Malayan Cement Berhad (KLSE:MCEMENT) and the Case for a 50% Undervaluation: A DCF-Driven Investment Opportunity

Malayan Cement Berhad (KLSE:MCEMENT) has long been a cornerstone of Malaysia’s construction materials sector, but recent financial disclosures and valuation metrics suggest the stock is trading at a significant discount to its intrinsic value. A discounted cash flow (DCF) analysis, incorporating the company’s robust free cash flow generation, prudent capital structure, and conservative growth assumptions, reveals a compelling case for a 50% undervaluation.

Free Cash Flow and Financial Performance

Malayan Cement Berhad’s 2024 annual report underscores its financial resilience, with free cash flow (FCF) reaching MYR 769.2 million as of June 30, 2025 [3]. This figure reflects a 7% year-over-year revenue increase to MYR 1,109.4 million for the quarter ended June 2025, alongside an 84% surge in profit before tax to MYR 265.2 million [4]. While net income dipped 9.53% sequentially to MYR 165.42 million in the most recent quarter [4], the company’s ability to generate consistent FCF—bolstered by a 14.85% net profit margin [6]—positions it as a cash flow generator in a cyclical industry.

WACC and Discount Rate Considerations

The weighted average cost of capital (WACC) for Malayan Cement Berhad is 8.96% as of September 3, 2025 [1]. This rate is derived from a cost of equity of 10.82% (using CAPM with a 4.04% risk-free rate, 1.13 beta, and 6% market premium) and a cost of debt of 5.79% (adjusted for a 31.59% tax rate) [1]. While the company’s return on invested capital (ROIC) of 8.38% [1] trails its WACC, the DCF model’s focus on future cash flow growth rather than current ROIC provides a more dynamic valuation framework.

Shares Outstanding and Equity Value

With 1.35 billion shares outstanding as of September 8, 2025 [5], the company’s equity value is a critical input for intrinsic value calculations. Analysts using a 2-stage FCF model estimate the present value of the 10-year cash flow at MYR 6.9 billion and the terminal value at MYR 9.1 billion, totaling an equity value of MYR 16 billion [1]. At the current stock price of RM5.91, this implies a 50% undervaluation relative to the projected fair value of RM11.81 [1].

Growth Projections and Terminal Value

Future FCF growth assumptions are pivotal to the DCF model. While the company’s historical 10-year FCF growth rate averaged 17% [3], near-term projections are more conservative. Analysts forecast a 7% compound annual growth rate (CAGR) for the next two years [4], followed by a terminal growth rate of 3.6%—aligned with the 10-year government bond yield [1]. These assumptions, combined with the 8.96% WACC, yield a DCF-derived intrinsic value per share of RM11.81, starkly contrasting with the current price of RM5.91 [1].

Risks and Counterarguments

Critics may highlight the company’s ROIC lagging its WACC and the recent 5% decline in net income over two years [2]. However, the DCF model’s sensitivity to growth assumptions allows for margin of safety: even if FCF growth slows to 1.8% annually for earnings and 5.4% for revenue [2], the intrinsic value remains above RM9.46 [5], still implying a 48% undervaluation. Additionally, the company’s debt-to-equity ratio of 37.9% [6] and strong liquidity position mitigate financial risk.

Conclusion: A DCF-Driven Buy Case

Malayan Cement Berhad’s combination of strong FCF generation, conservative capital structure, and favorable growth projections creates a compelling DCF-driven investment opportunity. At a 50% discount to intrinsic value, the stock offers a margin of safety for long-term investors willing to capitalize on market inefficiencies in the construction materials sector. As the company navigates macroeconomic headwinds and executes on its sustainability initiatives [1], the gap between intrinsic value and market price may narrow, rewarding patient investors.

Source:
[1] Malayan Cement Bhd (XKLS:3794) WACC %, [https://www.gurufocus.com/term/wacc/XKLS:3794]
[2] MCEMENT Stock Forecast - Malayan Cement Bhd, [https://www.alphaspread.com/security/klse/mcement/analyst-estimates]
[3] Free Cash Flow - Malayan Cement Bhd (KLSE:MCEMENT), [https://www.alphaspread.com/security/klse/mcement/financials/cash-flow-statement/free-cash-flow]
[4] Malayan Cement Berhad Reports Earnings Results for the..., [https://www.marketscreener.com/news/malayan-cement-berhad-reports-earnings-results-for-the-fourth-quarter-ended-june-30-2025-ce7c51d3d08ffe26]
[5] Malayan Cement Berhad Statistics - KLSE, [https://stockanalysis.com/quote/klse/MCEMENT/statistics/]
[6] Malayan Cement Berhad (KLSE:MCEMENT) - Stock Analysis, [https://simplywall.st/stocks/my/materials/klse-mcement/malayan-cement-berhad-shares]