INTERNATIONAL CEMENT GROUPLTD. (SGX:KUO)
International Cement Group - Cementing A Foothold In Central Asia; Initiate With BUY
- International Cement Group was listed on SGX Mainboard in 2019 via a transfer listing from Compact Metal Industries Ltd.
- Opportunities in cement industry in the Central Asia region.
- Initiate coverage on International Cement Group with a BUY rating with a target price of S$0.089.
International Cement Group - Company Background
- International Cement Group (SGX:KUO) (“ICG”) was listed on the Mainboard of the Singapore Exchange on 8 March 2019 after Compact Metal Industries (SGX:T4E) transferred its listing status to International Cement Group following an internal restructuring exercise pursuant to a scheme of arrangement.
- International Cement Group’s core business is in the production and distribution of cement for the use in construction of infrastructure projects, including residential buildings, roads, bridges, highways and railways, in the Central Asia region. The Group owns and operates the largest cement plant and a grinding station in Khatlon region in Tajikistan (under the “Mohir” brand). The Group also owns and operates a cement plant in Kazakhstan (under the “Alacem” brand). As at 31 December 2019, International Cement Group has a combined annual cement production capacity of about 3 million metric tonnes.
- In addition, International Cement Group is also in the business of manufacturing and marketing aluminium windows and doors primarily for residential properties in Singapore. The aluminium business was the principal business activity of Compact Metal Industries Ltd, which is retained by International Cement Group after the transfer of listing status. As at 30 June 2020, the aluminium sector order book stood at S$17.4 million, to be completed next 3 years.
International Cement Group - Corporate History
- Formerly listed as Compact Metal Industries (SGX:T4E), the Group’s early business model was centered around the fabrication of mild steel windows before expanding to become an one-stop aluminium specialist, which offers a range of aluminium products, including curtain walling, windows, doors and grilles.
- In November 2015, Compact Metal Industries began its transformation by entering into a scheme of arrangement for a proposed international restructuring exercise to transfer its Mainboard listing status to International Cement Group.
- In October 2017, Compact Metal Industries made its first venture into the cement business through the acquisition of a 65% equity interest in a cement plant in Tajikistan. The successful diversification into the cement business was shown to be profitable and prompted Compact Metal Industries to resume its internal restructuring exercise. The two parties terminated the 2015 agreement and signed a new agreement in 2018.
- In March 2019, International Cement Group completed the internal restructuring exercise and was successfully listed on the Mainboard of the Singapore Exchange.
- In the same year, International Cement Group expanded its cement production capabilities and broadened its footprint in Central Asia region by completing the construction of its first cement plant in Kazakhstan and the construction of a grinding station in Tajikistan. Together with the cement plant in Tajikistan, the annual production capacity of International Cement Group increased to 3 million metric tonnes. In FY2019, the Group’s cement division contributed 86.6% of its total revenue.
International Cement Group - Business Overview
- International Cement Group’s core business is in the production and distribution of cement. In addition to its cement business, the Group is also in the business of the manufacturing and marketing aluminium windows and doors for residential properties.
Cement Division
- International Cement Group’s main business is the production and distribution of cement in the Central Asia region for the use in the construction of infrastructure projects, including residential buildings, roads, bridges, highways and railways. Currently, International Cement Group’s production facilities are located in Tajikistan and Kazakhstan.
- In Tajikistan, International Cement Group owns and operates the largest cement plant in the Yovon district of the Khatlon region. Producing cement under the “Mohir” brand, the Mohir plant has an annual production capacity of 1.2 million metric tonnes. Additionally, the Group also owns and operates a grinding station with an annual production capacity of 0.6 million metric tonnes in the Kolkhozabad district of the Khatlon Province. The grinding station is strategically located close to the Group’s export customers, thus reducing transportation costs.
- International Cement Group’s Tajikistan cement production serves both the domestic and the export markets. Currently, the Group’s cement is exported to Afghanistan and Uzbekistan. Customers of the Group’s products include retail customers, construction firms and distributors who resell the cement to other end users.
- In Kazakhstan, International Cement Group owns and operates a cement plant with an annual production capacity of 1.2 million metric tonnes, which was constructed in December 2019. Producing cement under the “Alacem” brand, the Alacem plant sells its cement to the domestic market, specifically to the Almaty and Taldykorgan areas, as well as the Horgos ports near the Kazakh-Chinese border.
