• Still OVERWEIGHT, with Top Picks: Press Metal (PMAH) and Malayan Cement (LMC). Our outlook on the demand for aluminium is still upbeat, as we expect it to see a meaningful recovery beyond 2024, thanks to still-low aluminium inventories, growing demand for solar panels, and the “green push” towards EVs in Europe. We added LMC as one of our top sector BUY calls, as it is a direct beneficiary of the revival of construction and property activities in West Malaysia.

• 2Q23 missed expectations. PMAH’s 2Q23 results were softer than our and consensus’ forecasts, primarily due to lower LME aluminium prices, despite the easing in raw material prices (carbon anode and alumina). LMC’s FY23 (Jun) earnings surprised Street yet again, at 111% and 122% of our and consensus’ full-year estimates – thanks to the improvement in sales volumes and higher ASPs for both domestic cement and ready-mixed concrete. Cahya Mata Sarawak’s (CMS) earnings disappointed again, due to its loss-making road maintenance and phosphate divisions.

• Aluminium. PMAH’s 1H23 core earnings of MYR584.4m (-29.5% YoY) were below expectations, at 36% and 39% of our and Street’s full-year estimates. We note that QoQ improvement was encouraging, supported by higher sales volumes and a stronger USD, on top of easing carbon anode prices. We expect aluminium prices to stabilise moving forward, after coming off the peak. The decline in freight and raw material costs – on the back of the recovery in China’s production capacity for carbon anode and alumina – should support the company’s margins ahead. We believe the demand for aluminium will see a meaningful recovery beyond 2024, thanks to still-low aluminium inventory, growing demand for solar panels, and the “green push” for EVs in Europe.

• Cement. LMC’s FY23 (Jun) core earnings amounted to RM154.3m (+104.7% YoY), attributable to the improvements in sales volumes and ASPs for both domestic cement and ready-mixed concrete – coupled with coal prices easing during the quarter. CMS’ performance missed expectations, with 1H23 core net profit of MYR48.9m falling behind expectations, and making up 22% and 28% of our and Street’s full-year projections. We view that demand for cement in the mid-long term will be buoyed by the rollout of major infrastructure projects such as the Kuala Lumpur-Singapore High Speed Rail (HSR), Johor Bahru-Singapore Rapid Transit System (RTS), Bayan Lepas Light Rail Transit (BLLRT), and Mass Rapid Transit 3 (MRT3) – signalling the potential pick-up in construction activities in West Malaysia.

• Key sector downside risks: A decline in LME aluminium prices, decelerating global economic growth, higher-than-expected raw material costs, lower-than-expected cement ASPs, and lower-than-expected cement production.

Source: RHB Securities Research - 15 Sept 2023