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More material this year?
Maintain NEUTRAL. We expect construction sector growth and fundamentals for the building materials sector to stay positive in 2010 and beyond. The growth should be sustainable given the implementation of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10th Malaysia Plan (10MP) in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010. Although the outlook for building materials appears positive, we continue to rate the building materials sector a NEUTRAL as we believe that the earlier positive newsflow on stimulus packages and the potential pick-up in construction activities have already been priced in for the biggest player in our universe, Lafarge Malayan Cement. Ann Joo remains our top pick in the building materials sector. However, for exposure to pump-priming, we prefer direct exposure to the contractors.
Weak demand but outperformed KLCI in 2009. Demand for building materials, especially construction steel and bulk cement, depends largely on domestic construction activities. Despite the hoopla over pump-priming, Malaysia’s construction sector did not pick up as strongly as expected last year. In fact, concerns over the progress of pump priming/mega jobs mounted as anticipated newsflow failed to materialise. Nevertheless, demand for building materials was cushioned by orders from the export markets, especially for steel where strong global prices and demand from major construction projects across the region, especially Vietnam and Singapore, helped to buffer the weak domestic demand. Overall, building material stocks under our coverage gained 67% on average in 2009 vs. a 45% gain for the KLCI.
Tenders/award in advanced stages. Although the delays in mega jobs were a disappointment for the building materials suppliers, we are not unduly worried as the outstanding mega jobs have reached advanced stages of tendering. We believe execution will be the key theme in 1H10.
Price uptick expected. Regional steel prices are expected to continue rising due to strong demand and the upswing in raw material prices. Given the favourable prospects for regional and local construction activities, we believe that the odds of a drastic drop in steel prices are low. On top of that, the expected pick-up in construction activities will spur domestic cement demand which shrank an estimated 7% last year. The lifting of cement price controls in 2008 has also given cement players better control of prices. The cement players expect demand to pick up by about 5% this year. This should lead to an uptick in cement prices from the current levels of about RM260/tonne, leading to further upside for margins and earnings.
Positive indicators to follow through. Prospects for the construction sector and, by definition, the building materials sector, are favourable, thanks to the rollout of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10MP in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010.
Review of 2009
Weak demand… Demand for building materials, especially construction steel and bulk cement, depends largely on domestic construction activities. Despite the hoopla over pump-priming, Malaysia’s construction sector did not pick up as strongly as expected last year. In fact, concerns over the progress of pump priming/mega jobs mounted as anticipated newsflow failed to materialise. This, along with the economic slowdown, affected cement manufacturers such as Lafarge and Tasek as well as long steel manufacturers such as Ann Joo. However, demand for building materials was cushioned by orders from the export markets, especially for steel where strong global prices and demand from major construction projects across the region, especially Vietnam and Singapore, helped to buffer the weak domestic demand.
…but outperformed KLCI in 2009. We have had a Trading Buy call on Lafarge since June 2008. In April 2009, we expanded our coverage of cement stocks to Tasek which we initiated with an Outperform recommendation. Following that, when Lafarge released its 1Q09 results in May, we upgraded the stock to Outperform on the basis of a potential demand pick-up from pump priming and stable selling prices. However, by end of Aug after it released its 2Q09 results, the share price had risen more than 30% against a 13% gain for the KLCI, prompting us to downgrade it to Neutral.
As for steel manufacturers such as Ann Joo, prospects were weak at the beginning of the year due to the high inventory and finished goods write-down at the end of 2008. But the company managed to return to the black in 2Q, supported by the increasing sales volumes, higher export orders and improvement in utilisation rates. We then upgraded the stock from Neutral to Trading Buy on the basis of a strong demand pickup from the export markets. Overall, the building material stocks under our coverage gained 67% on average in 2009, with the clear market outperformers being Ann Joo (137%) and Lafarge (59%). This compares with a 45% gain for the KLCI.
