PETALING JAYA: Earnings of listed cement producers are expected see a boost from higher selling prices and lower input costs.
UOB Kay Hian (UOBKH) Research said Hume Cement Industries Bhd
had seen a boost in its earnings and margins from an improved cost structure.
“Based on our channel checks, bulk cement average selling prices have rebounded from RM250-RM270 per tonne in the fourth quarter of 2021 to RM380 per tonne currently. There was a drop in coal prices of some 48% in 2023,” the research house said.
Coal accounted for 50%-60% of total cost of goods sold currently for Hume, the research house said, adding that 2024 will be a year with better margins for the company.
Dividends in 2024 are also poised to improve, given the consistently strong profits and cash flow generated, the research house noted in a report.
Hume declared a dividend per share of two sen in the first quarter ended Sept 30, 2023 of financial year 2024 (FY24).
“We anticipate that Hume will resume its dividend payments in the subsequent quarter, driven by stronger profits. That being said, we conservatively assume a full-year dividend per share of nine sen implying a 30% payout, which will result in a net dividend yield of 3.4%.
UOBKH Research said any further upside support for cement prices may come from the rollout of key mega infrastructure projects.
“Based on our sensitivity analysis, a RM10 per tonne increase in cement prices would increase Hume’s earnings by 11% annually,” the research house said.
There could also be better utilisation rates with an uptick in construction activity in the country, it added.
“The industry is expected to grow in 2024 with utilisation rates normalising as construction activity rebounds with the acceleration of infrastructure projects and some housing projects.
“This will lead to stronger demand and stable prices, which will underpin improvements in the company’s earnings outlook,” the research house said.
UOBKH Research upgraded Hume’s FY24 to FY26’s earnings by up to 19% due to higher cement prices and lower coal prices.
It maintained its “buy” call on the counter with a higher target price of RM3.03 a share.
At the target price, the stock will trade at 10 times FY24 price to earnings ratio (PER) which is below the industry’s FY11 to FY13 average PER of 19 times.
The research outfit noted Hume’s strength lies in its strong clinker capacity with a healthy utilisation rate of 70% to 80% compared with the industry average of 60% to 70% and overall better cost management.
Further upside could come from even cheaper coal prices on less demand as a result of decarbonisation initiatives globally. “Cement players don’t seem to be passing on the cost savings from the reduction in coal prices to customers for now,” it said.
“We expect Hume’s FY24 results to gradually improve on better demand from the resumption of construction activity, recovery of cement average selling prices and effective cost rationalisation,” UOBKH Research said.
