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AGRIBUSINESS, PROPERTY & CONSTRUCTION
Megaproject delays knock construction Stiff competition forces companies into price war with increasing materials costs and thinning margins By BUSRIN TREERAPONGPICHIT Higher costs and delays in government megaprojects will continue to pressure returns in the construction materials sector in 2006, resulting in a flat performance. The sector, capitalised at 465.116 billion baht, showed an average one-year total shareholder return (TSR) of 7%, compared with a three-year return of 29.2%, a fiveyear of 50.2% and a 10-year of 5.3%.
According to Kawee Chukitkasem, head of research at Capital Nomura Securities, the sector remained unable to offer exciting returns for investors because rising production costs meant construction materials manufacturers couldn't raise sales prices due to stiff competition. Mr Kawee also noted the delay to the start of government megaprojects would be another threat for the sector this year. ``This could imply that competition among construction materials firms in the domestic market may be stronger than last year,'' he said. Siam Steel Service Plc (SSSC), was the top performer in 2005, capitalised at 1.392 billion baht, with a one-year TSR of -6.5%, but a high three-year return of 104.3% and a five-year return of 87%. Wanchai Kunanantakul, the SSSC chairman, attributed the good results to continuing company expansion, which resulted in increased sales. In addition, the company, which was one of the hardest hit during the crisis, had paid shareholders in cash and share dividends, resulting in increased share liquidity on the stock market.  However, he said the company was concerned about uncertainties this year and it may be hard to maintain its performance. The company has a policy to pay a dividend of at least 50% of its net profit when it has no further investments.The worst performer in the sector was Quality Construction Plc (Q-CON), capitalised at 1.096 billion baht, with a oneyear TSR of -74.9%. The low return was mainly due to tougher market competition, said an analyst for SCB Securities. She said that the increasing number of lightweight concrete block makers was resulting in an oversupply, and alongside a price cutting war, manufacturers had suffered declines in margins resulting in only 27% approximately, from 40% over the past two years. Q-CON's lightweight blocks are its only revenue source while rival Chonburi Concrete Products (CCP) has earnings from other concrete products and ready-mixed concrete businesses. The analyst said this year would be another unpleasant one for cement and concrete product manufacturers as they would be pressured by competition, high costs and slim margins. Siam Cement Plc (SCC), with the sector's highest capitalisation of 292.8 billion baht, and average returns compared with the entire sector, is expected to be a moderate performer this year. SCC offered a one-year TSR of 7.6%, a three-year of 34.3%, a five-year of 59.5% and a 10-year of 8.3%. The analyst said SCC was not going to be a very interesting stock this year because it earned nearly half of its income from petrochemicals, which had entered a downturn cycle. However, main rival Siam City Cement (SCCC) is focusing on its cement business, which was growing in line with the consumption, while the company was nearly debt-free. ``Although the overall industry will grow slowly, for investors SCCC is likely to offer a consistent return to shareholders of around 7% annually,'' Mr Kawee said. However, he does not recommend buying SCCC for short-term returns as its trading price has already reached full value. SCCC, capitalised at 84 billion baht, offered a one-year TSR of 44.4%, a threeyear of 22.6%, a five-year of 28.2% and a 10-year yield of 5.1%. Meanwhile, the improvement in steel prices on the world market is expected to drive steelmakers above the average in the sector in 2006. An analyst for SCB Securities said steel prices had been rebounding by around 15% from last year since the early part of 2006, which would help increase returns for shareholders. Last year steel prices dropped sharply, resulting in unfavourable returns for shareholders, in particular on share prices. ``I have an overweight rating on Sahaviriya Steel and Millennium Steel, as their returns will be markedly better than in the past year, as they could turn their provisions for inventory loss [high cost of raw materials] to earnings this year,'' she said. Another analyst said investors in this sector needed to review stocks one-byone because of the increasing number of small-capitalisation companies that had listed on the board last year. In some cases, he said, returns might be inflated by occasional speculation in small-caps.
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