A BENEFICIARY of the construction and property development sectors, the Malaysian cement industry – a subsector if the building material sector – is perceived to have turned the corner following the sector consolidation in 2019.
Nevertheless, AmResearch caveated that beyond the COVID-19 pandemic and upon recovery of the two key cement-consuming industries – notably the construction and property sectors – a demand-fuelled re-rating is imminent although visibility is still lacking at this juncture.
“We believe a more rational competitive landscape, driven by production restraints following the consolidation, has at least solved half of the problem (ie supply) which should at least lift the implied value of clinker capacity,” observed analyst Jeremie Yap in a recent cement sector update.
AmResearch further projected the average net cement selling price of cement in Peninsular Malaysia to rise marginally by 2% to RM240/tonne in 2021F (vs an estimated RM235/tonne in 2020).
The research house regarded the conditions are conducive for further price hikes with:
- The emergence of a price leader in the market (controlling close to 60% of total industry clinker capacity) following YTL Cement Bhd’s acquisition of Malayan Cement Bhd in 2019; and
- The easing of supply pressure after Malayan Cement and Cement Industries of Malaysia Bhd (CIMA) put one clinker plant each offline, effectively removing annual clinker capacity totalling 2 million tonnes, an equivalent to 8% of industry clinker capacity from the market.
“With the price hikes, we expect players to return to the black in a more decisive manner in the coming quarters,” opined AmResearch. “They already broke even over the last three quarters after persistent losses in recent years.”
For 2021F, the research house projected cement consumption in Peninsular Malaysia to be flat at 4.2mil tonnes.
The normalisation of construction activities (for both public infrastructure and property projects) during the early part of the year was short-lived.
Following the introduction of a new nationwide lockdown from June 1, construction activities of critical public infrastructure projects have been capped at 60% of the normal level while works on most property projects have been suspended entirely.
“However, we believe this will be temporary as it is our base-case assumption that Malaysia shall reach herd immunity against COVID-19 before the year is out,” noted AmResearch. “The national vaccination programme appears to have gathered significant momentum after the initial hiccups.”
All-in-all, the research house is “overweight” with the cement sector but would downgrade the sector to “neutral” or “underweight” if the much anticipated recovery in both local and global economies fails to materialise.
Its top pick for the sector is Malayan Cement (“buy”; fair value RM3.34) which current share price is effectively valuing the company at a 20% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120/tonne).
“We believe this is unjustified given that it is turning around with rational competition among players after the recent industry consolidation,” reckoned AmResearch. “We believe our valuation for Malayan Cement, based on a 10% discount to replacement cost, is more appropriate.” – Aug 2, 2021
