YTLCement could be a good BUY

Background

YTL Cement Berhad ('YTLCement') involved in the manufacture, sale, and supply of cement products and other related construction material. Its products include ordinary portland cement, ground granulated blast furnace slag, high sulphate resisting cement, blended cement, slag cement, fly ash cement, pulverised fly ash, and clinkers. It also involves in hiring vehicles; and processing and supplying ready-mixed concrete and related services. YTLCement ranked as the second largest producer of cement & clinker in Malaysia.


Source: The Star newspaper

Industrial Outlook

Cement and Concrete Association of Malaysia’s ED, Grace Okuda expects cement demand will continue to slow down, unless the government speed up the implementation of the stimulus packages. The same view was shared by CIMA’s CFO, Rozahan Osman says demand for cement in the region will grow 1% to 2% this year if major infrastructure projects progress as planned and residential projects recover as predicted.

The world’s biggest cement maker Lafarge SA is forecasting a contraction in demand for cement globally this year – the first in 25 years – due to the global financial crisis and economic slowdown. Its chairman and CEO, Bruno Lafont expects cement consumption worldwide to drop by up to 3% this year as the economic slowdown takes a toll on construction and infrastructure activities globally. He, however, did not take into account the economic stimulus packages that have been announced by various countries because he did not know when they would start to take effect.

For more, go here, here & here.

Recent Financial results

For 2Q2009 ended 31/12/2008, YTLCement's net profit increased by 10.5% y-o-y to RM48.4 million while turnover increased by 55.9% to RM492 million. When compared to the preceding quarter (1Q2009), net profit was lower by 30% despite a 7%-increase in turnover. This is because the net profit for 1Q2009 was pumped up by two rounds of price hikes for cement by 15% to 20% in June and about 8% in August due to an unprecedented 63% hike in diesel price and 26% rise in electricity tariffs respectively.



Valuation

If YTLCement can maintain the same level of profit for the next few quarters as that of 2Q2009, then its EPS would be about 30 sen. Based on this, YTLCement (closed at RM2.59 yesterday) would be trading at a PE of 8.6 times. At this multiple, YTLCement is trading near its fair value.

Technical Outlook

From the weekly chart (Chart 1), we can see that YTLCement has been drifting lower since making an all-time high of RM6.20 in June 2007. The downtrend is not over yet, but there are tentative signs that the stock is in a bottoming phase & poised for recovery. The +DMI has been inching higher, while the -DMI has been dropping lower. MACD, which had broken above its downtrend line, is in positive again.


Chart 1: YTLCement's weekly chart as at 4/2/2009 (Source: Quickcharts)

From the monthly chart below, we can see that the MACD is set to do a positive crossover. Williams %R has also begun to curve upward. All these suggest that YTLCement's downtrend is likely to be over & is poised for recovery.


Chart 2: YTLCement's monthly chart as at 4/2/2009 (Source: Quickcharts)

Conclusion

YTLCement could be a good stock to ride on the pump-priming effort by the Government. Its technical outlook is improving. Since the share price is nearly 60% off its all-time high, a decent recovery could result in big gain. This could compensate for the not-so-cheap valuation of the stock.