Economy improved towards end-2009. In 1H09, the Malaysian economy was mired in a recession for the first time since 1998 as real GDP growth retreated 5.1% yoy on an export slump, slowing consumption and falling investment. However, global economic conditions showed clearer signs of stabilisation and recovery in 2H as coordinated fiscal stimulus packages and monetary easing around the globe took hold. 3Q09 GDP data improved to a smaller contraction of 1.2%. (-3.9% in 2Q and - 6.2% in 1Q). Our economics team estimates that the economy returned to growth in 4Q09, taking full-year GDP to a contraction of 2.3% (4.6% in 2008).
Cement sector
Demand contracted. The performance of cement players is very much dependent on the performance of the Malaysian economy and the domestic construction industry. Due to the economic slowdown and lack of major construction activities, we gather that cement demand in Peninsular Malaysia contracted an estimated 7% to 13.5m tonnes last year (2008:14.5m tonnes).
But positive yoy growth in earnings. Nevertheless, since the lifting of cement price controls in June 2008, cement companies have enjoyed a better pricing mechanism, which resulted in an improvement in earnings, especially for 1H09 relative to 1H08. We estimate that cement selling price averaged RM265/tonne last year even though we suspect that rebates were higher towards the end of the year due to weak demand. To help sustain earnings and maintain their high utilisation rates, the cement companies exported their products but at much lower selling prices averaging US$40/tonne, resulting in lower margins. On average, cement manufacturers exported about 40% of their production in 2009.
Steel sector
Demand buffered by exports. Unlike cement, steel demand was buffered by the export markets, particularly from countries in the region such as Vietnam and Singapore. Exports made up on average 40-50% of steelmakers’ production compared to 20-30% in previous years. Regional steel prices also continued to recover on the back of growing demand in China. However, due to muted demand in the domestic market, selling prices for steel bars averaged about RM1,900/tonne throughout the year (2008:RM2,250/tonne).
Further liberalisation of steel. On 17 June 2009, the Ministry of International Trade and Industry (MITI) announced further liberalisation of the steel sector. The policy review included the granting of steel manufacturing licences without restrictions, lower import duty for long and flat products, import duty exemption for steel traders and the implementation of mandatory standards. The new policy did not have any major impact on construction steel manufacturers as the segment had been liberalised in 2008. Nevertheless, the government’s move is viewed as providing a fairer and more competitive environment for both the steelmakers and steel users in the longer term. Local steel players now enjoy less protection and have to compete with the international players in terms of product variety and pricing.
Upgraded the sector in October. Long steel manufacturers were awash in red ink in 1H09 though they reduced their losses in 2Q. Ann Joo was the only long steel manufacturer to return to the black during the quarter while the rest (Kinsteel, Lion Industries, Masteel and Southern Industries) only managed to report profits in 3Q. This leads us to believe that most steel manufacturers used up their high-priced scrap inventories by the first half of the year. Taking into consideration the recovering demand, lower losses reported for 1H09, the improving macro environment and higher production utilisation, we upgraded the steel sector from Neutral to Trading Buy in October last year.
Demand slowdown towards the year end. Year-end seasonal activities usually translate into lower domestic demand for steel. In addition, steel prices saw some correction in Oct and Nov, in tandem with the fall in prices in China as inventory levels in that country hit record levels. We gathered that this prompted some manufacturers to hold back exports to 1Q10.
Outlook
Tenders/award in advanced stages. Although the delays in the progress of mega jobs were a disappointment to building materials suppliers, we are not unduly worried as the outstanding mega jobs have reached advanced stages of tendering. We believe execution will be the key theme in 1H10. Our construction analyst expects the implementation of key projects under the government’s pump-priming initiative to regain momentum in 2010 as they have advanced to various stages of tender/award. Although the sector will continue to benefit from the rollout of selected smaller infrastructure/construction projects under the government stimulus packages announced in Nov 08 and Mar 09, the spotlight will be on the progress of three largescale projects (i) RM2bn new LCCT terminal, (ii) RM7bn LRT upgrade/extension and (iii) RM8.8bn interstate water transfer scheme (IWTS).
