KUALA LUMPUR (Sept 14): Kenanga Research kept its “overweight” call on the building material sector after industry players logged slightly improved earnings for the second quarter of 2023 (2QCY2023).

Kenanga noted that in 2Q2023, 20% of results came in above its forecast, while 40% came in within and below its forecast.

It noted that the top line of all players contracted due to weaker demand and average selling price (ASP) with the exception of United U-Li Corp Bhd, which beat expectations.

It said this was due to stronger margins for its cable support systems as industry consolidation during the pandemic had reduced competition, thus boosting pricing power of the remaining players, including United U-Li.

Kenanga is positive on the aluminum sector due to the stable price of the commodity and demand for cable support systems in the near term, but the same cannot be said for the steel sector amid the sluggish property sector, according to its sector note on Thursday.

Muted demand from China

Kenanga also stated that there has not been any significant pick-up in demand for aluminium despite China’s reopening and its government’s efforts to stabilise the property market.

Year-to-date (YTD), it noted that LME aluminium price has averaged US$2,280 per metric tonne (MT), 4% lower than US$2,364 per MT in the second half of 2022 (2H2022).

Meanwhile, YTD price of ferrosilicon of US$1,525 per MT is 9% lower against the 2H2022 level of US$1,682 per MT, while the YTD price of silicomanganese of US$1,010 per MT is 5% lower against the 2H2022 level of US$1,063 per MT.

“On the flip side, rising environmental concerns prompting the closure of fossil fuel-powered smelters especially on coal, combined with Western sanctions against Russian aluminium, are expected to keep aluminium prices firm.”

For the aluminium sector, it picked Press Metal Aluminium Holdings Bhd (“outperform”; TP: RM6.00) and Om Holdings Ltd (“outperform”; TP: RM2.07).

Kenanga said that Om is poised to reap the benefits of structural cost advantage over its global peers due to its access to cost-effective hydropower through long-term contracts until 2033.

It also picked United U-Li with an “outperform” call and a target price (TP) of RM1.22, foreseeing steady demand and healthy margins for its cable support systems.

Meanwhile, the research house has a bleak outlook for steel — both long and flat steel — weighed by the ongoing property debt crisis in China.

“Not helping either is the much anticipated roll-out of construction and infrastructure projects following China’s reopening has not materialised. To add salt to the wound, the effect of the traditional construction peak period in September and October is yet to be felt.”

Nevertheless, Kenanga is optimistic that steel prices could be buoyed by potential supply constraints, as well as stable cost inputs such as iron ore, scrap metal and coking coal.

Its top pick for the steel sector included Ann Joo Resources Bhd with an “underperform” call and a TP of 73 sen. It also picked Engtex Group Bhd (“Maintained perform”; TP: 58 sen).

“We anticipate Ann Joo and Engtex to continue facing margin compression as steel ASP continues to fall,” said Kenanga.

At market close, Ann Joo’s shares rose two sen or 1.74% to RM1.17, valuing the company at RM656.81 million.

Engtex’s shares fell by 1.5 sen or 2.44% to 60 sen for a market capitalisation of RM264.82 million.

Press Metal’s shares fell by three sen or 0.61% to RM4.89, giving it a market capitalisation of RM40.29 billion.

Om’s shares fell one sen or 0.64% to RM1.56. Its market capitalisation is RM1.15 billion.

United U-Li’s shares increased by three sen or 1.97% to RM1.55, valuing the company at RM337.59 million.