• D/G to NEUTRAL from Buy, new MYR3 TP from MYR2.90, 4.9% upside. 9MFY23 (Jun) results came above our and Street’s expectations at 114% and 113% after a few disappointing quarters – attributable to improvements in sales volumes and ASPs for domestic cement and ready-mixed concrete. We downgrade our call given the lack of near-term catalysts – in view of cautious inflationary pressures and absence of new large infrastructure projects in the pipeline that could potentially slowdown cement demand in the near term.

• Results surprised Street. 3QFY23’s core net profit of MYR63.9m jumped significantly (+371.2% QoQ, +248.9% YoY), bringing the 9MFY23 figure to MYR77.1m (+75% YoY). This came way above our and Street’s expectations at 114% and 113% of full-year estimates. Malayan Cement’s revenue recorded a steady growth of 10.5% QoQ, attributable to improvements in sales volumes and ASPs for domestic cement and ready- mixed concrete. While the higher production cost headwinds lingered (especially electricity and coal) during the quarter under review, PBT still booked impeccable improvements QoQ (+305.8%) and YoY (+271.7%).

• Outlook. Average bulk cement ASPs softened by 5% MoM at MYR371/tonne as at April. According to the Department of Statistics, cement production totalled 2.7m tonnes in March, a marginal increase from 2.5m tonnes in February and higher than the pre-pandemic monthly average of 1.3m. Given the normalising of coal costs, we expect cement costs to follow through as well.

• D/G to NEUTRAL following the recent share price rally. Post LMC’s results, we increase FY23F-24F earnings by 107% and 40.3% given the normalising of cement production costs. Our TP is now MYR3 with an unchanged of 0.6x P/BV against its pre-COVID-19 2-year mean of 1.1x. This is premised on cautious inflationary pressures and absence of new large infrastructure projects in the pipeline that could potentially slow down cement demand in the near term. As such, we downgrade our call, given the weak job flows awarded (1Q23: -17.3% YoY; latest April: -75% YoY), according to Construction Industry Development Board data.

• Key risks to our call includes raw material costs inflation, a broad economic slowdown that will taper off construction activities, and a softening in cement and ready-mixed concrete ASPs.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 26 May 2023