by SHAZNI ONG/ pic by TMR
MALAYAN Cement Bhd, formerly Lafarge Malaysia Bhd, is expected to turn profitable in 2020 once its cost rationalisation initiative bear fruit, as evidenced by the reduction in operating costs seen in the first half of 2019 (1H19), analysts have observed.
Affin Hwang Investment Bank Bhd in a note on Tuesday foresaw Malayan Cement posting better revenue on the back of higher cement prices as the price war eases following the industry consolidation.
Malayan Cement’s 1H19 core net loss narrowed by 45% year-on-year (YoY) to RM80.5 million.
Its revenue was down 6% YoY to RM1 billion, while its operating costs dropped 12% YoY — partly from lower selling and distribution costs, lower administrative expenses and lower coal costs.
Cement price has improved to about RM210-RM230 per metric tonne (MT) in October (from RM190 per MT in September) due to more rational pricing post-consolidation of the industry, Affin Hwang observed.
“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.
“Coupled with lower operating costs, we believe that the company will return to profitability from 2020 onwards,” the investment bank stated.
Meanwhile, the weaker coal prices will aid an earnings turnaround, it added.
“We reduce our 2019E losses while expecting a core net profit of RM16 million-RM35 million in 2020-2021E after incorporating better cement prices and lower operating costs,” Affin Hwang said, adding that it has a ‘Hold’ call on the YTL Corp Bhd-controlled cement maker with a lower target price of RM3.40 based on 1.2 times its 2020E price-to-book value.
Although it sees signs of improvement in cement selling prices, Affin Hwang believes that the industry prospects remain challenging on the back of a prolonged weak property market and excess capacity in the industry.
Meanwhile, Affin Hwang noted that it expects YTL Cement Bhd to pare down its stake in Malayan Cement to comply with the 25% public spread in the near term.
“Ideally, any share placement should be no less than YTL Cement’s acquisition price of RM3.75, in our view, failing which the group 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. We believe that YTL’s cement assets will be injected into Malayan Cement, to consolidate the operations and maximise the synergies between the two companies,” Affin Hwang stated.
The investment bank said the room to cut costs is there via the sharing of business resources including market information and geographic distribution between Malayan Cement and YTL Cement.
Malayan Cement owns three integrated cement plants located in Langkawi, Kedah; Kanthan, Perak; and Rawang in Selangor, two grinding stations in Pasir Gudang, Johor, two dry-mix plants and more than 30 ready-mix batching plants throughout Peninsular Malaysia.
YTL Cement owns integrated cement plants in Padang Rengas (Perak) and Kuantan (Pahang), two grinding stations in Port Klang (Selangor) and Pasir Gudang, and over 70 batching plants throughout Peninsular Malaysia.
The combination of YTL Cement and Malayan Cement will create a dominant player in the market which controls 65% of cement supply in Peninsular Malaysia.
“We gather that Malayan Cement’s plant in Rawang was shut down temporarily for refurbishment to improve the plant’s efficiency in the long run. We believe that the maintenance costs may be high which is expected to partially offset the cost savings from other operating costs. We also gather that the company will spend about RM50 million-RM70 million for the plant refurbishment over the next two years,” Affin Hwang said.
The investment bank said Malayan Cement may need to raise funds, either through a rights issue or borrowings to finance the potential acquisition of YTL Cement’s business as its internally generated funds are insufficient.
As of June 2019, Malayan Cement’s gearing stood at 0.4 time, with a cash position of RM57.3 million.