MCement posted 1HFY22 core PATAMI of RM31.2m falling within our but beat consensus expectations largely due to asset injection and economic reopening. Higher ASPs have aided in mitigating coal costs pressure. Nonetheless, we do take note that recent geopolitical events could keep coal prices elevated for longer than expected period. Reduce FY22 forecasts by -15%. Maintain BUY with lower TP of RM2.78 based on 0.87x target P/B representing c.50% discount to 10 year P/B average (from 40% to account for rising sentiment headwinds). The stock currently trades at P/B of 0.48x (10 year low) which we think is pricing in much of the downside risks. Overall, we believe risk reward is tilted to the upside.

Within expectations. MCement reported 2QFY22 results with revenue of RM821.0m +188.5% QoQ, +134.3% YoY) and core PATAMI of RM54.9m (vs core LATAMI of -RM23.7m in 1QFY22; core LATAMI of -RM5.5m in 2QFY21). This brings FY22 core PATAMI to RM31.2m (vs core LATAMI of -RM7.0m in 1HFY21). At 31% of our full year forecasts, we deem this within expectations but beat consensus at 45%. This due to our expectations of back-loaded FY22 as cement assets was only injected in late Sept-21.

QoQ/YoY. 2QFY22 turned in a stronger performance QoQ and YoY mainly due to injection of cement assets from YTL which was completed in late 1QFY 22. This marks the first quarter which fully reflects the assets’ financials. In part, we reckon contributing to the stronger performance was also the general recovery in construction activities.

YTD. Performance turned profitable post-completing acquisition of the aforementioned cement assets. The consolidation reverses widening losses in 1QFY22 which was badly affected by lockdown and subsequent short bout of price war.

Outlook. Along with full ramp up of construction projects, we expect further pick up in cement demand in CY22. Most contractors we cover are guiding for near normalisation in construction activities which bodes well for MCement. As for margins, we are comforted by a successful 25% cement price hike in Nov-21, passing on elevated coal prices. Nonetheless, we do take note that recent geopolitical events could keep coal prices elevated for a longer than expected period. Short term challenges aside, we are positive on MCement’s continued efficiency gains and with a dominant market share, MCement is poised to benefit from forecasted rebound in construction GDP of 11.5% this year (MOF estimates).

Forecast. We cut FY22 earning by 15% after tweaking finance costs assumptions.

Maintain BUY, TP: RM2.78. Maintain BUY with lower TP of RM2.78 (from RM3.50). Our TP is derived based on fully diluted target P/B multiple of 0.87x based on c.50% discount to 10 year P/B average (from 40% to account for rising margin headwinds). The stock currently trades at P/B of 0.48x (10 year low) which we think is pricing in much of the downside risks. Overall, we believe risk reward is tilted to the upside. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal/electricity costs.

Source: Hong Leong Investment Bank Research - 25 Feb 2022