Building materials
Maintain neutral: We expect the construction sector to be buoyant on the whole in 2012, but the steel sector will be in a contraction mode.
The cement sector is expected to be more shielded through minimal import threat and falling coal cost. Lafarge Malayan Cement Bhd (“buy”, target price: RM7.60) is our top proxy to the construction sector.
We maintain our “sell” call on Ann Joo Resources Bhd (TP RM1.30) and “hold” call on Kinsteel Bhd (TP 49 sen).
Local building materials demand was subdued from 2009 to 2011 due to low government construction spending. But the momentum is expected to pick up in 2012 as large-scale Economic Transformation Programme (ETP) projects (the MRT, Kuala Lumpur International Financial District, Warisan Merdeka, Sungai Buloh Rubber Research Institute land) are expected to be awarded progressively from 1Q12 onwards.
On the flip side, the pick-up in demand from the ETP projects could be partially negated by a softer property market (which accounts for about 40% of the construction sector). As newly awarded projects take three to six months to hit the ground, we expect the building materials sector to only see meaningful demand growth in 2H12, at the earliest.
In our view, the cement sector offers better fundamentals due to its oligopolistic market structure. Though new capacity is expected to come onstream in early 2013 (+7% in Peninsular Malaysia’s capacity), we expect this to be well-absorbed by demand growth.
Additionally, there is earnings upside for cement players in view of falling coal costs (December 2011: -20% year-to-date). With energy accounting for about 40% of production cost, we estimate that every 1% decline in coal cost contributes to a 0.8% rise in earnings for Lafarge.
Despite expectations of stronger local demand growth in 2H12, we see downside to steelmakers’ earnings owing to a weaker export market (which accounts for 30% to 40% of sales volume).
We are of the opinion that local demand growth will not make up for the export loss in 2012 and margins may be squeezed by a surplus in global supply. We also see dumping risk from China steelmakers, resulting in industry-wide losses, similar to 2005.
We have a “buy” call for Lafarge and derive our TP of RM7.60 by pegging the stock at its peak 17 times 2013 price earnings ratio. The cement maker is also supported by a high net dividend yield of 5.6%. Ann Joo is a “sell” (TP RM1.30) while Kinsteel is a “hold” (TP 49 sen) as we peg the stocks to their trough cycle price to book value valuations of 0.6 times and 0.55 times. We think there is potential upside to Kinsteel’s share price if the official mining award comes through, potentially in 2012. — Maybank IB Research, Jan 11
This article appeared in The Edge Financial Daily, January 12, 2012.
Maintain neutral: We expect the construction sector to be buoyant on the whole in 2012, but the steel sector will be in a contraction mode.
The cement sector is expected to be more shielded through minimal import threat and falling coal cost. Lafarge Malayan Cement Bhd (“buy”, target price: RM7.60) is our top proxy to the construction sector.
We maintain our “sell” call on Ann Joo Resources Bhd (TP RM1.30) and “hold” call on Kinsteel Bhd (TP 49 sen).
Local building materials demand was subdued from 2009 to 2011 due to low government construction spending. But the momentum is expected to pick up in 2012 as large-scale Economic Transformation Programme (ETP) projects (the MRT, Kuala Lumpur International Financial District, Warisan Merdeka, Sungai Buloh Rubber Research Institute land) are expected to be awarded progressively from 1Q12 onwards.
On the flip side, the pick-up in demand from the ETP projects could be partially negated by a softer property market (which accounts for about 40% of the construction sector). As newly awarded projects take three to six months to hit the ground, we expect the building materials sector to only see meaningful demand growth in 2H12, at the earliest.
In our view, the cement sector offers better fundamentals due to its oligopolistic market structure. Though new capacity is expected to come onstream in early 2013 (+7% in Peninsular Malaysia’s capacity), we expect this to be well-absorbed by demand growth.
Additionally, there is earnings upside for cement players in view of falling coal costs (December 2011: -20% year-to-date). With energy accounting for about 40% of production cost, we estimate that every 1% decline in coal cost contributes to a 0.8% rise in earnings for Lafarge.
Despite expectations of stronger local demand growth in 2H12, we see downside to steelmakers’ earnings owing to a weaker export market (which accounts for 30% to 40% of sales volume).
We are of the opinion that local demand growth will not make up for the export loss in 2012 and margins may be squeezed by a surplus in global supply. We also see dumping risk from China steelmakers, resulting in industry-wide losses, similar to 2005.
We have a “buy” call for Lafarge and derive our TP of RM7.60 by pegging the stock at its peak 17 times 2013 price earnings ratio. The cement maker is also supported by a high net dividend yield of 5.6%. Ann Joo is a “sell” (TP RM1.30) while Kinsteel is a “hold” (TP 49 sen) as we peg the stocks to their trough cycle price to book value valuations of 0.6 times and 0.55 times. We think there is potential upside to Kinsteel’s share price if the official mining award comes through, potentially in 2012. — Maybank IB Research, Jan 11
This article appeared in The Edge Financial Daily, January 12, 2012.
