• Still BUY, new MYR3.30 TP from MYR3.65, 26% upside. 9MFY22 (Jun) results came in far below our expectations. The negative surprise was due to margin compression from rising material costs – we had initially assumed Malayan Cement had enough coal inventory to maintain its margins. Despite the setback, we continue to like the stock as we expect a gradual recovery in cement demand, in tandem with a pick-up in construction activities. This report marks the transfer of coverage to Alexander Chia.

• Results missed expectations. 3QFY22’s core net profit of MYR18.3m brought the full-year figure to MYR44m, which was below our expectations (31%) but closer to consensus’ (80%). Net margins dropped from 6% in 2QFY22 to 2.3% in 3QFY33 due to higher coal and electricity prices. We had assumed margins would be maintained in FY22, with LMC having enough coal inventory on the books to last the financial year. However, we did not account for the sharp coal price hike. Revenue also dipped slightly by 3.2% QoQ with lower sales volumes following the festive holidays.

• ASPs continue to rise. Bulk cement ASPs continued to grow in the quarter, rising 10% QoQ to MYR285.00/tonne from MYR259.00/tonne. Our latest channel checks suggest bulk cement prices rose further to MYR340.00/tonne as of April. Management believes that ASPs can continue to rise, to pass on the cost increase to customers.

• Near-term challenges. Coal prices have rose over USD400.00/tonne in early March following the Ukraine-Russia war, from an average USD193.00/tonne in 4Q21 (USD105.00/tonne in May 2021). Recall that electricity and coal make up 50% of LMC’s costs. While we are cognisant of margin compression risks, the long-term prospects remain positive as industry production volumes should continue their recovery trajectory, and there should be improved efficiency following the full consolidation of YTL Cement’s domestic assets.

• Post results, we lower our FY22F earnings by 56% to account for the higher coal costs. We keep FY23-24F earnings unchanged as we had already accounted for margins compression risks from increased raw material prices for the latter years.

• Maintain BUY with new TP. We lower our P/B multiple to 1.0x on CY22F BVPS, to account for the near-term headwinds, in line with its historical mean. We think valuations remain attractive with the stock currently trading at 0.7x P/BV (-1SD from the mean). We continue to like the stock for its promising earnings recovery prospects. We ascribe a 0% ESG discount/premium to our intrinsic value, as LMC’s ESG score stands in line with the country median.

Source: RHB Research - 27 May 2022