Ripe for Turnaround; Upgrading to Buy

We expect Malayan Cement’s core net loss to shrink in FY20E before turning profitable in FY21E onwards, mainly due to better revenue and profit margins on the back of sustainable cement price improvements. Selling prices have increased faster than expected post the consolidation in the sector and are expected to hold up, which is positive for the industry, and as such we upgrade our call to BUY from Hold with a higher target price (TP) of RM4.10. Separately, we foresee an imminent restructuring with the injection of YTL Cement’s assets to enhance group efficiency. The outcome would likely be positive in our view, enhancing EPS while creating an entity with about 58% market share in the cement industry.

Cement Prices Holding Up

We believe that the current rise in cement prices is sustainable. Unlike the previous failed attempt to hike cement prices by 40-50% in Jun19, the current increase has been more gradual and acceptable to buyers, giving them room to adjust for the increase in their costs. In view of this, we increase our average cement selling price assumptions to RM225/250/260 per MT for FY20/21/22.

Expect Profitability in 5QFY20 Onwards

We reduce our 2019E loss by 10%, while we increase our FY21-22E core net profit by 1 to 2-fold, on the back of better cement prices and improving profit margin from lower unit operating costs. We believe the group will incur smaller losses in 4QFY20, before it turns profitable in 5QFY20 onwards.

Potential Restructuring Would be a Fair Deal

We believe the potential injection of YTL Cement assets into Malayan Cement will be a fair deal as majority shareholder YTL Cement needs the approval of Malayan Cement’s minority shareholders. We believe the risk of EPS dilution from the transaction is low as YTL Cement has achieved better operating margins historically. The enlarged entity should have a commanding market share of 58% in the cement industry, accompanied by better efficiency and pricing power.

Upgrade to BUY

We upgrade our call to BUY from Hold with a higher TP of RM4.10 based on 1.4x FY21E P/BV (close to its 10-year forward P/BV). Though we believe industry prospects remain challenging, the sustainable increase in cement prices from a more rational pricing strategy is positive for the group and the industry. A re-rating of the stock is imminent, in our view.

Source: Affin Hwang Research - 28 Jan 2020