CIMA returns to profitability, with earnings visibility strengthened
StarBiz - December 9, 2006

AFTER a torrid time last year, Cement Industries of Malaysia Bhd (CIMA) is back in the black and heading towards profitability for the current financial year.

For the third quarter of its financial year ending in December 2006 (FY06), CIMA recorded a net profit of RM29.9mil on the back of RM420.2mil in revenue. The figures represented a remarkable turnaround from a loss of RM37.8mil from a similar revenue of RM419.8mil during the previous corresponding period.

In a statement to Bursa Malaysia, CIMA attributed this upturn to lower selling and distribution costs as well as continued price stability. Quarter-on-quarter (qoq), revenue increased by 5% due to higher cement and readymix sales. However, scheduled plant maintenance saw operating costs rise 10% and operating profit dip 30% to RM12.8mil.

According to Standard & Poor's, CIMA's results were broadly within expectations, as the cement producer's nine-month net profit accounted for 80% of Standard & Poor's original full-year estimate of RM37.2mil.

One of the other reasons for CIMA's losses a year ago was a price war in the first half of last year. With no signs of a similar battle on the horizon, Standard & Poor's expects CIMA to remain profitable in the year's fourth quarter, though it feels that net profit would be flat qoq due to the festive season.

The rating agency is maintaining its strong buy recommendation on CIMA, with a revised 12-month target price of RM4.70, up from RM3.40 previously. The counter is currently trading at around the RM3.80 mark.

“Our target price is based on a combination of 18 times (x) price earnings ratio and 0.8x price to book on our 2007 estimates, plus a projected dividend per share of 4 sen. We believe CIMA should be re-rated up, as its earnings visibility has strengthened, being a potential beneficiary of the RM3bil 2nd Penang Bridge project, to be constructed by the UEM group,” says Standard & Poor's.

Standard & Poor's new net profit forecasts are RM37.7mil and RM42.7mil for 2006 and 2007 respectively. Risks to the agency's recommendation include slower demand take-up, lower-than-expected selling prices, and higher-than-expected raw material and energy costs.

CIMA is also still in talks with Vicat SA regarding the France-based company's offer to purchase a significant stake in its cement business. Vicat has made two offers, first in March and then in September this year.

The latest offer was put on hold by the Finance Minister, with the main concern believed to be the perception that foreign companies were buying large stakes in Malaysian-owned businesses.

In November, BizWeek published a story indicating that the two companies were closing in on a resolution. In response, via a reply to a query from Bursa Malaysia, CIMA confirmed that it was still in discussion with Vicat and has not concluded any agreement with regard to the latter's offer to acquire equity interest in CIMA's subsidiaries.

Both CIMA and Vicat have agreed that the offer will remain valid until Dec 15, 2006. With the deadline nearing, the market is eagerly awaiting further developments on the long-running saga.

CIMA is also among those companies expected to benefit from the Government's recent announcement that RM100bil worth of high-impact projects would be implemented, primarily to boost economic growth and rural development.

Given that many of these projects are infrastructure-related, the analyst fraternity reckons that the Government's announcement heralds a spike in demand and lifts margins for companies involved in building materials. In addition, the South Johor Economic Region is another project that has contributed to the excitement in the cement industry.