Aluminium Division
- International Cement Group is also in the business of manufacturing and marketing of aluminium windows and doors for residential properties. The Group currently owns and operates a fabrication plant at Sedenak, Johor Bahru after disposing its extrusion plant at Pasir Gudang, Johor in December 2019.
- International Cement Group primarily undertakes valuing-adding fabrication work for aluminium windows, doors, curtain walls, cladding and roofing panels. As at 31 December 2019, the Group has an order book of approximately S$22.7 million, which is expected to be progressively recognised over the next 2 to 3 years.
International Cement Group - Industry Overview
Aluminium Business
- International Cement Group’s aluminium division produces and markets aluminium windows and doors for residential properties in Malaysia and Singapore. According to Statista, Singapore’s consumption of aluminium has remained relatively constant from 2017 to 2019 at 51.1 million metric tons. International Cement Group recognises that the metals industry in Malaysia and Singapore has increasingly become saturated, and thus, more focus is being placed on their cement operations.
Cement Business
- International Cement Group’s cement operations lie within the Central Asia region, which consists of the former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan that are colloquially known as the “Stans”. More specifically, International Cement Group’s current cement operations concentrate in Tajikistan and Kazakhstan, with its Tajikistan cement plant being the largest in the country’s Khatlon Region.
- Central Asia is emerging as a centre ground between the East and the West. Foreign investment has been a major driving factor for the growth of cement production sector. Countries such as China, Russian, Iran, Turkey and Japan had invested substantially in the region, and India and the US have maintained military bases here.
Demand for cement
- Cement, being the material to make concrete, is widely used in the construction industry. With the increasing need for residential and commercial spaces, buildings and other establishments globally, cement demand is expected to grow with an increase in construction activity brought about by the need for urbanisation. The need for urbanisation is prominent in emerging economies, such as those in Central Asia, which are facing growing population.
- The construction materials industry had seen strong market value growth at a CAGR of 5.6% between 2015 to 2019.
- According to Marketline, global construction materials value is forecasted to see a CAGR of 6.0% between 2019 to 2024, to reach $1,220.5 billion in 2024.
- Fortune Business Insights reported that the global cement market size was valued at US$ 312.5 million in 2018, and is expected to reach US$ 463.0 billion by 2026, growing at a CAGR of 5.2%.
- Strong government support and major project opportunities in Central Asia have continued to drive growth and demand for the cement industry. For example, in Kazakhstan, the government had announced a US$9 billion investment policy to develop its infrastructure, which include housing for 77,000 families and modernisation of its transport system by building 48,000 kilometres of new roads. In Uzbekistan, the Ministry of Transport had secured a 240 kilometres road project in the city of Karakalpakstan. The project is critical to the development of the country into a transport hub, thus creating significant demand and opportunities for cement suppliers.
- Similarly, the Afghan Ministry of Mines and Petroleum has been working to finalise discussions on cement projects that would require an estimated investment of $350 million. On top of that, the Ministry also has plans to further upgrade some major cement plants in the country. These Government initiatives showcase the increased construction activity in the Central Asia region, which signals a positive demand for cement.
- According to the Tajikistan’s Ministry of Industry and New Technology (MOINT), it was reported that Tajikistan increased cement production by 10.5% from 3.8 Mt in 2018 to 4.2 Mt in 2019 to cater to high demand. In 2019, the exports of cement to neighbouring countries like Uzbekistan and Afghanistan increased by 11.0% y-o-y from 1.4Mt to 1.6Mt. The increase in demand for cement in the region could be attributed to the decline of Chinese-based suppliers as legislations in China curb carbon emissions, and hence the amount that could be produced locally.
- China’s Belt and Road Initiative, or the “One Belt One Road”, is a foreign and economic infrastructure development strategy adopted by the Chinese Government to link China to Central Asia, the Middle East, Russia and Europe via the Silk Road Economic Belt. In addition, the Maritime Silk Road would link China with South East and South Asia, Africa and Europe.
- Cement prices worldwide had declined significantly previously due to the overcapacity of production in many countries including China. However, with the expected capital investment of US$ 4 – 8 trillion for the Belt Road Initiative, the flow of funds is expected to trickle down to increase the demand for cement, as it is a key construction material. Furthermore, with legislations in place to curb cement production in China, more demand is expected from Central Asian cement suppliers.
