KUALA LUMPUR (Nov 24): Hong Leong Investment Bank (HLIB) upgraded Malayan Cement (MCement) from “hold” to “buy” at RM 3.94, with a higher target price (TP) of RM 4.80, after it recorded a core profit after tax and minority interest (Patami) of RM96.2 million for the first quarter of 2024 (1QFY2024), beating both HLIB's and consensus expectations.

In a note on Friday, HLIB stated that MCement’s 1QFY2024 revenue of RM1.15 billion, which increased by 13.6% quarter-on-quarter (q-o-q) and 33.7% year-on-year (y-o-y), came in well above its and consensus full-year forecasts of 46%.

This result is attributed to a combination of higher-than-expected sales and margins due to stronger volumes, while gains from lower coal costs remained sticky, said the research house.

“Its JV contribution was also stronger than it had anticipated. For context, 1QFY24 delivered 60% of FY23’s full-year earnings,” it added.

On a q-o-q basis, MCement’s core Patami increased by 20.9%, driven by revenue growth of 13.6%, while HLIB believes this is largely reflective of stronger sales volumes in view of flattish sequential average seling prices (ASPs).

Meanwhile, MCement's bottom-line margin expanded from 0.1% to 8.4% y-o-y, attributed to the 101 times higher core Patami, driven by stronger volumes due to normalisation of construction activities, higher ASPs (estimated at around 22% of the increase) and lower coal prices, which declined by around 67% y-o-y.

The research house reiterated its optimistic outlook on MCement and increased earnings forecasts for 2024 by 37.8% and 2025 by 27.8%.

“Sales volumes continue to see growth, and expectations are that the positive momentum may continue to be driven by civil and non-residential ventures, including infrastructure, logistics facilities, data centres and factories.

“Coal prices have weakened in recent weeks after a short-lived rally, which would help in sustaining operating margins.

“MCement is poised to see a stronger profit contribution from SG as infrastructure projects kick off.

“We understand that the company is working on optimising its debt structure, which could enhance earnings potential (approximately RM2 billion of debt sits at the company level)," it added.

At the time of writing, MCement was traded up six sen, or 1.52%, to RM4, giving it a market capitalisation of RM5.24 billion.