Concrete performance in volatile times

WITH the wave of tariffs rattling global trade, many companies are bracing for impact.

However, not all are equally exposed – one relatively “sheltered” area is the construction sector.

Further down the value chain, Malayan Cement Bhd – the largest player in the local cement industry – stands to benefit from the anticipated rollout of infrastructure and construction projects nationwide.

All six equity analysts covering the stock have a “buy” call on it, according to Bloomberg data.

Analysts have a consensus 12-month target price of RM6.84 for Malayan Cement, suggesting significant upside from its current price of RM4.80 at the time of writing.

The stock is trading at a price-to-earnings ratio (PE) of 11.87 times, below its historical average.

In previous industry upcycles, Malayan Cement’s valuation had reached as high as 20 to 22 times PE, indicating room for re-rating should earnings continue to improve in tandem with the ramp-up of domestic construction activity.

On July 15, 2024, Malayan Cement’s share price reached RM5.88 – its highest level in the past year.

“The stock has rebounded well from its April 9 low of RM4.29 despite ongoing market volatility and is now approaching levels seen at the start of the year.

“If domestic project rollouts continue to gain momentum, cement demand is likely to stay resilient amid global trade disruptions caused by tariffs,” says an analyst.

In contrast, the share price of its holding company, YTL Corp Bhd, is down nearly one-third year-to-date.

YTL Corp (via YTL Cement Bhd) owns 72.1% of Malayan Cement shares. The divergence in performance, the analyst explains, likely reflects shifting investor sentiment.

“YTL Corp has diversified business interests, and investors may be grappling with tariff-related uncertainties and currency risks across its various markets, making valuation more challenging.

“In times like this, investors may prefer pure-plays,” he adds.

Upward trend

Malayan Cement commands an estimated 60% market share in Peninsular Malaysia, with an annual production capacity of 25.1 million tonnes – far outpacing peers like Hume Cement Industries Bhd and Tasek Corp Bhd.

The company has operations in Malaysia and Singapore, where the YTL Group has interests spanning power generation, property development, hospitality and construction.

Last year, the cement manufacturer expanded into Sabah and Sarawak, while the upcoming Johor-Singapore Special Economic Zone is expected to be a new growth driver, the company says.

Following a recent site visit to Johor, MIDF Research released a report on Thursday, highlighting that 40 to 50 data centre (DC) projects are in the pipeline, with 20 already approved.

Each project typically spans 12 to 18 months, and the research house maintains a positive outlook on DC expansion, noting it supports capital goods imports and stimulus for the construction sector growth.

Major construction players are already capitalising on this trend.

Additionally, Malayan Cement’s Langkawi facility supports exports to the West and South Asian as well as East African markets.

However, its export strategy could face headwinds if the global trade war escalates.

In the second quarter ended Dec 31, 2024, the cement manufacturer’s core profit of RM159.8mil came in above analysts’ expectations.

This brings the group’s core earnings for the first half of financial year 2025 to RM304.3mil.

Revenue was largely flat at RM1.2bil, but net margins improved to 13.9% due to improved operational efficiencies and lower borrowing costs.

The quarter also saw higher demand for its ready-mixed concrete, resulting in higher selling prices.

Bulk cement prices remained stable at RM380 per tonne throughout 2024 and into the start of 2025.

Coal prices have declined by about 16%, easing cost pressures for cement producers.

The group’s contractual arrangement for the supply of cement to the East Coast Rail Link (ECRL) Phase 1 officially concluded in December 2024.

However, management recently confirmed that Malayan Cement will continue supplying cement for ECRL Phase 2, albeit without an exclusive contract.

Over in Singapore, demand could be bolstered by the Changi Airport Terminal 5 project, which is slated to begin construction in the first half of 2025, if all goes according to plan.

Strong cash flow

Notably, Malayan Cement’s debt level has come down significantly due to strong cash flow.

With improved efficiencies, analysts believe the company could “squeeze out” more bottom-line growth, especially if geopolitical tensions drive up production costs.

Its net gearing ratio currently stands at 0.38 times, and some analysts think it may turn to a net cash position in the near future.

The construction sector, with its domestic orientation, appears a little more “insulated” from external headwinds. Hong Leong Investment Bank Bhd analyst Edwin Woo believes that pump-priming activities are likely to help stimulate the domestic economy, benefiting companies like Malayan Cement.

“Heading towards an uncertain external environment, the government may bolster domestic-oriented sectors like construction to offset external weakness.

“The construction sector offers the highest ‘bang for the buck’, boasting the highest multiplier effect of more than two times due to its array of economic linkages,” Woo says in an April 22 report on the construction sector.

He anticipates another year of healthy job flows, anchored by infrastructure and DC projects, leading to further order book growth opportunities for construction companies.

However, considering the government’s tight finances, he notes a pivot toward incorporating private finance initiatives (PFIs) in projects like the Penang Light Rail Transit and Johor’s Automated Rapid Transit projects.

Another eagerly anticipated project is the MRT3 Circle Line, although its timeline remains uncertain.

Under the PFI model, Woo expects construction companies with sizeable balance sheets, such as Gamuda Bhd, IJM Corp Bhd and YTL Corp to thrive.