• Malayan Cement (MC) reported a marginal 1QFY20 core net loss of RM2.0m due to its cost rationalisation efforts.
• Results were within market expectations but above ours.
• Maintain HOLD with a higher 12-month target price of RM2.55 (from RM1.91) based on a FY21E P/BV of 0.95x.

1QFY21 earnings came in above our expectations

On a qoq basis, 1QFY21 headline net loss narrowed by 96.5% to RM1.3m. The narrower loss is attributable to a lower base in 6QFY20 as various production facilities were not operational during the Movement Control Order (MCO)/Conditional MCO period. Revenue more than doubled to RM367.9m after operations resumed and domestic demand picked up following the gradual increase in construction activities since the commencement of the Recovery MCO. In tandem with the better revenue, vigorous costcutting measures and operational synergies, pre-tax profit was in positive territory for the first time since 2016. Excluding one-off items, the group recorded a core net loss of RM2.0m in 1QFY21. This was within the street’s expectation but above ours. The variance to our forecast was due to lower-than-expected operating and depreciation costs.

Core net loss narrowed yoy

On a yoy basis, MC’s 1QFY21 core net loss narrowed by 94% to RM2.0m despite a decline in revenue of 21% yoy, attributable to the 30% decline in the operating cost and 15.7% reduction in depreciation yoy. As a result, the headline net loss narrowed by 96.5% yoy to RM1.3m.

Maintain HOLD with a higher target price of RM2.55

We lift our EPS by 45-72% for FY21-23E to incorporate a stronger recovery in demand for cement going forward, as well as lower operating and depreciation costs. We raise the target price to RM2.55 on a higher FY21E P/BV of 0.95x, based on -1.5SD its 10- year mean (0.72x previously) as ample market liquidity and positive sentiment on a faster recovery in cement demand from the revival of mega infrastructure projects should provide support to valuations. We maintain our HOLD call on Malayan Cement. 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 - 27 Nov 2020