Upward revision for cement stocks

Upward revision for cement stocks
Published: 04 June 2008

Shares in cement makers Lafarge Malayan Cement Bhd and Gopeng Bhd rallied yesterday following the announcement that the government is lifting the ceiling price on cement from tomorrow.

Lafarge jumped 20 sen to RM4.54 while Gopeng rose 13.5 sen to RM1.01 to finish among the day’s biggest gainers. Analysts expect cement counters to be re-rated upwards on an anticipated increase in earnings following the liberalisation of cement price.

Wee Kim Hong, M&A Securities head of research said the news bodes well for cement manufacturers as profit margins would improve significantly. “Companies which are operating below capacity would also have the incentive to increase production due to better selling prices, which would in turn improve their revenue,” Wee said.

However, he cautioned that these companies would still be affected by high production costs such as for coal.

Prime Minister Abdullah Ahmad Badawi Monday announced three immediate steps on the sale of two types of cement, including abolishing the ceiling price in the local market, to overcome the shortage of cement in the country. He said the government had to act because it had received many complaints on the supply of cement. Two other steps are that importers only need to pay an import duty of 10 per cent while importers in Sabah and Sarawak are exempted from getting import licences.

Abdullah said the types of cement involved were Ordinary Portland and hydraulic cement. He said the liberalisation of the sale of cement was in line with the government’s aim to ensure that the nation’s development proceeded smoothly besides ensuring that the marketing of cement would be more transparent and efficient.

He said the problems associated with the shortage had been due to the fact that demand and usage of cement in bags had risen compared with those in bulk form. Abdullah also said the price of cement on the world market was also higher than the fixed price locally. This problem had given a negative impact on the construction industry and could also affect the implementation of national development projects, he said.

Prior to this, the government had announced that the ceiling price of steel had been abolished since May 12 to overcome the shortage of steel among local contractors.

Kenny Yee, OSK Investment Bank Bhd research head,  was confident of an upward rating for cement players, but added that “we cannot be sure if price liberalisation translates into major earnings improvements.’’

Meanwhile, MIMB Investment Bank Bhd head of research Pong Teng Siew said, although there would an upward re-rating of cement stocks it might not be on a major scale as that for steel stocks following the liberalisation of steel price.

Master Builders Association of Malaysia president Patrick Wong said, lifting the ceiling price on cement would ease the shortage in cement supply but added that there was a need to clarify why import duty was fixed at 10 per cent. “Cement could only be imported regionally due to its short shelf life and under the Asean Free Trade Area, any goods imported within Asean is charged a flat import duty of five per cent,’’ he said.

Under the new structure, cement importers only have to pay a flat 10 per cent import duty for ordinary Portland cement and hydraulic cement, which currently attract duty of 50 per cent and 25 per cent respectively.