PETALING JAYA: CGS International (CGSI) Research has cut its financial year ending June 30, 2027 (FY27 to FY29) earnings per share (EPS) estimates for Malayan Cement Bhd
(MCement) by 25% per annum to factor in the full dilution of its irredeemable convertible preference shares (ICPS) of an additional 466.7 million shares.
The research house said it retained its “add” rating on the building materials company for its dominant sales market share in the Malaysian cement industry, and its growing exports.
Despite EPS dilution from the ICPS, valuations are inexpensive at 10 times FY28 price to earnings, it said adding that its target price for the stock falls to RM8 a share.
At last look, it was at RM5.37.
CGSI Research said downside risks for the stock included slowing property demand, and delays in key infrastructure projects while re-rating catalysts included faster-than-expected rollout of major projects, and stronger-than-expected property sales.
It said with higher oil prices now, investor attention had shifted to rising cost pressures for MCement, particularly for coal.
However, coal prices at the calorific values (CV) required are still lower versus the research house’s forecast for FY27 to FY29 with no issues in supply, it noted.
It said MCement also benefits from better pricing than peers due to its high volume of purchases while the diesel impact on the production process is minimal.
While transportation costs for bulk and bag cement are subsidised and not affected by higher diesel prices, transport of ready mixed concrete (RMC) is not subsidised but the company’s RMC business has a degree of pricing power given strong demand.
“With MCement’s dominant industry position and fully integrated structure, we believe higher costs may be partially offset by narrowing rebates, if demand is unchanged,” the research house said.
“Management has said there have been no average selling price cuts for cement and RMC,” it said, adding checks with contractors have confirmed this and some believe prices could rise if the war drags on.
“MCement’s coal procurement strategy is to build inventory leading up to the monsoon season in November.”
CGSI Research noted the group continues to diversify fuel sources to alternatives such as biomass, local plastics, and treated refinery waste while investments into some of its plants have enabled it to use coal with lower CVs.
CGSI noted the ICPS was in relation to the part settlement for the RM5.2bil acquisition of YTL Cement (unlisted) and its concrete business via RM2bil in cash, RM1.4bil in 375.5mil new ordinary shares and RM1.75bil in 466.7 million ICPS in 2019.
