• Six of industrial stocks under our coverage were below forecast, while the remaining two exhibited results in line with and surpassing our expectations during the quarter under review.

• We view a challenging business environment in the near term stemming from persistent global headwinds that show no signs of easing, potentially affecting weak demand. However, we also recognize that commendable strategic management approaches will help these companies sustain their growth despite the challenging circumstances.

• We are maintaining a NEUTRAL stance on the industrial sector as we anticipate the presence of persistent downside risks despite the promising long-term prospects for businesses in this sector.

Deteriorating metal prices, higher input cost weighed earnings

Earnings forecasts for all metal stocks under our coverage, namely Press Metal, PMB Technology, Ann Joo Resources, and OM Holdings, fell short of our expectations, primarily due to a substantial decline in metal prices such as aluminum, steel, and alloys. Meanwhile, in the industrial products sector, two stocks, Hextar Global and Kumpulan Perangsang Selangor (KPS), performed below expectations, mainly due to higher-than-expected operating expenses. On the positive side, quarterly earnings for Scientex and Wellcall met and exceeded expectations, driven by a stronger property segment and robust rubber hose export sales. Overall, the elevated inflationary environment is posing challenges for businesses, impacting their growth and profitability. Additionally, global headwinds, such as the Russia-Ukraine war and delayed effects on the reopening of the Chinese economy, as well as weather-related issues, have led volatility into the industrial sector, affecting the balance between supply and demand. Furthermore, aggressive interest rate hikes by the US Federal Reserve and other major central banks have prompted a cautious approach among businesses, leading to reduced demand

Negative metal prices outlook; proactive steps for manufacturing businesses to tackle challenges

We view a challenging business environment in the near term, stemming from persistent global headwinds that show no signs of easing. As for metals, we anticipate ongoing challenges in metal price movements, particularly for ferroalloys and steel, primarily driven by weakened demand. Nonetheless, the ongoing tight supply of aluminum is set to persist, with European supply cuts and the potential Russian production ban threatening inventory levels and driving up aluminum price. As for industrial products, we foresee industrial players to face margin pressure due to increased input costs, compounded by weak demand. Nonetheless, we acknowledge that prudent strategic management tactics will empower these companies to sustain growth in spite of the challenging environment.

Neutral on the sector

We have a NEUTRAL recommendation on the sector due to several global headwinds that may exert downward pressure on the industry. We have BUY call for Press Metal (RM5.43), OMH (RM2.11), Scientex, (RM4.00) and Wellcall (RM1.74), HOLD call for Hextar Global (RM0.69) and KPS (RM0.63) while SELL call for PMB Technology (RM1.11) and Ann Joo Resources (RM0.84).

Source: BIMB Securities Research - 5 Sept 2023