Economy in recovery mode. The Malaysian economy is gradually coming out of a deep recession as clearer signs of recovery started emerging in 2H09. Several factors are behind the revival of the economy – a gradual turn for exports, uptick in manufacturing output and the government’s fiscal boost. Our economics team expects the Malaysian economy to recover 3.5% in 2010 and 5.5% in 2011 after shrinking an estimated 2.3% in 2009. On top of that, it expects the construction sector to sustain a growth rate of 4.2% in 2010 (5.4% in 2009), reflecting ongoing implementation of projects under the two stimulus packages (Figure 7). As at 15 Jan 2010, projects worth RM3.6bn were at various stages of implementation while RM12.9bn had been completed and paid out to contractors (Figure 8). The completed projects under the stimulus packages
Steel price on the uptrend. Regional steel prices are expected to continue rising due to strong demand and the upswing in raw material prices. As of 26 Jan this year, billets were trading at US$502.50/tonne (6% increase YTD) while steel bars are trading at around US$530/tonne (3% increase YTD). The price upswing is largely supported by an increase in scrap and iron ore prices stemming from rising demand from infrastructure projects in China. On the local front, Malaysia’s domestic steel bar prices have risen to around RM2,150/tonne from RM1,850/tonne in Dec due to restocking ahead of the anticipated revival of strong demand. Given the positive outlook for regional and local construction activities, we believe that the odds of a drastic drop in steel prices are low.
Potential uptick in cement prices. Moreover, the expected pick-up in construction activities will lead to an increase in domestic cement demand. The lifting of cement price controls in 2008 has also given cement players better control of prices. The cement players expect demand to pick up by about 5% this year. This should lead to an uptick in cement prices from the current levels of about RM260/tonne, implying further upside for margins and earnings.
Positive indicators to follow through. Overall, we expect construction sector growth and fundamentals for the building materials sector to stay positive in 2010 and beyond. The growth should be sustainable given the implementation of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10th Malaysia Plan (10MP) in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010.
Small chance of further delays. Further delays are a major risk for the sector. However, we think the chances are small given timing issues and backing from the government. The launch of the National Key Result Areas (NKRA) initiative in Dec 09 highlighted public transportation as one of the crucial KRAs to kick off in 2010. The government targets public transport utilisation in the Klang Valley to rise from 6% currently to about 25% in the next 5-10 years. For this to be realised, the muchanticipated RM7bn LRT upgrade/extension in Klang Valley needs to be rolled out. The RM25bn new LRT line is likely to make progress in 2011 and could be one of the focus areas in the 10MP.
Companies’ strategies for 2010
Ann Joo targets to be the regional integrated steel player. Ann Joo is hopeful that the pump-priming activities across the region will continue to revitalise demand for long steel products. The company expects the commencement of mega projects in 2010 to lead to a shortage of steel bars when the projects go into full swing. On top of that, Ann Joo’s blast furnace project is on track for completion in 1H10, raising its annual rated capacity from 680,000 mt to 1.1m mt and helping it towards its goal of becoming a major integrated steel player in the region.
Continuous improvement for Lafarge. For 2010, Lafarge will continue its previous year’s strategy of focusing on the domestic market. The local market takes up about 70% of its total output. On top of that, the company is striving to improve its production efficiency, product quality and services in order to maintain its position as the dominant player in the domestic cement industry.
Tasek targets more supply contracts. Tasek’s financial position is strong, with little bank debt and a significant cash hoard of RM332m as of Sep 09. For 2010, the company targets to remove bottlenecks within its production process and effectively employ the latest information technology to monitor its entire production process which will improve productivity and also reduce cost and wastage. Besides that, the company aims to secure more long-term large supply contracts for its cement and ready-mixed concrete business.
Valuation and recommendation
Although the outlook for building materials is favourable, we remain NEUTRAL on the building materials sector as we believe that the earlier positive newsflow on stimulus packages and the potential pick-up in construction activities have already been priced in for the biggest player in our universe, Lafarge Malayan Cement. Ann Joo remains our top pick in the building materials sector as we are more positive on the steel industry given the clearer signs of recovery of export markets and strong global prices. However, for exposure to pump-priming, we prefer direct exposure to the contractors.
