Malayan Cement’s 12MFY20 core net loss narrowed by 49% yoy to RM149m. While revenue was 9% yoy lower, its operating costs dropped by 17% yoy on the back of the group’s cost rationalisation. That said, we deem the result as below our expectation, partly due to higher-thanexpected administrative expenses in 4QFY20 (+2.5x qoq). However, we expect the costs to normalize in the coming quarters. Given a better cost structure and higher cement average selling prices (ASP), we expect the group to turn around in 5QFY20 onwards. We maintain our BUY call with a lower TP of RM4.06.

12MFY20 Core Net Loss Narrowed by 49% Yoy

Malayan Cement’s 12MFY20 net loss narrowed by 47% yoy to RM168.1m. Revenue dropped 9% yoy to RM1.9bn mainly due to lower domestic cement sales that were partially offset by better export volumes and prices. The lower core net loss was also partly contributed by lower sales & administrative expenses (-24% yoy), lower depreciation (-7% yoy) and profit contribution from its associate in Singapore of RM13.7m. After excluding one-off items, the group recorded a core net loss of RM148.6m (-49% yoy). This is below our expectation as the 4QFY20 core net loss was higher than expected partly due to surprisingly high administrative costs.

Expect Profitability in 5QFY20 Onwards

On a qoq basis, Malayan Cement’s core net loss narrowed by 8% to RM33.5m. The losses were higher than our expectation partly due to higher administrative costs (+2.5x qoq). That said, we gather that the increment was a one-off cost, and costs are expected to normalize in the coming quarters. While the EBIT margin contracted by 0.8ppts qoq in 4QFY20, the gross profit margin was 5.8ppts qoq higher due to improved operational efficiency. We expect there will be additional cost savings from the recurrent related-party transactions between the group and YTL Cement that were approved in January 2020. In view of the improved cost structure and better cement ASPs, we expect the group to turn around in 5QFY20 onwards.

Maintain BUY With a Lower TP of RM4.06

We have increased our FY20E core net loss by 8% to account for the higherthan-expected losses YTD, while we cut our FY21-22E core net profit by 4% in view of the cautious macroeconomic outlook. Though we believe the cement industry outlook remains challenging, we are positive on the company, given its plan to improve operational efficiency, and gradual increase in cement prices with a more rational pricing strategy. We maintain our BUY call with a lower TP of RM4.06, based on FY21E PBV of 1.4x.

Source: Affin Hwang Research - 21 Feb 2020