• Among the metal’s stocks under our coverage, two performed inline with forecasts while the remaining two fell below expectations. The underperformance was primarily driven by lower-than-expected sales volumes, increased operating costs, and higher logistics expenses. Meanwhile, all four industrial products stocks under our coverage met expectations.

• We anticipate that intermediate-term earnings will remain strong due to expected Fed rate cuts in 2H24, which should boost global demand particularly for aluminium and alloys. However, the steel industry is likely to face challenges due to overcapacity and a slowdown in Chinese construction.

• Additionally, despite global demand difficulties, industrial products companies are likely to sustain growth through effective strategic management.

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

Metal Prices Mixed in 2Q24; Industrial Stocks Meet Expectations

Among the metal stocks in our coverage, only Press Metal and OMH reported earnings that met expectations, while PMBT and Ann Joo fell short. PMBT was dragged down by higher logistics costs despite an increase in sales volume of metallic silicon. Meanwhile, Ann Joo was impacted by rising operating costs. In the industrial products sector, the earnings of all the stocks under coverage, namely Wellcall, Scientex, Hextar Global, and KPS were in line with expectations. Overall, we conclude that during 2Q24, most metal prices increased on a quarterly basis, except for steel and silicon metal, which declined by -14% QoQ and -9% QoQ respectively. Meanwhile, aluminium, ferrosilicon, and manganese ore saw significant improvements due supply constraint.

Metal Prices Normalize, Short-Term Decline Expected but Intermediate Outlook Remains Positive

We saw that some metal prices have normalized from their peak and have shown a downtrend since June’24. We expect the lower average metal prices in 3Q24 could result in a slight decline in the financial performance of the metal companies under our coverage. However, we foresee sustainable earnings performance in the intermediate term, as the anticipated Fed rate cuts in the US during 2H24 should improve global demand, particularly for aluminium and alloys. Nonetheless, the steel industry is likely to remain challenging due to overcapacity and a slowdown in construction projects in China. As for industrial products, despite weak global demand, we believe that prudent strategic management tactics will empower these companies to sustain growth in this challenging environment.

Neutral on the Sector

We have a NEUTRAL recommendation for the sector due to several global headwinds that may exert downward pressure on the industry. We have a BUY call for Press Metal (TP: RM6.45), OMH (TP: RM1.96), and Wellcall (TP: RM1.90). A HOLD call for Scientex (TP: RM4.15), Hextar Global (TP: RM0.98), and KPS (TP: RM0.72), while SELL call for PMB Technology (TP: RM1.11). Non-Rated for Ann Joo Resources.

Source: BIMB Securities Research - 3 Sept 2024