Ann Joo Resources (AJR MK, Trading Buy)
We maintain our Trading Buy recommendation on Ann Joo given that the company will benefit from government pump-priming activities across the region as well as the potential increase in domestic demand from the kick-off of mega construction jobs in this year. We think that demand for Ann Joo’s products will pick up and possibly even gain momentum in 2H. Our target price remains at RM3.55, still pegged to 12.8x P/E, a 15% discount to our target market P/E of 15x.
Ann Joo will be releasing its 4QFY09 results sometime at the end of next month. Following the steel price correction in China last year, regional billet prices weakened from September until end of November. Billet prices went from US$505/tonne to as low as US$455/tonne in Nov. Judging from the weaker steel prices and soft domestic demand, we estimate that the company’s sales for the quarter may have dropped qoq. On top of that, given the weak regional prices, we think that the company may have held back its exports for a rise in prices which only occurred towards the end of 2009. Taking all this into account, we believe that Ann Joo’s earnings will be lower qoq (3Q: RM45.5m) and full-year earnings are likely to miss our forecast of RM55m which assumes better sales volume and higher prices in 4Q.
Lafarge Malayan Cement (LMC MK, Neutral)
We remain Neutral on Lafarge as we think that the share price has already priced in the positive newsflow on construction activities and stimulus packages. We also retain our target price of RM6.96, which we continue to base on a blend of our target market P/E of 15x and a P/BV of 1.1x.
Tasek Corporation (TC MK, Outperform)
Tasek, the fourth largest cement producer in the country, was a laggard among the building materials stocks last year. With a cash hoard of RM332m as at Sep 09, it is in an excellent position to capitalise on M&A opportunities in the region. We maintain our Outperform rating in view of the potential strong pick-up in construction activities in 2010. Our target price remains at RM5.00, still based on a blend of 12x P/E and 0.8x P/BV. These target valuations are a discount to Lafarge’s 15x target P/E and 1.1 P/BV. Potential re-rating catalysts include stronger demand from pump-priming which could boost sales and selling prices.
Maintain NEUTRAL. We expect construction sector growth and fundamentals for the building materials sector to stay positive in 2010 and beyond. The growth should be sustainable given the implementation of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10th Malaysia Plan (10MP) in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010. Although the outlook for building materials appears positive, we continue to rate the building materials sector a NEUTRAL as we believe that the earlier positive newsflow on stimulus packages and the potential pick-up in construction activities have already been priced in for the biggest player in our universe, Lafarge Malayan Cement. Ann Joo remains our top pick in the building materials sector. However, for exposure to pump-priming, we prefer direct exposure to the contractors.
Weak demand but outperformed KLCI in 2009. Demand for building materials, especially construction steel and bulk cement, depends largely on domestic construction activities. Despite the hoopla over pump-priming, Malaysia’s construction sector did not pick up as strongly as expected last year. In fact, concerns over the progress of pump priming/mega jobs mounted as anticipated newsflow failed to materialise. Nevertheless, demand for building materials was cushioned by orders from the export markets, especially for steel where strong global prices and demand from major construction projects across the region, especially Vietnam and Singapore, helped to buffer the weak domestic demand. Overall, building material stocks under our coverage gained 67% on average in 2009 vs. a 45% gain for the KLCI.
Tenders/award in advanced stages. Although the delays in mega jobs were a disappointment for the building materials suppliers, we are not unduly worried as the outstanding mega jobs have reached advanced stages of tendering. We believe execution will be the key theme in 1H10.
Price uptick expected. Regional steel prices are expected to continue rising due to strong demand and the upswing in raw material prices. Given the favourable prospects for regional and local construction activities, we believe that the odds of a drastic drop in steel prices are low. On top of that, the expected pick-up in construction activities will spur domestic cement demand which shrank an estimated 7% last year. The lifting of cement price controls in 2008 has also given cement players better control of prices. The cement players expect demand to pick up by about 5% this year. This should lead to an uptick in cement prices from the current levels of about RM260/tonne, leading to further upside for margins and earnings.
Positive indicators to follow through. Prospects for the construction sector and, by definition, the building materials sector, are favourable, thanks to the rollout of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10MP in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010.
