Malayan Cement’s 9MFY20 core net loss narrowed by 49% yoy to RM127m. While revenue was 6% yoy lower, its operating costs were lower on the back of cost savings from the group’s cost-cutting initiatives. Similarly, core net loss narrowed by 30% qoq to RM30m in 3QFY20. We expect earnings to improve in 4QFY20 on the back of better cement prices, while costs remain low. That said, we remain cautious on the stock as the operating environment remains tough in view of the prolonged weakness in the property market and current oversupply situation. Maintain HOLD call with an unchanged TP of RM3.40.

9M19 Core Net Loss Narrowed by 48% Yoy

Malayan Cement’s 9M19 net loss narrowed by 49% yoy to RM127m. Revenue dropped 6% yoy to RM1.5bn mainly due to lower domestic cement sales that were partly offset by higher export volumes and prices. The lower net loss was also partly attributable to lower sales & administrative expenses (-25% yoy), lower depreciation (-11% yoy) and profit contribution from its associate in Singapore of RM8.8m. After excluding one-off items, the group recorded a core net loss of RM126.6m (-48% yoy). This is within our expectation as we expect the group to break even in 4Q19 in view of better domestic cement selling prices.

Expect Better Qoq Results in 4Q19 on Better Pricing

Sequentially, Malayan Cement’s core net loss narrowed by 30% to RM29.8m. This is mainly due to lower operating costs on the back of cost savings from manpower rationalisation and lower selling and distribution expenses, coupled with a higher associate contribution of RM4.1m (+87% qoq). 3Q19 revenue was marginally lower (-1% qoq) due to lower domestic cement sales. We expect earnings to improve in 4Q19 mainly on the back of better domestic cement ceiling prices, while costs are expected to remain low. That said, we believe the operating environment remains challenging given the prolonged weakness in the property market and current oversupply situation.

Maintain HOLD With An Unchanged TP of RM3.40

As the company has changed its financial year-end from December to June, we have also revised our FY20 forecasts for 18 months from Jan19 to Jun20. We maintain our HOLD call with an unchanged TP of RM3.40, based on 2020E PBR of 1.2x. While we are positive on the group’s strategy to focus on improving operational efficiency, we remain cautious on the stock as the earnings outlook remains challenging

Risk to Call

Key upside and downside risks to our call include; (1) decreased/increased price competition; (2) stronger/weaker domestic cement demand; and (3) further declines/increases in coal and raw material prices

Source: Affin Hwang Research - 27 Nov 2019