We expect Malayan Cement to continue incurring losses in 1HCY20. The closure of its cement operation for 38 days since the Movement Control Order (MCO) started on 18 March has badly affected its revenue and earnings. We expect the company to turn profitable in FY21E mainly on the back of better cement ASPs, a recovery in cement demand and improved cost efficiency. That said, we reaffirm our SELL call on the stock with an unchanged TP of RM1.40 as earnings visibility remains poor post-MCO, in view of a slow recovery in construction activities and the continued soft property market.

Malayan Cement Has Resumed Operation

Malayan Cement resumed its cement production operation on 24 April, after receiving approval from the government. We expect the company to ramp up its utilisation to pre-MCO levels, ie, 50-60% over the next 1-3 bmonths. Meanwhile, we gather that its quarry operation and most of its ready-mixed trucks have resumed operation recently after receiving state government approvals.

Post-MCO, Cement Demand Likely to Recover Gradually

While most construction projects have received the green light from the government to resume operations, we expect the recovery to be slow as strict work and travel restrictions will likely remain in place to prevent new Covid-19 infections. Housing starts fell 38% qoq to 20,462 in 4Q19 suggesting continued weak cement demand from the property sector.

Cement Average Selling Prices and Costs Remain Stable

On a more positive note, cement prices are holding up quite well. Prices for bulk and bag cement remained stable at RM240-250MT and RM16-17/bag, respectively in March 2020. On the cost side, we expect operating costs to remain stable as the coal price has eased to USD52/MT (-23% ytd) at endApril, coupled with further improvement in the company’s operating cost, arising from cost savings and synergies with YTL Cement’s operation.

Losses Are Expected to Continue in 1HCY20

We expect Malayan Cement to remain loss-making in 1HCY20 given the temporary shutdown of its operation for 38 days since 18 March 2020 following the MCO implementation.

Reaffirming Our SELL Rating

We reaffirm our SELL rating and 12-month TP of RM1.40 based on a 0.5x FY21E P/BV. We believe earnings visibility remains poor due to slow construction activities post-MCO and the prolonged weak property market.

Source: Affin Hwang Research - 12 May 2020