Review of 2009
Weak demand… Demand for building materials, especially construction steel and bulk cement, depends largely on domestic construction activities. Despite the hoopla over pump-priming, Malaysia’s construction sector did not pick up as strongly as expected last year. In fact, concerns over the progress of pump priming/mega jobs mounted as anticipated newsflow failed to materialise. This, along with the economic slowdown, affected cement manufacturers such as Lafarge and Tasek as well as long steel manufacturers such as Ann Joo. However, demand for building materials was cushioned by orders from the export markets, especially for steel where strong global prices and demand from major construction projects across the region, especially Vietnam and Singapore, helped to buffer the weak domestic demand.
…but outperformed KLCI in 2009. We have had a Trading Buy call on Lafarge since June 2008. In April 2009, we expanded our coverage of cement stocks to Tasek which we initiated with an Outperform recommendation. Following that, when Lafarge released its 1Q09 results in May, we upgraded the stock to Outperform on the basis of a potential demand pick-up from pump priming and stable selling prices. However, by end of Aug after it released its 2Q09 results, the share price had risen more than 30% against a 13% gain for the KLCI, prompting us to downgrade it to Neutral.
As for steel manufacturers such as Ann Joo, prospects were weak at the beginning of the year due to the high inventory and finished goods write-down at the end of 2008. But the company managed to return to the black in 2Q, supported by the increasing sales volumes, higher export orders and improvement in utilisation rates. We then upgraded the stock from Neutral to Trading Buy on the basis of a strong demand pickup from the export markets. Overall, the building material stocks under our coverage gained 67% on average in 2009, with the clear market outperformers being Ann Joo (137%) and Lafarge (59%). This compares with a 45% gain for the KLCI.
Economy improved towards end-2009. In 1H09, the Malaysian economy was mired in a recession for the first time since 1998 as real GDP growth retreated 5.1% yoy on an export slump, slowing consumption and falling investment. However, global economic conditions showed clearer signs of stabilisation and recovery in 2H as coordinated fiscal stimulus packages and monetary easing around the globe took hold. 3Q09 GDP data improved to a smaller contraction of 1.2%. (-3.9% in 2Q and - 6.2% in 1Q). Our economics team estimates that the economy returned to growth in 4Q09, taking full-year GDP to a contraction of 2.3% (4.6% in 2008).
Cement sector
Demand contracted. The performance of cement players is very much dependent on the performance of the Malaysian economy and the domestic construction industry. Due to the economic slowdown and lack of major construction activities, we gather that cement demand in Peninsular Malaysia contracted an estimated 7% to 13.5m tonnes last year (2008:14.5m tonnes).
But positive yoy growth in earnings. Nevertheless, since the lifting of cement price controls in June 2008, cement companies have enjoyed a better pricing mechanism, which resulted in an improvement in earnings, especially for 1H09 relative to 1H08. We estimate that cement selling price averaged RM265/tonne last year even though we suspect that rebates were higher towards the end of the year due to weak demand. To help sustain earnings and maintain their high utilisation rates, the cement companies exported their products but at much lower selling prices averaging US$40/tonne, resulting in lower margins. On average, cement manufacturers exported about 40% of their production in 2009.
Steel sector
Demand buffered by exports. Unlike cement, steel demand was buffered by the export markets, particularly from countries in the region such as Vietnam and Singapore. Exports made up on average 40-50% of steelmakers’ production compared to 20-30% in previous years. Regional steel prices also continued to recover on the back of growing demand in China. However, due to muted demand in the domestic market, selling prices for steel bars averaged about RM1,900/tonne throughout the year (2008:RM2,250/tonne).
Further liberalisation of steel. On 17 June 2009, the Ministry of International Trade and Industry (MITI) announced further liberalisation of the steel sector. The policy review included the granting of steel manufacturing licences without restrictions, lower import duty for long and flat products, import duty exemption for steel traders and the implementation of mandatory standards. The new policy did not have any major impact on construction steel manufacturers as the segment had been liberalised in 2008. Nevertheless, the government’s move is viewed as providing a fairer and more competitive environment for both the steelmakers and steel users in the longer term. Local steel players now enjoy less protection and have to compete with the international players in terms of product variety and pricing.
