KUALA LUMPUR (June 8): CGS-CIMB maintained its “add” call on Malayan Cement Bhd (MCement) with a higher target price (TP) of RM5.08, from RM3.97, amid stronger recovery in volumes. 

Notably, it expects improved profitability and cash flow for the manufacturer and seller of cement, as well as a potential maiden dividend as early as the financial year ending June 30, 2024 (FY2024).

At the time of writing on Thursday (June 8), MCement’s share price stood at RM2.82, up by two sen or 0.71%. The share price has increased 33.02% year to date, and 20.51% over the course of the past twelve months.  

In a research note on Thursday, CGS-CIMB analyst Chong Tjen-San lifted MCement’s financial year 2023 forecast (FY2023f) earnings per share (EPS) by 107%, as well as FY2024f (45%) and FY2025f (36%). 

The higher EPS forecast has factored in higher blended average selling price (ASP) per metric tonne (ASP/mt) assumptions of RM326 for FY2023f, RM354 (FY2024f), and RM357 (FY2025f), he said. 

“ASP has risen by 11% over the past six months to RM410-420/mt and assuming rebates of RM50/mt, net ASP of RM360-(RM)370/mt.” 

Chong said MCement expects a gradual recovery in volumes, with an increase of 5% in FY2024f, from 2% in FY2023f, with earnings in the medium term buoyed by lower coal prices. 

“Third quarter (of) financial year 2023 (3QFY2023) was still affected by high coal prices but we think the lower coal costs will filter through in 4QFY2023, boosting earnings,” he said. 

Chong also said that MCement may see more future contracts from YTL Construction, including the MRT3 project and the revival of the high speed rail project for both YTL and MCement. 

With better profitability in FY2024-FY2025f, Chong added that Malayan Cement expects to generate higher free cash flow (FCF) of RM687 million to RM691 million, assuming a capital expenditure of RM100 million per year. 

This translates to FCF of 52 sen per share, which will pave the way for maiden dividends since YTL Corp Bhd acquired 77% of MCement in 2019 for RM3.75, translating to an FY2021 enterprise multiple (EV/EBITDA) of 10 times, said Chong. 

MCement’s last total dividend of five sen was paid in FY2016. 

“We are now modelling a dividend per share (DPS) of 7-8 sen in FY2024-2025f, based on a payout ratio of 50%.” 

Chong also said that the cement industry will see further consolidation as Khazanah-owned Cement Industries of Malaysia Bhd may be up for sale. 

“This could be positive for MCement, as the smaller cement players have been known to cut prices more aggressively, although we understand this has since abated.”