RHB Research has downgraded YTL Cement Bhd to underperform from market perform at RM4.72 with a fair value of RM4.27 as the company’s earnings risks are high.

The research house said the possible cancellation or delays in the implementation of certain Ninth Malaysia Plan (9MP) projects, as well as the escalating cost of production could erode the company’s profitability going forward.

It said delays in the rollout of 9MP projects could result in the lower growth in demand for cement, while delays in the implementation of the automatic price mechanism (APM) meant cement producers would suffer margin compression on the back of rising input costs.

It cut the stock’s indicative fair value by 8.8% from RM4.68 to RM4.27, based on 10 times revised financial year ending June 2009, in line with its benchmark one-year forward target price earnings ratio for the building materials sector.

It said YTL Cement’s net profit for the nine months ended March 31, 2008 came in below expectations at 62.3% to 65.5% of its full-year forecast and the full-year market consensus.

“We believe the variance against our forecast came largely from the higher-than-expected operating cost,” it said.

“We are downgrading our FY08 net profit forecast by 8.5%-9.3% to RM196.8 million to RM223.6 million, to reflect higher cost of production,” it said.

RHB Research said YTL Cement’s profit for the nine months increased by 25.8% to RM140.8 million, driven mainly by higher average sales volume and selling prices, lower finance costs and higher earnings contribution from associate companies.

The research house said the company’s earnings from China could offset the weaker outlook in the domestic market.

“Looking forward, we expect YTL Cement’s performance in Malaysia to weaken, as the decline in housing starts and property under construction in Peninsular Malaysia since 3Q07 indicates weaker property development activities ahead, and hence lower demand for cement.

“However, this would be partly offset by positive earnings contribution from its cement business in China,” it said. At last Friday’s close, YTL Cement rose two sen to RM4.74.

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