Upgraded the sector in October. Long steel manufacturers were awash in red ink in 1H09 though they reduced their losses in 2Q. Ann Joo was the only long steel manufacturer to return to the black during the quarter while the rest (Kinsteel, Lion Industries, Masteel and Southern Industries) only managed to report profits in 3Q. This leads us to believe that most steel manufacturers used up their high-priced scrap inventories by the first half of the year. Taking into consideration the recovering demand, lower losses reported for 1H09, the improving macro environment and higher production utilisation, we upgraded the steel sector from Neutral to Trading Buy in October last year.
Demand slowdown towards the year end. Year-end seasonal activities usually translate into lower domestic demand for steel. In addition, steel prices saw some correction in Oct and Nov, in tandem with the fall in prices in China as inventory levels in that country hit record levels. We gathered that this prompted some manufacturers to hold back exports to 1Q10.
Outlook
Tenders/award in advanced stages. Although the delays in the progress of mega jobs were a disappointment to building materials suppliers, we are not unduly worried as the outstanding mega jobs have reached advanced stages of tendering. We believe execution will be the key theme in 1H10. Our construction analyst expects the implementation of key projects under the government’s pump-priming initiative to regain momentum in 2010 as they have advanced to various stages of tender/award. Although the sector will continue to benefit from the rollout of selected smaller infrastructure/construction projects under the government stimulus packages announced in Nov 08 and Mar 09, the spotlight will be on the progress of three largescale projects (i) RM2bn new LCCT terminal, (ii) RM7bn LRT upgrade/extension and (iii) RM8.8bn interstate water transfer scheme (IWTS).
Economy in recovery mode. The Malaysian economy is gradually coming out of a deep recession as clearer signs of recovery started emerging in 2H09. Several factors are behind the revival of the economy – a gradual turn for exports, uptick in manufacturing output and the government’s fiscal boost. Our economics team expects the Malaysian economy to recover 3.5% in 2010 and 5.5% in 2011 after shrinking an estimated 2.3% in 2009. On top of that, it expects the construction sector to sustain a growth rate of 4.2% in 2010 (5.4% in 2009), reflecting ongoing implementation of projects under the two stimulus packages (Figure 7). As at 15 Jan 2010, projects worth RM3.6bn were at various stages of implementation while RM12.9bn had been completed and paid out to contractors (Figure 8). The completed projects under the stimulus packages
Steel price on the uptrend. Regional steel prices are expected to continue rising due to strong demand and the upswing in raw material prices. As of 26 Jan this year, billets were trading at US$502.50/tonne (6% increase YTD) while steel bars are trading at around US$530/tonne (3% increase YTD). The price upswing is largely supported by an increase in scrap and iron ore prices stemming from rising demand from infrastructure projects in China. On the local front, Malaysia’s domestic steel bar prices have risen to around RM2,150/tonne from RM1,850/tonne in Dec due to restocking ahead of the anticipated revival of strong demand. Given the positive outlook for regional and local construction activities, we believe that the odds of a drastic drop in steel prices are low.
Potential uptick in cement prices. Moreover, the expected pick-up in construction activities will lead to an increase in domestic cement demand. The lifting of cement price controls in 2008 has also given cement players better control of prices. The cement players expect demand to pick up by about 5% this year. This should lead to an uptick in cement prices from the current levels of about RM260/tonne, implying further upside for margins and earnings.
Positive indicators to follow through. Overall, we expect construction sector growth and fundamentals for the building materials sector to stay positive in 2010 and beyond. The growth should be sustainable given the implementation of larger government and private sector jobs this year, and increased construction on the property side. The tabling of the 10th Malaysia Plan (10MP) in June 2010 should provide more visibility on infrastructure and construction spending beyond 2010.
