This article first appeared in The Edge Financial Daily on November 6, 2019
Malayan Cement Bhd
(Nov 5, RM3.17)
Maintain hold with a lower target price (TP) of RM3.40: We expect Malayan Cement Bhd to turn profitable from 2020 onwards. Its cost rationalisation initiative has borne fruit as we saw reduced operating costs in the first half of 2019 (1H19). In addition, we foresee better revenue, improving on the back of higher cement prices as the price war eases following the recent industry consolidation. Furthermore, declining coal prices (-34% year to date [YTD]) are favourable and will aid an earnings turnaround. That said, the cement market remains challenging on the back of a prolonged weak property market. We maintain our “hold” call with a lower TP of RM3.40, based on 2020E (estimate) price-to-book value (PBV) of 1.2 times.
To recap, Malayan Cement’s first half of financial year 2019 core net loss narrowed by 45% year-on-year (y-o-y) to RM80.5 million. While revenue was down 6% y-o-y to RM1 billion, its operating cost dropped 12% y-o-y partly from lower selling and distribution costs (-23% y-o-y), lower administration expenses (-29% y-o-y) and lower coal costs. We expect costs to be contained as the company continues to rationalise costs.
We gather that the cement price has improved to about RM210-RM230 per tonne in October (from RM190 per tonne in September). This is mainly due to more rational pricing post-consolidation of the industry. Apart from that, the expected pickup in construction activities in 2020 as major infrastructure projects resume should support domestic cement demand and a hike in cement prices. Coupled with lower operating costs, we believe the company will return to profitability from 2020 onwards.
Near term, we expect YTL Cement Bhd (YTL) to pare down its stake in Malayan Cement to comply with the 25% public spread. Ideally, any share placement should be no less than YTL’s acquisition price of RM3.75, in our view, failing which YTL would need to recognise an impairment of goodwill in its book. An earnings turnaround at Malayan Cement is thus imperative for a return of investors’ confidence. Further to this, we believe YTL’s cement assets will be injected into Malayan Cement, to consolidate the operations and maximise the synergies between the two companies.
We reduce our 2019E losses, while expecting core net profit of RM16 million-RM35 million in 2020-2021E after incorporating better cement prices and lower operating costs. We maintain our “hold” call with a lower TP of RM3.40 based on 1.2 times 2020E PBV. Though we see signs of improvement in cement selling prices, we believe industry prospects remain challenging on the back of a prolonged weak property market and excess capacity in the industry. — Affin Hwang Capital, Nov 5