• We maintain a NEUTRAL stance on industrial sector given persistence downside risks despite promising long-term prospects for metal companies, particularly Press Metal and OMH.

• In 2016, the Ringgit experienced prolonged depreciation because of global recession fears, declining crude oil prices, and apprehension regarding China's economy, imposing significant economic challenges for Malaysia. On the contrary, amidst these adversities, commodities such as aluminium, steel, and silicon manganese displayed notable resilience.

• Based on the sensitivity analysis conducted, it has been determined that Press Metal is more sensitive to the changes in the Malaysian Ringgit against USD compared to Ann Joo Resources and OM Holdings. The findings highlight the potential impact of currency fluctuations on financial performance of these metal companies.

• We have a BUY call for Press Metal (RM5.43), OMH (RM2.11), Scientex, (RM4.15) and Wellcall (RM1.73) though a HOLD call for Hextar Global (RM0.69) and KPS (RM0.77) while a SELL call for PMB Technology (RM1.11) and Ann Joo Resources (RM0.84).

Ringgit has been experiencing volatility due to several factors

Over the past decade, the journey of the Malaysian Ringgit against USD has resembled a roller coaster ride, influenced by various global economic situations and significant events. From 2013 to the current year, the Ringgit's performance has been quite a story to the Malaysian economy. The Ringgit reached its lowest point in a decade in 2016, touching RM4.48 against the US Dollar, marking a 22.8% YoY decline from 2015. There were a few economic indicators and events that are worth highlighting which caused the Ringgit to weaken during the year. We have come into a conclusion that the bumpy Ringgit during 2016 was caused by global recession fears, falling crude oil prices as well concerns over China economy. The narrative is as follows:

1. Trembling Oil Price

In 2016, Brent Crude was traded at USD58.82 per barrel, showing a 52.5% YoY improvement from 2015, primarily due to low base effect. Brent Crude hit its 10-year low in 2015 when it was traded at USD37.28 per barrel due to oversupply condition. In view of this, the Organization of Petroleum Exporting Countries (OPEC) reached an agreement to cut oil production to 32.5mn barrels a day and followed by non-OPEC countries such as Russia. Though the Brent price recovered, a relatively high production and inventory levels brought downward pressure on crude oil prices for most of 2016.

2. Slower China Economy

Over the last decade, China has become a dominant player in term of its share in the consumption of metals and for some metals, also in terms of production. It was imperative to highlight that China economy experienced a downturn in 2016 due to several factors. Overcapacity in heavy industrial sectors was one of the reasons that contributed to the moderation in China economy. Steel, aluminium, cement, and coal were in overcapacity mode as international and domestic demand for construction materials and production inputs dropped off, leaving factories with excess supply. This emerged as a drag on growth as heavy industrial firms struggled to sell their goods, placing a financial and political burden on central government, which supported these sectors through cash assistance or electricity subsidies.

3. Trump Win

It is worth highlighting key event such as the Donald Trump presidential win which have significantly impacted the global economic landscape. Donald Trump's election as the President of the United States in 2016 was a surprising moment in political history, as he was the first individual with no prior government or military experience to achieve this. The unexpected outcome of the United States election with Donald Trump elected as US president led to a surge in the Dollar against the Malaysian Ringgit (-4.5% YoY), as well as other regional currencies such as the Singaporean Dollar (-2.0% YoY) with the Philippines Peso the worst hit (-5.7% YoY). We are the view that the negative reaction of USD strengthening against many emerging market currencies were due to the expectations of US’s fiscal stimulus, tax cuts, and deregulation promised by the Trump administration.

Metals prices making a comeback during 2016

Despite weakening Ringgit during 2016, commodities and ferroalloy performed well particularly aluminium, steel and silicon manganese. Aluminium and steel registered double-digit growth by 13.6% YoY and 61.9% YoY respectively while silicon manganese inching up 4.4% YoY. Based on our finding, the surged in these commodities during 2016 were due to strong global demand amidst China’s policy of reducing overproduction and pollution by shutting down factories. We acknowledged other factors that were a boon for the sector including the Chinese economic prospects, lower-than-even chance of interest rate hikes in the U.S., and promising developments in supply and demand which have collectively created a favourable environment for the sector. In conjunction to rally in metal prices, all of metals stocks under our coverage showed tremendous results during this period. Press Metal revenue and profit after tax surged 53.9% YoY and 130.9% YoY while both Ann Joo Resources and OMH turned to black following losses during 2015, thanks to the normalisation in global prices for major alloy products.

Press Metal affected the most in Ringgit movement

Our sensitivity analysis framework examines how changes in the Malaysian Ringgit affect metals stocks in terms of revenue and normalised net profit. We will assess how changes in Ringgit against USD may impact the company's financial performance. On that score, a higher sensitivity indicates that the company is more affected by such changes, vice versa. Based on our sensitivity analysis, Press Metal has a higher exposure on changes in Ringgit against USD compared to Ann Joo Resources and OMH (Table 1). A mere RM0.05 increase in the Ringgit can lead to its revenue shifting from RM28mn to RM165mn, and alters the normalised net profit between RM2mn to RM77mn, ceteris paribus. Higher exposure in Ringgit fluctuation for Press Metal is in view of its sales revenue that is denominated in USD, regardless local or other geographies. Note that exports market makes up 85-90% of its revenue. Cost’s structure wise, alumina is quoted in USD while carbon anode in Renminbi (RMB).

Challenging outlook persists

Overall, metal prices performance is expected to be lacklustre at least until 1H2024 due to the prevalence of geopolitical and global challenges, casting uncertainty on prospects, which in turn may influence the industry’s dynamics. The current environment of heightened inflationary risks has resulted in moderation in demand for metals. Additionally, the ongoing conflict between Russia and Ukraine remains a significant threat to the stability of the metal market. This invasion has led to a noteworthy surge in energy costs, exerting pressure on the profit margins of metal producers. When it comes to aluminium, demand remains in equilibrium however despite tight supply. The closure of smelters that rely on fossil fuels, particularly coal, due to mounting environmental concerns, along with Western sanctions targeting Russian aluminium products, is poised to introduce additional constraints on supply chain, bolstering aluminium prices. Nonetheless, our view is differing when assessing the steel market. Despite the reopening of economic activities in China, demand is expected to remain tepid for steel products.

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, (RM4.15) and Wellcall (RM1.73), HOLD call for Hextar Global (RM0.69) and KPS (RM0.77) while SELL call for PMB Technology (RM1.11) and Ann Joo Resources (RM0.84).

Source: BIMB Securities Research - 13 Nov 2023