Malayan Cement Bhd
(Nov 19, RM3.28)
Upgrade to buy with a higher target price (TP) of RM3.95: We gather that rebates for cement have been reduced, resulting in higher cement prices. We believe YTL Cement’s acquisition of Malayan Cement Bhd (MCB) has improved industry dynamics that have been pressured by intense price competition and sluggish demand over the past few years. YTL Cement and MCB have a combined market share of about 60%, leading to cost synergies and better pricing power. In addition, we expect cement demand to recover with the revival of several major infrastructure projects. We factor in: i) a higher cement price of RM215 per tonne (from RM200 per tonne) in financial year 2021 (FY21); ii) better cost synergies between YTL Cement and MCB; and iii) an improved utilisation rate on the back of stronger demand next year. We upgrade our call on MCB to “buy” with a TP of RM3.95.

 
Several key projects such as the East Coast Rail Link (ECRL), Bandar Malaysia and Penang Transport Master Plan have recently been revived. This should help support cement prices and sales. We expect MCB’s cement sales to improve (FY20F [forecast]/FY21F/FY22F: 2%/4%/3%).

We do not discount the possibility of YTL Corp Bhd injecting YTL Cement into MCB in the future, given that YTL Cement has kept MCB’s listing status. This could create greater shareholder value.

Our TP of RM3.95 is pegged at an unchanged price-to-book multiple of 1.35 times, a 10% discount to MCB’s three-year mean of 1.5 times.

Sales volume might also improve with an expected increase in local demand. We believe domestic cement consumption contracted in the first half of calendar year 2019 due to slow progress in some key infrastructure projects, such as the Light Rail Transit Line 3.

However, we expect cement demand to recover gradually when work on these projects resumes, which is likely to spill over into next year. Demand from the ECRL project should also come next year as the subcontracting portion for local contractors is expected by early 2020.

We understand that MCB’s plants have been running at full steam except for the Rawang plant, which is being refurbished. Once the Rawang plant is completed, this could support MCB’s volume and help increase its overall utilisation rate.

As we are positive on MCB’s cost-optimisation efforts, a turnaround might come as soon as next year after its recent price recovery. We have imputed our assumption of higher cement prices — a RM15 per tonne increase — from our previous assumption. We also assume a higher utilisation rate driven by an expected increase in local demand and completion of refurbishment of the Rawang plant. According to our estimate, an increase of RM10 per tonne in the bulk price could boost MCB’s earnings by about RM35 million. — AllianceDBS Research, Nov 19