Earnings Boost For Cement Firms


28 December 2006

PETALING JAYA: Cement industry players look set for an earnings boost and an upward re-rating following the 10% increase in the ceiling price of cement and the anticipated rise in demand from mega projects to be implemented under the Ninth Malaysia Plan (9MP) next year.


Analysts concurred that the new ceiling price, which varied according to the different regions in the peninsula and east Malaysia, were long overdue. The previous price of RM198 per tonne had been in force for 11 years.


"The timing is good given the anticipated construction boom next year, whereby demand for construction and building materials is set to escalate," said an analyst with a local brokerage. This development augurs well for major cement players like LaFarge Malayan Cement Bhd, YTL Cement Bhd, Cement Industries of Malaysia Bhd (Cima) and Tasek Corp Bhd.


Brokerages have recently re-rated upwards the outlook for the cement sector, which has seen earnings drop some 70% from the peak of the 1999-2000 price war and another one in the first half last year. The sector also took a beating when the construction sector contracted for in 2004 and 2005.


The analyst expects cement companies to gradually switch from their dependence on lower-margin export sales to beef up their previously lacklustre domestic sales.


HLG Securities is recommending a "buy" on LaFarge, the country's largest cement producer with an estimated 43% market share. "LaFarge is in good stead to benefit from the 9MP projects, which can enhance its earnings by increasing domestic sales," the brokerage said. It said that in the absence of immediate expansion plans and a build-up in cash hoard, there could be improved net profit and dividend yield for LaFarge.


A Singapore-based brokerage singled out YTL Cement as one of the lowest production cost operators among its peers and which continued to remain profitable even during the price wars. "During the hard times, YTL Cement was able to source for internal demand from its solid parent, YTL Group," its analyst said.


He said that as the group's plant in Pahang is the country's most efficient and the only one in the east coast, the company was expected to benefit from potential construction projects in Kelantan and Terengganu. The analyst said the group was confident of bagging the RM8bil Kuala Lumpur-Singapore bullet train project as well as secure construction projects worth at least RM1.6bil under the 9MP.


Standard & Poor's is maintaining a buy on Cima, the smallest among the country's top three cement players.
The research house said Cima made a remarkable turnaround in the third quarter ended Sept 30 after posting a loss last year.


"With no sign of a similar battle on the horizon, Cima will remain profitable in the fourth quarter ending Dec 31, although net profit will be flat due to the festive season," S&P said.


Cima was a potential beneficiary of Penang and Johor infrastructure play, being the only government-linked company in the cement sector, it added. Amid the bright picture for the sector, however, the key investment risks are execution and timing of the 9MP projects, companies' ability to divert production from export sales to domestic sales, a renewed price war and higher-than-expected increase in production costs.