• Malayan Cement (MC) reported a 18MFY20 core net loss of RM241m due to lower revenue, arising from lower demand due to disruptions during the Movement Control Order (MCO) period, partly mitigated by lower operation costs.
• Going into FY21-23E, we are cautious on MC’s earnings outlook given the weakness in the property market, weak demand pickup from the infrastructure sector and slow pace in achieving its rational pricing strategy.
• As such, we fine-tune down our earnings and maintain our HOLD with a lower target price of RM1.91 (from RM2.63) based on a FY21E P/BV of 0.72x.

MCO Disruption Impacted Cement Demand

MC’s 6Q FY20 revenue fell by 73% yoy to RM126.0m (compared to RM471.5m in 2Q FY20) due to disruptions in its operations, lower demand during the MCO period, and the closure of its Rawang plant (which made up 20% of the group’s cement capacity). The drop in revenue was partly mitigated by the cut in operating costs of 70% yoy in 6Q FY20 as a result of the group’s cost rationalization initiatives. On a cumulative basis, the group recorded RM241m in core net loss in 18M FY20. This was above our expectations, accounting for 76% of our 18M FY20E loss estimate of RM315.8m but below street’s full- year expected loss of RM115m. The variance to our forecast was due to better than expected revenue and lower tax expense. This note marks a transfer of analyst coverage.

A Widened Qoq Core Net Loss Incurred

On a qoq basis, 6QFY20 core net loss widened by 112% to RM61.6m. The wider loss is attributable to a 65% decline in revenue to RM126m, loss from share of results in joint venture of RM1.9m and higher tax.

Maintain HOLD With a Lower Target Price of RM1.91

Moving into FY21, we expect a slower recovery in its financial performance due to lingering weakness in the property sector, slower demand pickup from the infrastructure sector and the closure of its Rawang cement plant for 3 years which would impact sales volume. Given the lower demand for cement, we believe the increase in ASPs will be slower than previously anticipated and to hover in the RM245-260/MT range in subsequent years. As such, we expect MC to remain in the red in FY21E, albeit lower losses than FY20, supported by low coal prices and an expected improvement in operational efficiency. We expect MC to return to the black in FY22-23E. All in, we are cautious of MC’s earnings outlook going forward due to the low earnings visibility. We maintain our HOLD call on the stock with a lower 12-month TP of RM1.91, based on a lower target P/BV of 0.72x, based on-2SD of its 10-year mean (applied 1.0x previously).

Risk to Call

Key downside/upside risks to our HOLD call include; (1) increased/decreased price competition; (2) weaker/stronger domestic cement demand; and (3) higher/lower coal and raw-material prices.

Source: Affin Hwang Research - 1 Sept 2020