KUALA LUMPUR (Nov 5): Malayan Cement Bhd, formerly known as Lafarge Malaysia Bhd, is expected to turn profitable from 2020 onwards as the company's cost rationalisation initiative has borne fruit as seen in reduced operating costs in the first half of 2019 (1H19), analysts at Affin Hwang Capital said.

This is riding on better revenue foreseen on the back of higher cement prices as the price war eases following the recent industry consolidation, wrote its analysts Laila Razip and Loong Chee Wei in a note today.

In 1H19, Malayan Cement's core net loss narrowed by 45% year-on-year to RM80.5 million. While revenue was down 6% on year, operating cost was 12% lower, partly from lower administration expenses and lower coal costs.

The research house said cement price has improved to about RM210 to RM230 per metric tonne in October, from RM190 in September, due to more rational pricing post-consolidation in the industry.

Apart from that, the expected pick-up in construction activities in 2020 as major infrastructure projects resume should support domestic cement demand and a hike in cement prices, although industry prospects still remain challenging on the back of a prolonged weak property market and excess capacity.

"Coupled with lower operating costs, we believe the company will return to profitability from 2020 onwards.

"We reduce our 2019E losses, while expecting core net profit of RM16 to RM35 million in 2020-21E after incorporating better cement prices and lower operating costs. We maintain our 'Hold' call with a lower target price (TP) of RM3.40 based on 1.2x 2020E price-to-book value," it added.

Meanwhile, for the near term, Affin Hwang expects 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 recognize 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 maximize the synergies between the two companies," it added.

Shares in Malayan Cement, which were not traded today, closed at RM3.18 apiece for a market capitalisation of RM2.70 billion on Monday.