• Stay BUY, with new MYR2.45 TP from MYR3.30, 27% upside. We remain optimistic on Malayan Cement’s outlook from its improved operational efficiency and expanded market share in the local cement market post-YTL Cement Bhd consolidation. Key catalysts include improved cement demand pending execution of infrastructure works post-elections and gradual return of foreign labour. We lower our P/BV to 0.55x on CY23F BVPS from 1.0x to account for near-term headwinds and increased equity post consolidation. This report marks a transfer of coverage to Oong Chun Sung.

• Cement demand. In 1H22, monthly average cement production of 1.8m tonnes was higher than the pre-pandemic monthly average of 1.6m tonnes as the sector saw a spike in demand following the full reopening of the economy. However, increasingly challenging operating conditions ie labour shortage and cost pressure since the second quarter has led to a downtrend in cement production. In July, monthly cement production stood at only 1.1m tonnes after peaking at 2.5m tonnes in February.

• Cement ASP. Bulk cement prices have moderated 3% MoM to MYR295.50 per tonne, but remained higher than the pre-COVID-19 average ASP of MYR198 per tonne by 49%. Demand recovery has also been impeded by the persistent labour shortage, which may only improve in 2023 as foreign workers slowly return. We think that the revival of local infrastructure projects post-Budget 2023 and political stabilisation (ie post-elections) would be a near-term key sector catalyst moving forward.

• ESG revisited. We upgrade our “S” score for LMC given its firm emphasis on employee work health and safety – the company reported zero workplace fatalities in 2021. On its “G” criteria, we lower our score as we see a lack of further deliberation in terms of LMC’s ESG disclosure and shareholder engagement. In our view, LMC’s overall ESG disclosure was mostly aligned with YTL Corp (YTL MK, NR) but lacks further deliberation as compare to other operations of the parent. All in, we maintain our ESG score for LMC at 3.0.

• Earnings revision and valuation. We raise our 2022-2023 cement price assumption by 7% and 2% to MYR295/tonne and MYR280/tonne as cement players have raised prices amid inflationary pressure. We also raise our 2022-2023 coal cost assumption by 50% and 20% to factor in elevated coal prices following Russia’s invasion on Ukraine and export ban imposed by the Indonesian Government. We lower our P/BV to 0.55x (-1.3SD from its mean) on CY23F BVPS from 1.0x to account for near-term headwinds. Our TP incorporates a 0% ESG discount/premium as LMC’s ESG score is in line with the country median.

Source: RHB Research - 14 Oct 2022