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YTL Cement on firm foundation

   

The Edge (Top 100 companies), May 15, 2006

BY LIM AI LEEN

Resilient earnings and high dividends have kept YTL Cement Bhd shareholders smiling in the last five years, in the face of plunging cement prices and industry-wide losses. Between 2001 and 2005, YTL Cement paid 45 sen in dividends and saw its share price more than quadruple in value.

Plant efficiency - YTL Cement is the lowest cost cement producer in the country - and demand from its sister construction and property development companies, say analysts, are the main reasons for the company's steady showing.

UOB-Kay Hian, in its February research report, notes that YTL Cement outperforms its listed peers with an average return on equity of 18.8% over the last five years, compared against LaFarge Malayan Cement's 2.7% and Cement Industry of Malaysia's (Cima) 2%.

For its financial year ended June 30, 2005, YTL Cement made RM68.6 million in net profits, a 19.4% fall from the previous year. LaFarge made RM29.8 million in net profit for 2005, less than half the RM82.8 million it earned in 2004. Meanwhile, Cima showed net losses of RM21.7 million last year.

YTL Cement also seized its opportunity to grow cheaply during the industry's troubled times. It scooped up loss-making Pahang Cement and Perak-Hanjoong Simen over the last two years and became the second-largest cement producer in the country. These buys place it in a stronger position to gain from the sector's recovery.

Government spending, say analysts, is set to revive the construction sector, and cement players along with it.

"We expect YTL Cement's three-year earnings CAGR [compound annual growth rate] at 34.6%, on the back of recovery in cement prices, rising demand and cost savings from rationalisation of operations after... [acquiring] Perak-Hanjoong in FY2005," states UOB-Kay Hian.

The research house pegs YTL's net profit for FY2006 at RM100 million. Results for the first six months of FY2006 show the company is well on track - net profits came in at RM72.6 million.

Cement prices are also on the mend. After being bashed down in a five-month price war - RM100 per tonne (below the average cost of production) last May - prices rebounded to RM180 per tonne the following month. A foreign research house believes that local cement prices will jump to RM192 per tonne this year. UOB, meanwhile, expects prices to only hit RM192 next year and RM198 in 2008.

These operating conditions mean YTL Cement shareholders can probably expect more of the same dividends-wise, this year.

In a written reply to The Edge last year, managing director Tan Sri Francis Yeoh said: "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." This includes growing overseas.

Last year, YTL Cement acquired a 21 % stake in ailing Jurong Cement Ltd, Singapore, for RM19.4 million. Indonesia is another prospect, since the YTL group has a power plant there and has expressed its interest in the country's infrastructure projects.

A potential blip on the horizon, however, is rising competition on home ground. In March, French cement giant Vicat Group caused a stir among local players when it put in a bid for a "controlling equity interest" in Cima's subsidiary companies. No decision has been announced, but it is understood that the Cima management is mulling selling a smaller stake. The Vicat offer lapses on June 1.

Cima is currently the third largest player in the Malaysian cement market, with a 16% share. Lafarge Malayan Cement leads the market with 44 %, while YTL Cement is second with 24 %. Heavyweight Vicat - market capitalisation of three billion euros on the Paris stock exchange and annual net profits in the 100-something million euro range - could alter this pie chart.

Analysts are hailing this bid as confirmation that the cement sector is looking attractive again. Cement counters ran up in March, YTL Cement included. The stock soared to its six-month high of RM2.S0 on March 20. Prices have eased since; last Monday the counter closed at RM2.44.





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