MCement posted FY22 core PATAMI of RM71.5m falling below our but beat consensus expectations. The miss was top-line driven. Amidst the volatile input costs spikes, GP margin has remained reasonably stable. Indonesian coal prices have trended lower of late which helps to alleviate costs pressure. Trim FY23 & 24 earnings by -8.6% & -5.1%. Post a -27% correction in its share price, we upgrade the stock to BUY (from Hold) with unchanged TP of RM2.78 based on fully diluted 0.87x target P/B representing c.50% discount to 10 year P/B average. MCement trades at an attractive P/B of 0.48x (more than -2SD below 10 year mean). Downside risks: higher interest rates, mega project delays, prolonged high coal/electricity costs.

Below expectations. MCement reported 4QFY22 results with revenue of RM804.8m (1.2% QoQ, 191.2% YoY) and core PATAMI of RM22.1m (21.2% QoQ; 170.1% YoY). This brings FY22 core PATAMI to RM71.5m, increasing by nearly 15x vs FY21. Results came in below our forecasts but above consensus at 84% and 105% of full year forecasts respectively. Shortfall was mainly due to lower than expected sales. Note that we have adjusted 4QFY22 earnings for: (i) reversal of trade receivables impairment (RM10.6m) and (ii) reversal of inventory obsolescence (RM1.4m).

QoQ. Core PATAMI improved by 21.2% despite a rather flattish revenue performance (+1.2%) as higher ASPs mitigated the impact of inflationary fuel costs, further aided by lower repairs and maintenance expenses. Consequently, core PATAMI margin expanded by 50 bps. While ASPs were higher QoQ, MCement saw a -5% drop in volume, we believe due to construction labour shortages. We note that throughout this episode of sharp spikes in input costs, GP margin (excluding D&A) have remained steady ranging between 34-38%. We attribute this to stronger pricing power post industry consolidation.

YoY/YTD. The big jump in profitability on a YoY (+170.1%) and YTD (15x) basis largely stems from completion of the acquisition of YTL’s cement assets. Contribution from these assets was only effective starting in 2QFY22.

Outlook. Sequential recovery momentum in cement volumes is impeded by tough on the ground operating conditions mainly due to labour shortage. We expect shortages to only subside meaningfully in CY23 given that the pace of intake is slow thus far. Volumes may start improving in CY23 aided by higher site progress and MRT3 implementation. On ASPs, we observe bulk cement prices trending slightly lower to RM310/mt, which is rather in-line with somewhat weaker Indonesian thermal coal prices (low CV). This is contrary to its high CV counterpart, Newcastle coal remaining at >USD400/t (driven by disruption to high CV Russian coal). The increasing pricing spread is reportedly due to low degree of substitutability between the two. We think the stock has taken a beating due to headline grabbing spikes for Newcastle while domestic cement producers generally procure Indonesian coal as fuel.

Forecast. Trim FY23 & 24 earnings by -8.6% & -5.1% after tapering down on sales assumptions.

Upgrade to BUY, TP: RM2.78. Upgrade to BUY (from Hold) with unchanged TP of RM2.78. 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 (implies -1.5SD to 10 year mean). Since April-22, the stock has declined by -27%, we think possibly due to margin fears. MCement trades at an attractive P/B of 0.48x (more than -2SD below 10 year mean). Downside risks: higher interest rates, mega project delays, prolonged high coal/electricity costs.

Source: Hong Leong Investment Bank Research - 26 Aug 2022