KEY INVESTMENT HIGHLIGHTS

• Losses seen narrowing

• Revenue reported in 4QFY19 dipped by -9.4%yoy

• Forward performance is anticipated to improve

• Earnings forecast left unchanged

• Maintain NEUTRAL call with unchanged TP of RM3.29

Losses seen narrowing. The group’s FY19 bottom line showed an improvement, albeit still in the red. Malayan Cement’s losses moderated to -RM167.0, a significant improvement of +47.6%yoy in comparison to -RM318.9m losses last year. Based on our FY19 estimate, the quantum slightly lagged with our expectation but ahead of consensus expectation at 92% and 113 % of full year estimates respectively.

FY19 revenue dipped by -9.4%yoy. Malayan Cement’s revenue shrank -9.4%yoy to RM1,923.0m in FY19. The lower sales were caused by lower domestic demand for cement. However, it is worth noting that lower domestic sales were compensated partially by higher export sales. On a brighter note, the group managed to improve its loss before tax (LBT) by +50.5%yoy to -RM200.5m in FY19 from -RM405.4m a year earlier. The lower LBT was on the back of (1) vigorous cost cutting measures, and (2) savings from manpower rationalization.

Forward performance is anticipated to improve as a result of operational synergies from logistics, distribution and procurement in light of the acquisition of Malayan Cement by YTL. While we are positive on the group’s strategy to improve its performance by (1) more cost saving through economies of scale (EOS), and (2) reduction of duplicated functions and corporate overheads, we remain cautious on the stock as the earnings outlook remains challenging due to subdued domestic demand for cement.

Earnings forecast left unchanged. We make no changes to our estimates, given that its latest earnings came in within our expectation.

Recommendation. We maintain our NEUTRAL recommendation on Malayan Cement. While the outcome of robust cost cutting measures seems to give positive impact on the group’s financial result, we still think that cement demand remains lackluster. Our TP was unchanged at RM3.29 as we ascribe the FY20 BVPS to PBV of 1.1 times.

Source: MIDF Research - 21 Feb 2020