- With infrastructure development expected to continue to be the key driver of the region’s cement industry, International Cement Group is put in an advantageous position to benefit from infrastructure and construction projects both within Central Asia and with the Belt and Road Initiative. International Cement Group reported a production capacity of 3 million metric tonnes, with a record of having continually increased production capacity in the Central Asia region year-on-year. With ongoing projects in the region, the increase in demand and the ability to supply allow International Cement Group to be better able to meet the projected demands for reconstruction, urbanisation, and infrastructure growth in the Central Asia region.
International Cement Group - Financial Summary
- Since venturing into the cement business in late 2017, International Cement Group’s financials have improved steadily over the years. In FY2019, 86.8% of the Group’s revenue came from its cement operations while the rest is contributed by its aluminium business.
- International Cement Group’s overall revenue grew by 15.0% year-on-year from S$114.1 million in FY2018 to S$131.2 million in FY2019. This came on the back of a 20.1% growth in the cement segment driven by higher cement sales volume as a result of stronger demand for cement in Tajikistan. This was partially offset by a drop in sales of aluminium projects and aluminium related products. We expect the cement segment to continue its growth driven by:
- strong demand for cement in the Central Asia region and
- contribution from the cement plant in Kazakhstan, which completed its construction in December 2019 and is expected to gradually begin sales in the 2nd half of 2020.
- Geographically, domestic sales in Tajikistan contributed 75.2% of the total cement revenue in FY2019 while the rest was made up by export sales to Afghanistan and Uzbekistan.
- Looking into the reportable segment results, International Cement Group’s cement segment recorded a S$38.1 million in profit before tax while the aluminium segment recorded a loss before tax of S$3.8 million in FY2019. Since venturing into the cement business in November 2017, International Cement Group’s profit after tax margin improved to 23.4% and 21.6% in FY2018 and FY2019 respectively as compared to 0.9% recorded in FY2017.
COVID-19 Impact
- The outbreak of COVID-19 had led to a slowdown in construction activities and tightened border control measures in Central Asia. As a result, sales of cement by the Tajikistan plant had dropped from 2nd half of Match to end May 2020. Sales have since resumed to pre-COVID-19 levels. Despite that, the cement segment still recorded a higher contribution of S$8.7 million in 1H2020, leading to a 8.8% year-on-year increase in revenue to S$63.1 million in 1H2020.
- On the other hand, commencement of sales from the Kazakhstan plant has also been delayed and sales is expected to start August 2020. We believe that the cement segment will continue to impact the Group positively in the near future.
International Cement Group - Future Plans and Growth Strategy
Increase product offerings within the construction sector
- International Cement Group plans to expand its product offerings through the construction of a drywall (gypsum plasterboard) production line within its cement plant in Tajikistan. The investment, which is estimated to cost the Group US$15 million (approximately S$21 million) is expected to have an annual production capacity of 30 million square metres of drywall and is expected to be completed by 2021. International Cement Group is optimistic the new business will be able to tap into the Group’s existing distribution channels n Tajikistan and meet local demand as well as to enter in the Central Asia market.
Expanding its presence in the Central Asia region
- International Cement Group is planning to expand its footprint in Central Asia with more projects in the region. In order to capture the growing demand for cement, the Group is continuously exploring opportunities to increase its overall production capacity through investments in construction of cement plants, acquisitions, joint ventures, and/or strategic collaborations, particularly within the Central Asia region.
International Cement Group - Key Risks
Foreign exchange risks
- The currencies in which transactions are primarily denominated are the Tajikistani Somoni (“TJS”), Kazakhstani Tenge (“KZT”), United States Dollar (“US$”) and Chinese Yuan (“CNY”). Revenue and expenses are primarily denominated in domestic currencies such as TJS and KZT while payables to intercompanies and the main EPC contractor are primarily denominated in CNY and US$. An unfavorable movement of exchange rate will potentially result in huge foreign exchange loss.
Initiate with a BUY rating with a target price of S$0.089
- We arrived at our target price for International Cement Group on the back of our DCF valuation (terminal growth rate: 1.0%, WACC: 10.0%).
- International Cement Group’s financial has improved significantly since venturing into cement business in end-FY2017. We are of the view that the Group will continue to produce positive results, especially with the addition of its Kazakhstan plant. International Cement Group’s presence and experience in the cement industry in the Central Asia region will also allow it to benefit from the projected growth of the industry in the region.
- See
Lam Wang Kwan
SAC Capital Research
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https://www.saccapital.com.sg/
2021-01-22
SGX Stock
Analyst Report
0.089
SAME
0.089