Small chance of further delays. Further delays are a major risk for the sector. However, we think the chances are small given timing issues and backing from the government. The launch of the National Key Result Areas (NKRA) initiative in Dec 09 highlighted public transportation as one of the crucial KRAs to kick off in 2010. The government targets public transport utilisation in the Klang Valley to rise from 6% currently to about 25% in the next 5-10 years. For this to be realised, the muchanticipated RM7bn LRT upgrade/extension in Klang Valley needs to be rolled out. The RM25bn new LRT line is likely to make progress in 2011 and could be one of the focus areas in the 10MP.
Companies’ strategies for 2010
Ann Joo targets to be the regional integrated steel player. Ann Joo is hopeful that the pump-priming activities across the region will continue to revitalise demand for long steel products. The company expects the commencement of mega projects in 2010 to lead to a shortage of steel bars when the projects go into full swing. On top of that, Ann Joo’s blast furnace project is on track for completion in 1H10, raising its annual rated capacity from 680,000 mt to 1.1m mt and helping it towards its goal of becoming a major integrated steel player in the region.
Continuous improvement for Lafarge. For 2010, Lafarge will continue its previous year’s strategy of focusing on the domestic market. The local market takes up about 70% of its total output. On top of that, the company is striving to improve its production efficiency, product quality and services in order to maintain its position as the dominant player in the domestic cement industry.
Tasek targets more supply contracts. Tasek’s financial position is strong, with little bank debt and a significant cash hoard of RM332m as of Sep 09. For 2010, the company targets to remove bottlenecks within its production process and effectively employ the latest information technology to monitor its entire production process which will improve productivity and also reduce cost and wastage. Besides that, the company aims to secure more long-term large supply contracts for its cement and ready-mixed concrete business.
Valuation and recommendation
Although the outlook for building materials is favourable, we remain NEUTRAL on the building materials sector as we believe that the earlier positive newsflow on stimulus packages and the potential pick-up in construction activities have already been priced in for the biggest player in our universe, Lafarge Malayan Cement. Ann Joo remains our top pick in the building materials sector as we are more positive on the steel industry given the clearer signs of recovery of export markets and strong global prices. However, for exposure to pump-priming, we prefer direct exposure to the contractors.
Ann Joo Resources (AJR MK, Trading Buy)
We maintain our Trading Buy recommendation on Ann Joo given that the company will benefit from government pump-priming activities across the region as well as the potential increase in domestic demand from the kick-off of mega construction jobs in this year. We think that demand for Ann Joo’s products will pick up and possibly even gain momentum in 2H. Our target price remains at RM3.55, still pegged to 12.8x P/E, a 15% discount to our target market P/E of 15x.
Ann Joo will be releasing its 4QFY09 results sometime at the end of next month. Following the steel price correction in China last year, regional billet prices weakened from September until end of November. Billet prices went from US$505/tonne to as low as US$455/tonne in Nov. Judging from the weaker steel prices and soft domestic demand, we estimate that the company’s sales for the quarter may have dropped qoq. On top of that, given the weak regional prices, we think that the company may have held back its exports for a rise in prices which only occurred towards the end of 2009. Taking all this into account, we believe that Ann Joo’s earnings will be lower qoq (3Q: RM45.5m) and full-year earnings are likely to miss our forecast of RM55m which assumes better sales volume and higher prices in 4Q.
Lafarge Malayan Cement (LMC MK, Neutral)
We remain Neutral on Lafarge as we think that the share price has already priced in the positive newsflow on construction activities and stimulus packages. We also retain our target price of RM6.96, which we continue to base on a blend of our target market P/E of 15x and a P/BV of 1.1x.
Tasek Corporation (TC MK, Outperform)
Tasek, the fourth largest cement producer in the country, was a laggard among the building materials stocks last year. With a cash hoard of RM332m as at Sep 09, it is in an excellent position to capitalise on M&A opportunities in the region. We maintain our Outperform rating in view of the potential strong pick-up in construction activities in 2010. Our target price remains at RM5.00, still based on a blend of 12x P/E and 0.8x P/BV. These target valuations are a discount to Lafarge’s 15x target P/E and 1.1 P/BV. Potential re-rating catalysts include stronger demand from pump-priming which could boost sales and selling prices.
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