Malayan Cement Bhd
(Jan 28, RM3.29)
Upgrade to buy with a higher target price of RM4.10: We believe that the current rise in cement prices is sustainable. Unlike the previous failed attempt to hike cement prices by 40% to 50% in June 2019, the current increase has been more gradual and acceptable to buyers, giving them room to adjust for the increase in their costs. In view of this, we increase our average cement selling price assumptions to RM225, RM250 and RM260 per tonne for financial year 2020 (FY20), FY21 and FY22 respectively.
We reduce our FY19 loss by 10%, while we increase our FY21-FY22 estimated core net profit by one to twofold, on the back of better cement prices and improving profit margin from lower unit operating costs. We believe the group will incur smaller losses for the fourth quarter of FY20 (4QFY20), before it turns profitable from 5QFY20 onwards.
We believe the potential injection of YTL Cement Bhd assets into Malayan Cement will be a fair deal as majority shareholder YTL Cement needs the approval of Malayan Cement’s minority shareholders.
We believe the risk of earnings per share dilution from the transaction is low as YTL Cement has achieved better operating margins historically. The enlarged entity should have a commanding market share of 58% in the cement industry, accompanied by better efficiency and pricing power.
Though we believe industry prospects remain challenging, the sustainable increase in cement prices from a more rational pricing strategy is positive for the group and the industry. A rerating of the stock is imminent, in our view. — Affin Hwang Capital, Jan 28