‘Neutral’ stance for building materials sector

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Building materials sector
Maintain neutral:
During the budget review speech yesterday, the government maintained its development expenditure for 2015. Such a move is positive to the building material sector, as sustained development expenditure will support consumption (and hence, prices) of building material products.

Between the steel and cement sub-sectors, we are keeping to our view that the cement sub-sector will be a larger beneficiary from the implementation of construction and infrastructure projects, as its fortunes are more localised vis-à-vis the steel sub-sector (which on the other hand, is more susceptible to several external factors including raw material price fluctuation and pricing pressure from regional players).

The catalysts for the steel sub-segment are more effective measures introduced by the Chinese authorities to curb steel capacity, and potential trade action by the government on steel-dumping activities. The catalysts for the cement sub-segment are the timely implementation of the Economic Transformation Programme projects and sustainable demand from property development projects. Risks to the industry are overcapacity in China which remains over the longer term and an increase in raw materials which will reduce margins.

For the steel sub-segment, the negative is overcapacity results in volatile earnings, while the positive is potential trade action on steel-dumping activities. For the cement sub-segment, the positive is a positive demand outlook, while the negative is pricey valuation.

Maintain a “neutral” stance on the sector. For exposure, our top pick is Lafarge Malaysia Bhd (“buy”; target price: RM10.72).

We continue to like Lafarge for its bright longer-term demand prospects (arising from the implementation of various large-scale infrastructure and construction projects), strong balance sheet (with net cash of 51.1 sen per share as at Sept 30, 2014), and a generous dividend payout history (with average payout ratio of 86.2% over the past three years translating into a net dividend yield of 3.5% to 4%). — Hong Leong Investment Bank, Jan 21

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This article first appeared in The Edge Financial Daily, on January 22, 2015.