Investment Highlights

• We streamline our building material sector coverage by focusing on the cement sector with an OVERWEIGHT stance. We believe the cement sector in Peninsular Malaysia has turned the corner following the sector consolidation in 2019. We believe a more rational competitive landscape, driven by production restraints following the consolidation, has at least solved half of the problem (i.e. supply), which should at least lift the implied value of clinker capacity. Beyond the pandemic and upon the recovery of the two key cement-consuming industries, i.e. property and construction, a demandfuelled re-rating is imminent, although visibility is still lacking at this juncture.

• Cement producers may flex their pricing muscles a little. We project the average net cement selling price in Peninsular Malaysia to rise marginally by 2% to RM240/tonne in 2021F (vs. an estimated RM235/tonne in 2020). We believe the conditions are conducive for further price hikes with: (1) the emergence of a price leader in the market (controlling close to 60% of total industry clinker capacity) following YTL Cement’s acquisition of Malayan Cement in 2019; and (2) the easing supply pressure after Malayan Cement and CIMA put one clinker plant each offline, effectively removing annual clinker capacity totalling 2mil tonnes, 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. They already broke even over the last three quarters, after persistent losses in recent years (Exhibit 1).

• Flattish demand in 2021. Meanwhile, we project cement consumption in Peninsular Malaysia to be flat at 4.2mil tonnes in 2021F. 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 1 June 2021, 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. The national vaccination programme appears to have gathered significant momentum after the initial hiccups.

• We may downgrade our recommendation to NEUTRAL or UNDERWEIGHT if the much anticipated recovery in both local and global economies fails to materialise.

• Our top pick for the sector is Malayan Cement (BUY, fair value RM3.34). At its current share price, the market is effectively valuing Malayan Cement 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. We believe our valuation for Malayan Cement, based on a 10% discount to replacement cost, is more appropriate.

Source: AmInvest Research - 30 Jul 2021