KEY INVESTMENT HIGHLIGHTS

• 1QFY21 losses narrowed down significantly to -RM1.8m from -RM39.8m incurred in 1QFY20

• The lower losses were mainly attributable to the recovery in domestic cement demand post-MCO and sharp fall in costs

• Gross profit margin doubled to 14.8% in 1QFY21 as compared to 7.0% in 1QFY20 on operational synergies

• Strong beneficiary of the upcoming construction upcycle on revival of mega infra projects as a dominant cement player

• Upgrade to BUY with a revised target price of RM3.00

On track to profitability. Malayan Cement Berhad (MCB) showed a huge improvement in its 1QFY21 financial performance as the group managed to post a much narrower losses at -RM1.8m from previously large losses of -RM39.8m in 1QFY20. The results was above our and consensus’s expectation. This was mainly driven by the recovering domestic cement demand and much lower operational costs postintegration between YTL Cement and the group which enable the merged entity in achieving synergies across the important value chain such as the operation, distribution and logistical cost components. Moving forward, we posit that the group will potentially be able to achieve a promising earnings turnaround in coming quarters onwards.

Cost rationalisation to drive margin expansion. Despite MCB’s 1QYF21 revenue declined by -21.0%yoy to RM367.9m, the group was still able to achieve a feat of superb results to almost a break-even level. Nonetheless, the post-integration exercises have started to bear fruits as seen in the higher pace of reduction in cost of sales and operating cost by -27.6%yoy and -25.7%yoy to RM313.5m and RM51.7m respectively. This led the gross profit margin of the group to more than double to 14.8% in 1QFY21 from 7.0% in the corresponding period. As a result, the group was able to achieve a profit before tax of RM1.3m in 1QFY21 as compared to -RM42.4m in 1QFY20.

Earnings estimates. We are revising our earnings estimates for FY21/22/23 to RM82.4m, RM140.1m and RM196.1m respectively as we impute a much lower cost of sales and operating costs assumption and higher revenue trajectory.

Target price. We are rolling forward our valuation base year to FY22 and derive a new target price of RM3.00 (previously RM1.75). This is achieved through pegging a higher PBV of 1.0x (previously 0.7x) to the group’s FY22 BVPS of RM3.00. Note that the PBV is +1SD to the group’s two year historical average. The premium is mainly premised on the group’s dominant market share in the cement, concrete, and aggregates industry as well as being one of key beneficiary of higher development expenditure in CY21.

Upgrade to BUY. We are surprised by the huge improvement in the financial performance of the group in 1QFY21 which showed the bottom-line to reach a near break-even level. This was mainly achieved through the group’s initiative to embark on cost rationalisation and operational synergies from logistics, distribution and procurement post-integration with YTL Cement which has made significant progression as reflected in the lower cost of sales and operating costs. This led to the group’s gross profit margin to more than double in 1QFY21. As such, we opine that continuous effective cost synergies and the steady revenue growth trajectory will able to present an exciting earnings turnaround prospects for the group from FY21 onwards. Coupled with a potentially considerable domestic demand for the group’s products (i.e. cement, concrete and construction aggregates) from the continuation of mega public infra projects such as MRT, KL-SG HSR, KVDT2 and ECRL as announced in Budget 2021, we postulate that these developments would bode well for the group’s revenue and earnings moving forward. All in, we are upgrading our recommendation on MCB to BUY from Neutral previously.

Source: MIDF Research - 27 Nov 2020