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Tasek Cement is a company involved in manufacturing and sales of cement and ready mix concrete. Cement is a combination of sintering limestone (clinker), coal and gypsum. Ready mix concrete is a combination of water, cement, aggregates (sand, gravel or crushed stone), coal and gypsum.
Malaysia cement industry has not been friendly to the players over the past few years. Overcapacity issue has led to an intense price competition in the domestic market. Among the big players are Lafarge Malaysia, YTL Cement, CIMA Group, Hume Cement, Cahaya Mata Sarawak, Tasek Cement, Sabah Cement and Aalborg Cement. Following the merger of Lafarge and Holcim, Lafarge Malaysia takes up 40% of Malaysia 38.4 million Metric Tonne capacity. As for clinker, Malaysia had a capacity of 26.57 million Metric Tonnes. This capacity has not meet up with the demand due to government strict regulation on environmental guidelines resulting Malaysia being a net importer of clinker.
Since 2016, a softer property market has increase pressure on cement players not to mention the rising cost of production due to weakening Ringgit. Coal and gypsum being important raw materials for cement players are being priced in US Dollar, alongside with the surge in coal price in the year 2016. Going forward, we expect the prospect may not be too dull due to numerous infrastructure project being issued by the government and an increase construction activity from China investors.
Sabah Cement, being a 30% associate of Tasek Cement, provides us an indirect proxy to Sabah construction activity. A few notable infrastructure project in Sabah includes the Pan Borneo Highway, expansion of Sepangar port and the expansion of Kota Kinabalu International Airport. With limited players in East Malaysia and the difficulty in transporting cement, Sabah may be a green field for cement players.
Over the past 6 years, Tasek Cement revenue has increase swiftly alongside with the boom in Malaysia property market. However, we see a compressed margin due to higher cost of production and intense price competition. Nevertheless, Tasek still achieve an average ROCE (Return on Capital Employed) of 10%-15 % over the past 6 years. However, Tasek Cement has recorded a bad Q3 2016 result which started the sell down in Tasek Cement.
Tasek Cement is tightly controlled by its owner which is Hong Leong Asia. Some foreign funds such as Lockheed Martin Retirement Trust has also invested in Tasek Cement, leaving only 4.85% of free float for retail investors.
As a conclusion, we like Tasek Cement for its strong balance sheet, generous dividend and efficient management. For investors who seek for constant dividend income, you should put Tasek Cement under your radar.
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