KEY INVESTMENT HIGHLIGHTS

• 1HFY20 results remain in losses of -RM66.3m (-13.0%yoy) due to lower cement demand brought about by the MCO

• 18MFY20 normalised losses of -RM270.2m which is below our and consensus expectations

• The losses were mainly attributable to contraction in domestic cement demand for the past years

• Embarking on cost rationalisation and operational synergies to cushion the shrinking cement demand during RMCO

• Maintain NEUTRAL with a revised target price at RM1.75

Remains in losses. Malayan Cement Berhad (MCB)’s 6QFY20 remain in losses of -RM66.3m, mainly due to lower domestic cement demand brought by the MCO during the quarter under review. Cumulatively, the group’s 18MFY20 results posted a loss of -RM270.2m which was below both our and consensus expectation. Note that the current set of audited financial statements is for a period of eighteen months from 1 Jan 2019 to 30 June 2020 following the group’s changes of its financial year end from 31 December to 30 June.

Revenue shrank. Malayan Cement’s 6QYF20 revenue declined - 73.3%yoy to RM126.0m. The year-over-year decline was driven by: i) the continued decline in domestic cement demand and, ii) exacerbated by the implementation of Movement Control Order (MCO) on 18 March 2020. Moving forward, we believe the extended RMCO period until 31 December 2020 is expected to keep cement demand under pressure as construction work progresses in a slower manner due to continued stringent Covid-19 standard operating procedures at work site operations. Note that the group’s various production facilities were not operational during MCO period in view of the lower domestic cement demand.

Demand recovery to be tepid. While the domestic cement demand is seen picking up post-MCO following the resumption of economic activities, we opine the recovery to be tepid as certain stringent restriction were still in place during the extended RMCO period.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the MCO on the group’s businesses. We are revising our FY21 losses forecast to - RM71.5m and introducing our new set of FY22 forecasts.

Target price. We are revising our TP to RM1.75 (previously RM2.70). This is achieved through pegging a PBV of 0.7x to the group’s FY21 BVPS of RM2.50. Note that the PBV is at the slight discount to the group’s two year historical average given the current subdued business sentiments in the construction sector.

Maintain NEUTRAL. In the near term, we expect that the group’s revenue and earnings prospects to remain lacklustre in anticipation of the slower recovery in domestic cement demand given the slower resumption of construction and business activities and limited workforce capacity at work sites in view of the stringent Covid-19 standard operating procedure. The extended RMCO period to 31 December 2020 might continue to dampen the demand for cement. Nonetheless, we are encouraged by the group’s initiative to embark on cost rationalisation and operational synergies from logistics, distribution and procurement that might be able to partially support the group in paring down losses. Given the lack of near-term positive re-rating catalysts, we are maintaining our NEUTRAL recommendation on MCB.

Source: MIDF Research - 1 Sept 2020