Hume Cement Industries: Poised for Growth Amid Infrastructure Delays

Report Date and Broker Information

• Date: October 28, 2024
• Broker: UOB Kay Hian Private Limited

Company Overview
Hume Cement Industries, an emerging player in the Malaysian cement market, ranks as the third-largest cement manufacturer in the country by production capacity. The company is positioned in the materials sector with a Bloomberg ticker of HUME MK. It currently has 725.5 million shares issued, with a market capitalization of RM2.52 billion (approximately USD 579.9 million).

Share Price and Target Price

• Current Share Price: RM3.38
• Target Price: RM5.10, reflecting a 50.9% potential upside from the current price.
• 52-Week High/Low: RM3.97/RM1.59

Ownership Structure
The largest shareholder is Hong Leong Manufacturing Group, holding a 70.3% stake in the company. Other significant shareholders include Ambank M Berhad (2.1%) and Public SmallCap (1.4%).

Financial Performance and Outlook

1. Expected Stronger Q1FY25 Performance
   Hume is anticipated to report increased earnings in Q1FY25 due to several favorable factors:

   • Extended working days in the quarter.
   • Stable cement average selling price (ASP).
   • A stronger Malaysian ringgit against the US dollar, which helps offset coal price increases, improving cost efficiency.

2. Dividend Prospects

   • With robust profit generation and cash flow, the group issued an 8 sen dividend per share in FY24, translating to a payout ratio of 27%.
   • The recent sale of the Penang Prai Industrial Estate for RM39.8 million contributed a net gain of RM32.2 million, further strengthening its debt profile.
   • Projected dividend per share (DPS) for FY25 is 13 sen, suggesting a dividend yield of 3.8%.

Market and Industry Outlook

1. Impact of Infrastructure Projects

   • Despite the slower rollout of mega projects in the government’s 2025 Budget, smaller projects like the Penang LRT are expected to boost cement demand.
   • The delayed MRT3 and HSR projects are not expected to dampen Hume’s growth, as anticipated construction for the Johor Rapid Transit System and Penang LRT could kick off in 2025, generating an estimated RM2.4 billion – RM3.4 billion in cement demand.

2. Cement Price Trends

   • Cement prices are forecasted to remain stable at approximately RM380/mt, with potential upside due to increased construction activity and lower coal prices.
   • Historically, cement prices peaked at RM400/mt, and, adjusted for inflation, the real price could reach RM470/mt. This price stability, alongside decarbonization initiatives globally, bodes well for Hume’s profitability.

3. Growth in Construction Sector Utilization Rates

   • Hume is expected to benefit from a steady increase in construction activities, which will support cement demand. Key infrastructure projects like the MRT3, PBH, ECRL, RTS, and PSR are forecasted to drive cement utilization and capacity maximization.

Key Financial Metrics (FY24-FY27 Forecast)

• Revenue: Projected to increase from RM1,205 million in FY24 to RM1,404 million in FY27.
• EBITDA Margin: Expected to improve from 29.3% in FY24 to 31.4% in FY27.
• Net Profit: Anticipated growth from RM210.9 million in FY24 to RM281.5 million in FY27.
• Dividend Yield: Forecasted increase from 2.3% in FY24 to 4.5% in FY27.
• Return on Equity (ROE): Predicted to gradually decline from 41.6% in FY24 to 29.2% by FY27 as capital investments stabilize.

Environmental, Social, and Governance (ESG) Initiatives

1. Environmental Efforts

   • The Gopeng cement plant is ISO 14001 certified, reflecting Hume’s commitment to environmental management.
   • The company has achieved a 9% reduction in CO2 emissions since 2019 and planted 570 trees at its Gopeng site to enhance environmental sustainability.

2. Social Contributions

   • Hume Cement has contributed over 7,000 hours of safety training for its employees, underscoring its commitment to workplace safety.

3. Governance

   • The company’s FTSE Russell ESG rating improved from 2.3 to 3.8, indicating progress in corporate governance standards.
   • Hume has achieved full ISO 37001 certification across its plants, reinforcing its stand against bribery and corruption.

Key Risks and Sensitivities

• Cement Demand Volatility: Lower-than-expected demand for cement could affect earnings.
• Coal Price Fluctuations: Rising coal prices may inflate operational costs.
• Governmental Price Controls: Potential regulatory interventions in cement pricing could restrict Hume’s profitability.

Analyst Recommendation

The report maintains a BUY recommendation on Hume Cement Industries, with a revised target price of RM5.10 (down from RM5.40), based on a forward price-to-earnings ratio of 15x for FY25.