Century Bond Bhd
(July 7, RM1.70)
Non-rated with fair value of RM2.29: We had a meeting with Century Bond’s management recently and came away more positive on the company’s prospects.

It has raised production capacity substantially, and management might consider higher dividend payouts as capital expenditure will be minimal in the coming years while its cash pile has built up to RM94.5 million today, which is a tidy sum relative to its market capitalisation of only RM199 million.

The share price has performed well recently, post issuance of our first non-rated note on April 15. We revise our fair value for the company slightly upwards from RM2.19 to RM2.29 to account for the higher cash level.

Net cash has risen now at RM94.5 million, while the dividend payout is higher. Earnings for financial year 2015 ended March (FY15) fell 13.0%, mainly dragged down by weaker overseas sales contribution while Malaysia’s sales came down by only 1.6%.

Cement paper packaging, which made up more than 83% of the group’s earnings, dropped 23% while plastic packaging and contract manufacturing packaging and packaging showed improved contributions.

Pre-tax margin weakened from 14.6% to 13.3%. Meanwhile, the group’s net cash level jumped from RM77.8 million in FY14 to RM94.5 million in FY15.

Management also declared a higher dividend payout for FY15 with a dividend per share of six sen, which translates into a dividend yield of 3.6% (three sen will be paid in the near term).

Lafarge Malayan Cement Bhd’s first phase of capacity expansion should come onstream in January 2016, starting with 300,000 tonnes per annum (pa) at its Rawang plant followed by 900,000 tonnes pa in Kanthan, Perak by July 2016.

Meanwhile, YTL’s new cement capacity of 1.8 million tonnes pa will also come in this year. It is also in the process of setting up a new cement terminal in Singapore, the largest cement terminal, which will cater for the import of various cement-related products.

To cater for the bigger demand from local cement players, the group has recently increased its production capacity in Johor from seven million bags per month to 10 million bags per month, an increase of 42%.

Today, the group has a total capacity of 15 million bags per month in Malaysia and Indonesia with a utilisation rate of 80%.

Apart from its own production plant in Medan, which has a capacity to produce 3.5 million bags per month, the group has recently set up a 51:49 joint venture (JV) with one of the largest Indonesian cement makers, PT Bosowa, in Makasar having an initial production line with a capacity of three million bags per month and potentially expanding to 10 million bags per month in the future. The JV business is expected to commence in September.

Stripping out the net cash of RM94.5 million, the existing core businesses are valued at only 6.8 times price-earnings ratio, which is not justifiable considering its steady earnings margin (pre-tax margin: 13% to 15%), 60% market share in Peninsular Malaysia and strong operating cash flows in the coming years. — Public Investment Bank, July 7.

This article first appeared in The Edge Financial Daily, on July 8, 2015.