MCement posted 1QFY22 core loss of -RM23.7m falling below our and consensus expectations largely due to lower sales and margins caused by 2 months of disruption. ASPs have started moving higher by c.RM40/t while we are hopeful coal price headwinds could start to dissipate post-winter season. With c.50-60% market share, MCement is poised to benefit from higher construction activity moving forward. Post-acquisition, increase FY22-23 PATAMI by 5.3x/3.7x. Maintain BUY with lower TP of RM3.50 based on 1.1x target P/B. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal/electricity costs.

Below expectations. MCement reported 1QFY22 results with revenue of RM284.6m (3.0% QoQ, -22.6% YoY) and core LATAMI of -RM23.7m (vs core PATAMI of RM8.2m in 4QFY21; core LATAMI of -RM1.5m in 1QFY21). Results missed both our and consensus expectations (we projected core PATAMI of RM18.9m in FY22; while consensus forecasts core PATAMI of RM20.8m).

Deviation. Shortfall was due to lower than expected sales and margins.

QoQ. 1QFY22 turned core LATAMI of -RM23.7m from core PATAMI of RM8.2m due to weaker margins negating the marginally higher revenue (+3.0%). This was brought about by the two month lockdown reflected in the current quarter which saw low revenue but incurring fixed costs. The marginally higher revenue was contributed by the consolidation of YTL Cement assets for a period of seven working days (21 Sep- 21).

YoY. MCement’s core LATAMI widened to -RM23.7m following a -22.6% fall in revenue with 1QFY22 reflecting two months of lockdown and restricted operating capacity when operations were permitted to gradually ramp up.

Outlook. Along with full ramp up of construction projects, we expect further pick up in cement demand for MCement’s 2QFY22. Most contractors we cover have been operating at 100% since Sept/Oct. We gather that cement ASPs have also moved higher in Oct by~RM40/t, passing on the earlier surge in coal costs (since Apr). Current coal prices have started to pare down gains closer to July level which is comforting, albeit still elevated~40% vs Apr. We are hopeful such headwinds could dissipate once winter passes. Short term challenges aside, we are positive on MCement’s continued efficiency gains as well as M&A completion (21 Sept-21), likely to improve financial performance. With c.50-60% market share, MCement is poised to benefit from forecasted rebound in construction GDP of 11.5% next year (MOF estimates).

Forecast. Post-completion of the acquisition, we revise upwards our FY22/23 earnings upwards by 5.3x/3.7x. Introduce FY24 earnings of RM153.5m.

Maintain BUY, TP: RM3.50. Maintain BUY with lower TP of RM3.50 (from RM3.60). Our TP is derived based on target P/B multiple of 1.1x based on c.40% discount to 10 year P/B average (from 20% to reflect cost headwinds). Overall, we are positive on the stock as we opine MCement’s continued efficiency gains as well as M&A completion should improve performance. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal/electricity costs.

Source: Hong Leong Investment Bank Research - 26 Nov 2021