Rawang plant and continuous operational streamlining.

Outlook. With the loosening of restrictions for construction projects, we anticipate demand to normalise by 4QCY21 as most projects would achieve minimum 80% operating capacity by then. We are positive on MCement’s continued efficiency gains as well as impending completion of acquisition of 12 companies from YTL Cement which would improve financials significantly. By our estimates, post-acquisition MCement’s FY22/23 earnings would surge to RM241m and RM262m respectively. A favourable 12MP (Sept-27) and Budget 22 (Oct-29) could also help to crystallise growth prospects over the longer term.

Forecast. Increase FY22-23 PATAMI by 10.7% and 5.0%. Our forecasts have yet to factor in target assets pending deal completion.

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 as we opine the injection of profitable assets should rerate MCement’s trading valuations given shift in earnings profile with further upside from extraction of synergies. Favourable 12MP could also crystallise growth prospects over the longer term. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal prices.

Source: Hong Leong Investment Bank Research - 9 Sept 2021