UOB Kay Hian Research cautious over surge in cement companies' prices


Lafarge share price ended one sen lower at RM4.33 at midday, off the earlier high of RM4.57.

Lafarge share price ended one sen lower at RM4.33 at midday, off the earlier high of RM4.57.

KUALA LUMPUR: UOB Kay Hian Malaysia Research has cautioned investors the surge in share prices of cement companies amid speculation of cement prices rising by up to RM80 a tonne (40%) as “unwarranted”.

It said on Friday demand was unlikely to firm up enough to sustain such average selling price (ASP) even with mega projects’ roll-out factored in. 

“For steel, we do not rule out possible industry M&As but for now, the outlook may remain unexciting (that is due to weak demand, higher raw materials cost and escalating trade tension),” it said. 

UOB Kay Hian Research retained its underweight outlook on the building material sector in the  absence of compelling catalysts.

It issued the report after share prices of cement companies surged on Thursday on news of significant price hikes starting this month.  Following the release, the share price of Lafarge Malaysia and Tasek gave up their early Friday gains.

“We believe that any recovery in cement ASP post industry M&A will be gradual, given subdued cement demand,” it said.

UOB Kay Hian Research expects the industry to recover gradually from 4Q19 on the back of a gradual pick-up in cement demand from the roll-out of mega and infrastructure projects. 

It thinks cement ASP will improve after YTL Corp’s acquisition of Lafarge Malaysia Corp as the intense price war is expected to ease.

As for steel, it sees a challenging environment. Local steel bar prices eased 0.9% week-on-week to RM2,175 a tonne as at June 7. 

It believes the industry will remain sluggish in 2H19 owing to weak demand, higher raw material costs and escalating trade tensions.

“Revival of mega and infrastructure projects is a positive for the sector but we expect demand to pick up gradually by 4Q19. In addition, steel companies may continue reporting unexciting
earnings growth as a result of weak demand, depressed ASP and heightened trade tensions. 

“On the other hand, the cement sector may gradually improve on the back on higher cement ASP but valuations are not compelling at this juncture,” it said.

* Ann Joo Resources (Hold/Target price: RM1.30). Target price based on seven times 2020F EPS of 13.7 sen. It also assumes a 45% dividend payout ratio which translates into a dividend yield of 2.6% for 2019. Entry price RM1.

Choo Bee Metal Industries (Hold/TP: RM1.35). TP based on six times 2019F EPS of 34.3 sen. The company’s outlook remains challenging amid industry oversupply and weak demand which are dragging ASP. Entry price RM1.

* Hume (Sell/TP: 75 sen). Amid lofty valuations, the research house thinks the market has factored in an earlier-than-expected recovery in earnings. It believes the rise in cement ASP will be gradual in 2H19 and has yet to be ascertained especially in the near term when demand is still muted.
 

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