The wait is over and things could finally be looking up for Malaysia’s cement sector.
About six months after the announcement of the Ninth Malaysia Plan (9MP), the Government has finally announced on Nov 2 that RM100bn worth of high-impact projects would be rolled out, largely to bolster economic growth and rural development.
As many of the projects fall under the infrastructure category, analysts say it will spike demand and lift margins for building materials players.
The construction and cement sector has, thus far, outperformed the Kuala Lumpur Composite Index this year
In the case of cement, the main beneficiaries of the 9MP will be the four listed players – Lafarge Malayan Cement Bhd, YTL Cement Bhd, Tasek Corp Bhd and Cement Industries of Malaysia Bhd (CIMA).
There is much room to grow in the infrastructure sector. An unexplored area is the building of concrete roads.
Master Builders Association Malaysia (MBAM) secretary-general Yap Yoke Keong said concrete road construction had been largely underdeveloped in the country.
Concrete roads, in theory, were also cheaper than asphalt, involved low maintenance and were more durable, he added.
However, while such opportunities abound, industry observers believe Malaysia lack sufficient resources to build concrete roads.
The South Johor Economic Region, a mega-9MP project, has also spurred much excitement in the cement industry.
“However, we’ll really see how much, and how well, it impacts the cement producers only next year,” an analyst from a local bank-banked research house told StarBiz.
Demand for cement from 9MP projects had been anticipated for a long time, and throughout the year, overall demand for cement and concrete had not slowed down, the analyst added.
It is with developments like this that investor confidence in cement stocks has improved. Share prices of the four listed cement producers have generally been on the uptrend since the middle of the year, and all four players have shown a marked improvement in financial performance.
Lafarge’s half-year cumulative net profit for the year ending Dec 31, 2006 rose 256.3% year-on-year to RM63.34mil.
YTL Cement, the second largest player, posted a 148.4% year-on-year climb in net profit to RM138.9mil for the same period.
Tasek Corp’s net profit for the first quarter ended Sept 30, 2006 rose 5.8% to RM7.4mil compared with the same period in 2005. CIMA returned to the black, with net profit rising 149.1% to RM22.22mil year-on-year for the first six months of the year.
UOB Kay Hian noted that overall, the construction and cement sector had, thus far, outperformed the Kuala Lumpur Composite Index this year.
It said cement companies, in particular, had “better visibility and lower execution risks and will benefit regardless of which contractor wins the project.”
It has a “buy” call on CIMA as its earnings are expected to grow 16.2% to RM50.2mil in financial year 2007 and 15.8% to RM58.1mil in financial year 2008. CIMA, with strategically located plants in Perlis and Negri Sembilan, is in a favourable position to benefit from 9MP projects.
In addition, the analyst believes that if the deal for French cement company Vicat Group to acquire 49% of CIMA’s assets goes through, the market share of the other cement players could be slightly affected.
“Having Vicat as a partner might give CIMA a new edge in negotiating for supply contracts,” he said.
AmResearch Sdn Bhd has also revised the country’s biggest cement player, Lafarge’s target price upwards.
Issues, however, still remain for the cement industry.
One is the status of cement’s ceiling price which has been stagnant at RM198 per tonne for the past 11 years. The inability to raise these prices has eroded the margins of cement players as costs have increased by about 30% due to inflation.
The recent increase in electricity tariffs had also continued to add pressure to margins for all players, an analyst said.
In May 2005, the Cement & Concrete Association of Malaysia submitted a request to the Domestic Trade and Consumer Affairs Ministry to raise the ceiling price of cement. While talks are believed to be ongoing, there is still no resolution.
But while the construction and building materials industries are expected to perk up, some parties have also expressed concern over 9MP-related issues, like late payments.
MBAM’s Yap said: “Clients under contractual obligation are required to pay contractors within the stipulated period, when services are rendered and certificates are issued. Similarly, contractors have to pay sub-contractors after receiving payment from clients.”
MBAM also hopes that there will be a proper break down of projects to smaller sizes, to ensure that more contractors are able to bid for projects that are rolled out.