Malayan Cement: Benefitting from higher ASPs and lower coal prices

Affin Hwang Investment Bank, May 26, 2023

Malayan Cement Berhad
Target Price: RM3.30

  • Earnings spiked on the back of favourable ASPs and lower coal costs
  • We raise our FY23-25 estimates to factor in higher cement prices and lower coal costs. We believe the costs saved from decreasing coal prices should more than offset any decrease in transacted cement prices ahead
  • Upgrade to BUY with higher TP of RM3.30 due to the sector’s pricing power coupled with a much more favourable cost environment

9MFY23 above expectations with the anticipation of a strong 4QFY23
MCEMENT’s 3QFY23 core net profit of RM53m (3.2x qoq, 3.2x yoy) brought 9MFY23 earnings to RM72.1m (+93% yoy), forming 80% of our previous full-year estimate (112% of consensus). The stark improvements in 3QFY23’s results were heavily driven by stronger cement prices coupled with coal prices seeing a sharp decline from the month of February (subsequent to natural gas prices falling) which more than offset the recent electricity tariff hike. We gather from construction players that the average selling price for bulk cement in the reported quarter averaged in the c.RM390/mt range (rose c.16% qoq) whilst bag cement averaged at c.RM22/bag (rising c.17% qoq). Meanwhile, coal prices fell c.34% qoq to US$250/mt in the quarter under review. We estimate cement sales volume for the quarter to remain flattish at 2m tonnes for the quarter, which remains well below its quarterly rated capacity of c.6m tonnes.

Earnings to be driven by higher cement prices and lower coal prices
We are positively surprised by the cement industry’s successful attempt in raising transacted prices (ie, reducing discounts) despite sales volumes still remaining tepid. With coal prices finally easing, we subsequently expect cement prices to taper down gradually over time (month of April saw transacted prices decreasing to c.RM365/mt). Nonetheless we believe the industry will continue enjoying a decent spread ahead, barring any unforeseen price disruptions by players to gain market share (which we believe is unlikely). We raise our FY23-FY25 earnings estimates based on the following assumptions: i) cement prices to average at RM350/280/260 per mt; ii) coal prices to
average at US$290/170/150 per mt; and iii) sales volume to average at: i) 8m/8m/8.8m tonnes. Note that earnings growth will be primarily driven by the spread in ASPs and production cost, as opposed to sales volume. Upside to estimates would arise if the spreads are maintained at current levels of over RM90/mt (based on our estimates) as opposed to what we have priced in, ie decreasing to RM86/mt by FY25E.

Upgrade to BUY with a higher target price of RM3.30
We upgrade to a BUY rating with a higher target price of RM3.30 (from RM2.50) based on a 1x FY24E BVPS, which is 1SD above the 5-year mean (from 0.8x previously), due to the sector’s pricing power coupled with a much more favourable cost environment. Key downside risks include: i) increased pricing competition; and ii) higher coal prices.

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