Lafarge Malaysia (LAFMSIA) vs Tasek (TASEK)

Cement manufacturers play an important supporting role to the construction, property and building materials industries especially we always have big projects being announced every years. I checked through the list and conducted a study in this industry throughout the weekend. Currently, there is only 2 pure cement manufacturers listed in Bursa, namely Lafarge Malaysia Berhad and Tasek Corp. The other listed player is Cahya Mata Sarawak Berhad who is having a diversified businesses in trading of building materials and road maintenance beside cement segment. Besides that, YTL cement and CIMA who is the subordinate of UEM Group also contributing to the cement industry. 

Since it’s very hard to search info for CIMA, YTL Cement and Cahya Mata Sarawak for comparison and breakdown, I’m concentrated on the pure listed players. Tasek corp. is under the umbrella of Hong Leong group while Lafarge is a French company and also the world largest cement manufacturer with 180 plus years history, don’t play play. 

Ever since the liberalization in year 2008, the cement manufacturers able to adjust their selling price without the ceiling price control from the government. This enable them to pass over the escalating operating costs to their customers partially or fully.

 In terms of market capital, Lafarge is larger than Tasek by around 4 times at around RM7.5bils market capitalization. The PE ratio for both companies is around 19 times. Both companies also quite generous in giving out dividends to the shareholders with Lafarge giving out 90% of the net profit as dividends last financial year while Tasek went even further by distributed more than 180% of the net profit as dividends. The high dividend payout can explain the reason why the PE ratio of Tasek is on par with Lafarge given its smaller market capitalization. The dividend yields are around 4.6% and 9.4% for Lafarge and Tasek respectively based on recent share price.

 One thing to note here is that the compound annual growth rate for cement industry is so low as in the case of Lafarge and Tasek. Both companies only able to record around 2.5% CAGR in revenue for the past 5 years. Tasek able to record around 4.5% CAGR in net profit while Lafarge only able to record a mere CAGR of 0.96% (Less than 1 percen L) in net profit for the past 5 years. Gross profit margin and net profit margin of Tasek is higher if compared to Lafarge. This shows that the cement industry is quite saturated with limited growth ahead. Every player is fighting for the same size of cake every year by offering rebates to increase the volume. Tasek is better in managing its operating cost and selling price by achieving a higher gross profit margin.

Both companies are quite good in managing their working capital and thus have a very good operating cash flow all these years. This contributed to their high owners' earnings per sales. The good cash generating ability of both companies give the owner chances to pay out generous dividends. Apart from that, both companies keep their trade receivable and payable in good condition. However, Tasek has higher inventory turnover compared to Lafarge which in turn contribute to higher cash conversion cycle. Both companies also spend certain amount for capex every years but it will not affect their dividend payout ability given by their strong balance sheet and cash generating ability. 

Both companies also in net cash position with negligible borrowings. However, Tasek's cash balance in hands is so high that when converted, it's around 21% of its market capitalization. Whoever want to acquire the group can directly enjoy the high pile of cash in hands. Due to the high amount of cash for Tasek, its current ratio is so high at 7.0 compared to Lafarge who only managed to record around 2.23 ratio. Currently, both also trading at a price to book value of around 2.xx. On the other hand, Lafarge has higher ROE compared to Tasek group but both also fall short of the 15% benchmark. Tasek has higher ROIC as a result of the high amount of cash balance. 

Tasek mainly is doing for domestic consumption while 5% of the Lafarge's revenue came from its Singapore segment. Thus in general, the cement players are fighting a price war with each other to gain volume while as the same time constantly facing the escalating costs such as utilities, labour, petrol, coal, raw materials as well as freight rates. It's growth is limited but the demand is there whenever there is construction works. Furthermore, both companies also in the business of manufacture concrete but somehow the margin for this segment is quite low. For some years, the concrete segment even recorded losses too for both companies. The effect of the tariff hike since Jan this year remained to be seen. 

So in conclusion, the cement players will experience limited growth unless they expand oversea, set up a manufacturing plant to supply for their domestic demand. ROE considered mediocre but it's good to invest for stable performance and receive dividends.