Friday, September 10, 2010

Cement stocks firming up on better 2H outlook

Cement players have seen share prices firming up despite their lacklustre first half results and flattish demand for cement. Nonetheless, the consensus is that there will be a pick-up in demand in the second half.

Lafarge Malayan Cement Bhd has seen its share price surging 20.8% year-to-date to close at RM7.55 yesterday, while YTL Cement Bhd rose 4.5% from a 52-week low of RM3.81 on May 26, to close at RM3.98 yesterday.

“It had been mostly a flattish year for cement players, with their exports hit largely by the exchange rate (stronger ringgit) and meanwhile domestic demand has not been picking up.

“Nonetheless, I think demand should improve and pick up in the second half of the year,” an analyst told The Edge Financial Daily. He forecasted a 5% year-on-year (y-o-y) increase in demand for cement this year.

Investors have continued to hold on to cement players, which have been rewarding shareholders with decent dividends.


A general view of the factory and product of Lafarge Roofing Sdn Bhd, a unit of Lafarge Malayan Cement
For 1HFY10 ended June 30, Lafarge had declared dividend of eight sen per RM1 share twice. If annualised, total dividend for FY10 could amount to 36 sen or a 4.2% yield. The company paid out 15 sen per RM1 share for
FY09.

Meanwhile, YTL Cement had declared a cumulative 26.2% dividend or 13.125 sen per 50 sen share for FY10 ended June 30. This works out to a yield of 3.3% based on YTL Cement’s closing price of RM3.98 yesterday.

For FY10 ended June 30, YTL Cement posted a net profit of RM266.9 million on the back of RM1.97 billion in revenue. Its net profit gained 11.5% y-o-y but revenue had declined 6.4%.

“Dividend payouts have been steady, which is why investors have been patient with cement stocks while waiting for projects to really take off next year. In the meantime, Lafarge should see a better second half despite the 1H results which were below our expectations,” she said.

For 1HFY10, Lafarge’s net profit dropped 30% to RM123.67 million from a year earlier on the back of RM1.14 billion in revenue, due to lower contributions from ready-mixed concrete operations, and certain non-recurring plant repair costs and expenses.

In a report dated Aug 26, Maybank maintained “hold” on Lafarge with a target price of RM6.40. It however expected Lafarge’s earnings to catch up for 2H10 on improved plant performance, falling coal cost and demand recovery.

“Domestic cement demand in 1H10 was flattish y-o-y and management is positive of a 2% to 6% full-year growth given the rollout of various public projects. Margins will continue to strengthen with coal cost trending down,” it said.

Both Lafarge and YTL Cement have RM198.8 million and RM922.65 million cash in hand respectively. Their borrowings stood at RM217.52 million and RM710.41 million. YTL Cement is currently sitting on a net cash position, while Lafarge has a net gearing of 0.6 times.

An analyst noted that these companies are sitting on a good pile of cash, given that their days of consolidation have passed.

Apart from Lafarge and YTL Cement, analysts have noted the good earnings posted by smaller cap cement players Tasek Corp Bhd and Gopeng Bhd.

“Tasek benefited when they offered rebates for their cement prices. The company should maintain its momentum for the second half of FY10, and post similar results to their first half,” the analyst said, adding that she has a “neutral” call on the counter.

Tasek saw its net profit increased 9.6% y-o-y to RM19.08 million in 1HFY10 on the back of RM139.84 million in revenue, due to lower cost of production and the revision of cement
prices.

Gopeng Bhd also saw its net profit gaining 71% y-o-y to RM27.43 million for 1HFY10 from RM16.1 million a year earlier, due to higher share of profit from associate, Perak-Hanjoong Simen Sdn Bhd, and from the sale of
land.

Tasek closed 3.1% or 20 sen higher at RM6.75 yesterday while Gopeng fell one sen to RM1.12. Both stocks have gained 16.2% and 60%, respectively, year-to-date.

This article appeared in The Edge Financial Daily, September 9, 2010.

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