Investment Highlights

• We have an OVERWEIGHT view on the building materials sector for the next 12 months. We are positive on all subsegments except the cement industry, particularly in Peninsular Malaysia. The key catalysts for this sector are visible, underpinned by the stronger demand for building materials based on record order books of construction players in the country. These include various mega projects such as the MRT2 (RM32bil), Pan Borneo Sarawak Highway (RM16bil), LRT3 (RM12bil) and mega-scale township development such as TRX, KL118 and others.

• Other key catalysts that potentially boost greater demand for building materials are the infrastructure development projects earmarked under Budget 2018, in which the government is committed to spending on roads, bridges, schools, hospitals, public housing, water and electricity supply. These infrastructure projects will continue to further boost the demand for building materials such as steel, cement and aluminium.

• Aside from the strong demand for building materials, higher-than-expected ASP for selected building materials like steel and aluminium would further affirm our OVERWEIGHT stance on this sector.

o Steel ASP has shown a recovery since 4Q2016 with the ongoing steel supply cuts in China (due to global steel glut caused by China in 2015) and cost-push factors (increase in raw material prices). Local steel ASP is further improved with the imposition of safeguard duties by MITI for steel reinforcing bar (REBAR), steel wire rods (SWR) & deformed bar in coil (DBIC) till April 2020. YTD average steel ASP stands at ~RM2,400 MT. We project steel prices of RM2,140 MT and RM2,250 MT for 2018 and 2019 respectively.

o Similarly, aluminium ASP has been on the upward trend largely due to reforms in China to curb aluminium production coupled with the move to address pollution caused by aluminium smelters in the country. Additionally, cost-push factors would cause the aluminium ASP to fluctuate. YTD aluminium ASP stands at ~US$1,950 MT. We project aluminium prices of US$1,950 MT and US$2,145 MT in 2018 and 2019 respectively.

o Unlike steel and aluminium, the outlook for cement in the peninsula remains lacklustre. Cement ASP continues to depress in 9M2017 with increased industry capacity resulting in oversupply within Peninsular Malaysia. Earnings for peninsular cement players were further pushed down to a record low. Large-scale construction projects, which are expected to begin in FY18, will spur greater demand resulting in an improved cement ASP as well tonnage volume. Contrary to peninsular cement players, the only cement player in Sarawak continues to deliver positive results due to robust demand of cement in the state coupled with better ASP. We project peninsular cement price of RM255/tonne and RM265/tonne in 2018 and 2019 respectively.

• However, we may downgrade our OVERWEIGHT stance on the building materials sector to NEUTRAL if: 1) demand volume for building materials is hampered by federal government’s plans to postpone, scale down or even cancel infrastructure projects due to unforeseen circumstances such as economic slowdown; and 2) ASP for building materials drops significantly due to policies set by the regulator or startling external headwinds.

• Our top large-cap and mid-cap picks are Cahya Mata Sarawak and Ann Joo Resources respectively.

• Cahya Mata Sarawak (BUY, FV: RM4.45). It is the sole cement manufacturer and one of the dominant local players supplying building materials (aggregates, premix and wire mesh) through its construction and materials trading arm. The ongoing development plan in the state, spearheaded by the federal and state governments, namely SCORE and SETP will spur the construction industry through infrastructure projects such as road connectivity improvement with the construction of the Pan Borneo Highway and roads into the hinterland and building of additional power plants including hydroelectric power plants. Other projects in the state pipeline include improving public transport amenities via the introduction of LRT and BRT in Kuching.

• Ann Joo Resources (BUY, FV: RM4.34). Dubbed the dominant local steel player, it controls 20% of the market share and able to produce high tonnage of steel. AJR is able to maintain better margin in comparison to its peers in the industry due to cost optimisation in production by adopting the hybrid BF-EAF technology.

Source: AmInvest Research - 14 Dec 2017