KUALA LUMPUR (May 3): RHB Investment Bank Research expects commendable quarterly earnings from Press Metal Aluminium Holdings Bhd, Malayan Cement Bhd and Cahya Mata Sarawak Bhd in the basic materials sector.

In a note on building materials on Wednesday (May 3), the research house said it regards the aluminium and cement sector to be looking optimistic, due to relaxing Covid-19 restrictions in China and expectations of the rate hike cycle entering its tail-end.

Aluminium

Underpinned by the decline of global economic growth, aluminium prices are expected to remain volatile in the first half (1H23).

Nonetheless, the aluminium sector’s risk-reward profile is looking positive, underpinned by (1) the reopening of China, which accounts for 60% of global demand, (2) the pick-up in aluminium adoption from the renewable energy and electric vehicles (EV) sectors, and lastly (3) the expectation of the rate hike cycle ending.

According to RHB analyst Oong Chun Sang, Press Metal (PMAH) is their Top Pick as it is a proxy to the low-carbon-producing aluminium smelters in Asean, and benefits from the structural demand shift towards Asian smelters and production disruptions in Europe due to the ongoing power crisis.

Although the volatility of aluminium prices are expected to continue in 1H23, Press Metal's hedging policy of 35-40% at US$2,400-2,500 (RM10,693-11,138) per tonne (for 2023), 30% at US$2,600/tonne (for 2024), and 15% at US$2,700/tonne and above (for 2025), should help cushion against the volatility.

Additionally, Oong expects Press Metal to deliver commendable quarter-on-quarter (QoQ) earnings, underpinned by the 3% QoQ spike in the price of aluminium and 13% QoQ drop in the price of carbon anode — albeit offset by a 1.1-percentage-point rise in the alumina-to-aluminium cost ratio.

Cement

Meanwhile, for the cement sector, Oong expects Malayan Cement's and CMS's earnings to be buoyed by sustained cement average selling prices (ASPs) and a sequentially lower cost of production (mainly coal cost).

The sustained cement ASPs stays elevated at RM390/tonne as of March (flat month-on-month [MoM]) due to the elevated time lag in passing through the spike in coal prices by local cement producers.

RHB stays optimistic on the cement sector due to (1) the recent sharp correction in key raw material prices, ie coal (around 50% of total production costs) by an average of 50% year-to-date (YTD), (2) potential improvements in operating efficiency post industry consolidation in West Malaysia, as well as (3) earnings visibility for Cahya Mata Sarawak following the higher allocation of Budget 2023 for East Malaysia (2023: RM12.1 billion vs. 2022: RM9.8 billion).

For Cahya Mata Sarawak, a clarity in their earnings visibility can be reflected in an increase of demand for cement in Sarawak, underpinned by ongoing state construction projects namely the Baleh Dam (expected completion in 2026), Sarawak coastal roads, the state's second trunk road, and the Pan Borneo highway.