The Edge (Malaysia), 20 June 2005
YTL Cement Bhd transformed itself from a ready-mixed concrete producer to being the second-largest cement player in the country last year, after acquiring Pahang Cement and PerakHanjoong Simen Sdn Bhd. These buys not only plumped up earnings, they set the company in a position for growth as well.
"These acquisitions combined will drive a conservative three-year EPS [earnings per share] CAGR [compounded annual growth rate] of 11%," says Andrea Koh of ECM Libra in her March report.
Taking over ailing cement plants is consistent with that classic YTL group strategy of buying assets when they're cheap. And though it may seem a brave step to take when cement prices are weak, it also means that the company is poised to benefit when conditions pick up.
This forward-looking approach is perhaps one of the reasons YTL Cement has shown good shareholder returns over the years.
"Growth will come from Malaysian demand post this consolidation phase. Malaysian consumption of cement per capita is still very low in global terms. If our economy grows 7% compounded till 2020, then we still see explosive growth in the coming years. Also regionally, Asia will be a huge consumer of cement in the coming years, and we will be strategically prepared for this trend," explains managing director Tan Sri Francis Yeoh, in a written reply.
Over the last five years, YTL Cement has paid a total of 35 sen a share in dividends, and quadrupled its share price. This was achieved in spite of the country's sluggish economic conditions, which slowed down construction activities.
What was behind this commendable performance?
"The driving factors are plant efficiency – investing in state-of-the-art plants that enhance productivity and quality of finished products – reduce the down-time and maintain schedules. We also maintain very good relationships with our distributors and they provide us invaluable feedback to improve our service," says Yeoh.
This strategy has also enabled YTL to increase its earnings at a time when many cement players are feeling the pinch of slowing construction, excess capacity and low prices. For the financial year ended June 30, 2004, YTL earned RM85.1 million in net profit, a 27.2% improvement over the previous year.
But can YTL sustain this level of earnings and dividend payouts over the next five years? Yes, says Yeoh.
"We are confident that this level of dividends can be sustained over the medium and long term. We are hoping to increase this level of dividend to a higher level but it will be balanced against opportunities for growth. Although the Malaysian cement industry is in a consolidating phase, from a regional point of view, for example in Indonesia, there are still huge prospects for expansion," he says.
Of course, it will not be an easy ride. The local cement industry is still suffering the effects of a price war, which has affected even industry leader LaFarge Malayan Cement Bhd. Last year, LaFarge earned RM82.8 million in net profit, a 30.4% fall from the RM119 million it earned the previous year. This was despite a slight increase in revenue, from RM1.75 billion in 2003 to RM1.76 billion in 2004.
Meanwhile, YTL Cement's earnings have shown more resilience. For the first nine months of FY 2005, net profits stood at RM58.4 million, a slight dip from the RM60.6 million earned for the same period last year. Though margins have narrowed considerably – profit came in lower despite a revenue surge, from RM362.2 million last year to RM478.3 million this year.
Some industry analysts say YTL Cement doesn't need to participate in a price war because demand for its cement comes from companies within the YTL group, which are involved in property development and power generation in Malaysia. In any case, Yeoh believes the price slashes will not continue for long. In the meantime, he is gearing up for the competition.
"We will further improve on our plant efficiencies and distribution network relationship. We know that while customer acquisition is important, customer retention is even more important," he observes.
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