Light at the End of Tunnel

We expect Malayan Cement to turn profitable from 2020 onwards. Its cost rationalization initiative has borne fruit as we saw reduced operating costs in 1H19. In addition, we foresee better revenue, improving on the back of higher cement prices as the price war eases following the recent industry consolidation. Furthermore, declining coal prices (-34% ytd) are favourable and will aid an earnings turnaround. That said, the cement market remains challenging on the back of a prolonged weak property market. We maintain our HOLD call with a lower TP of RM3.40, based on 2020E Price/book of 1.2x.

Losses Narrowing as Cost Measures Take Effect

To recap, Malayan Cement’s 1H19 core net loss narrowed by 45% yoy to RM80.5m. While revenue was down 6% yoy to RM1.0bn, its operating cost dropped 12% yoy partly from lower selling and distribution costs (-23% yoy), lower administration expenses (-29% yoy) and lower coal costs. We expect costs to be contained as the company continues to rationalize costs.

Expect Profitability by 2020

We gather that the cement price has improved to about RM210-230/MT in October (from RM190/MT in September). This is mainly due to more rational pricing post-consolidation of the industry. Apart from that, the expected pick-up in construction activities in 2020 as major infrastructure projects resume, should support domestic cement demand and a hike in cement prices. Coupled with lower operating costs, we believe the company will return to profitability from 2020 onwards.

What’s Next?

Near term, we expect YTL Cement (YTL) to pare down its stake in Malayan Cement to comply with the 25% public spread. Ideally, any share placement should be no less than YTL’s acquisition price of RM3.75, in our view, failing which YTL would need to recognize an impairment of goodwill in its book. An earnings turnaround at Malayan Cement is thus imperative for a return of investors’ confidence. Further to this, we believe YTL’s cement assets will be injected into Malayan Cement, to consolidate the operations and maximize the synergies between the two companies.

Maintain HOLD

We reduce our 2019E losses, while expecting core net profit of RM16-35m in 2020-21E after incorporating better cement prices and lower operating costs. We maintain our HOLD call with a lower TP of RM3.40 based on 1.2x 2020E P/BV. Though we see sign of improvement in cement selling prices, we believe industry prospects remain challenging on the back of a prolonged weak property market and excess capacity in the industry.

Source: Affin Hwang Research - 5 Nov 2019