Feb 1, 2013

Malaysia Building Materials - A Waiting Game

The cement sector significantly outperformed the market in the past year, gaining 63.3% versus a 7.2% gain for the FBMKLCI index. Cement stocks rallied ahead of the 6% price hike effective 1 Aug 2012; Lafarge Malayan Cement (LMC), the country’s largest cement manufacturer with 40% market share, raised its gross cement ASP by MYR20/mt to MYR340/mt – thefirst increase since Mar 2011. The increase was to compensate for the 7% electricity tariff hike and roll-back of diesel subsidies over the past year as fuel and utilities account for ~23% of total cost.

Malaysian Building Materials Sector (click to enlarge):

building materials

That said, we believe LMC’s earnings peaked in 3Q12 and will come off  slightly in subsequent quarters due to pricing pressure from Hume’s new 1.5m mt plant. We have, accordingly, cut our FY12-14 EPS by 8-9% on lower ASPs (-2%) and sales volume(-2%) assumptions, and downgrade LMC from Buy to Hold with a lower TP of MYR9.60 based on an unchanged target PER of 21x FY14 EPS as its earnings are cushioned by low coal prices and the prevailing strong demand for cement as large-scale ETP and other land redevelopment projects are progressively rolled-out. LMC turned debt free in 3Q12 with a cash position of ~28sen/shr; given its high cash generation, we see the prospect of a capital repayment and/or special dividend in 2H13. Elsewhere, Tasek Corp continues to outperform amid speculation of a potential privatisation and/or other M&A activity.

On the flip side, its steel cousins had a horrible 2012, with our basket of five steel stocks down 34.4% in the past year. The sharp fall in ASPs of benchmark iron ore and steel bars in China (which accounts for 48% of global steel production) as a result of severe overcapacity in steel production has resulted in rampant dumping of steel products into Malaysia and the region. Steel bar ASPs in China are about 16% below international prices and 22%below Malaysia’s. Global steel ASPs will likely decline and track closer to those of China given its dominance in the global steel sector; similarly, steel bar ASPs in Malaysia will also succumb to supply pressure from China, resulting in margin squeeze and, potentially, a recurrence of industry wide losses last seen in 2005 due to dumping from China.

We previously downgraded the steel sector to Underweight due to the volatility of earnings going forward as the fall in ASPs may see steel-makers writing down their inventories further. Given the bleak outlook for the steel sector, we maintain Ann Joo Resources (AJR) as a Sell with  a lower TP of MYR 1.05 (from MYR1.30 previously) while keeping Kinsteel as a Hold with a lower TP of MYR0.38 (from MYR0.40 previously) following their 3Q12 results

by MIB