Malayan Cement recorded larger-than-expected losses of RM185m in 15MFY20. The variance was mainly due to lower-than-expected revenue as cement demand shrank and its operation was disrupted, given the government’s Movement Control Order (MCO) to curb the spread of the Covid-19 outbreak. The impact of lower revenue was partly mitigated by lower operation costs. All in all, we increase our 18MFY20E core net loss to RM316m as we expect higher losses in 6QFY20 in view of the slowerthan-expected ramp-up of its operation. We maintain our HOLD call with a lower TP of RM2.63, based on a FY21E PBV of 1.0x.

Below Expectations

Malayan Cement’s 5QFY20 revenue plunged 33.6% yoy to RM357.9m (compared to RM538.7m in 1QFY20) due to the closure of its Rawang plant (which made up 20% of the group’s cement capacity) and the disruption of its operation due to the MCO since March 2020. Though the MCO affected only 2 weeks of 5QFY20, the impact was apparent as the group’s sales and billings were uneven especially for large customers. Its 5QFY20 core net loss widened by 4.2% yoy to RM29.1m. The drop in revenue was partly mitigated by the 34% yoy drop in operating costs as a result of the group’s cost rationalization initiatives. On a cumulative basis, the group recorded RM184.6m in core net loss in 15MFY20. This is below our expectations, accounting for 114% of our previous 18MFY20E loss estimate of RM161.6m.

Margin Improved on the Back of Cost Rationalization Initiatives

On a qoq basis, 5QFY20 core net loss narrowed by 16.7% to RM29.1m. Though revenue declined by 19.9% qoq to RM357.9m, core net loss narrowed on the back of lower operating costs (-21.1% qoq) partly due to lower admin expenses (-73% qoq) and lower cost of sales (-15% qoq). As a result, the EBITDA margin improved by 1.4ppt to 2.9% in 5QFY20.

Maintain HOLD With a Lower TP of RM2.63

We maintain our HOLD call on Malayan Cement with a lower TP of RM2.63, based on an unchanged FY21E PBV of 1.0x. While we believe the cement industry outlook remains challenging, we are cautiously optimistic of the company’s earnings prospect in FY21, given its plan to improve operational efficiency while cement prices gradually improve in view of a more rational pricing strategy. We think its losses will peak in 6QFY20, and expect gradual improvement in its financial performance in 1QFY21 onwards in tandem with a recovery in the construction sector.

Source: Affin Hwang Research - 17 Jun 2020