We reiterate our OVERWEIGHT call on Building Materials as construction demand remains robust boosted by major infrastructure projects, while the upcoming GST could provide nearterm sales lift, offsetting a traditionally slower 1Q. The steel sector could be catalysed by possible anti-dumping trade actions, while aluminium prices outlook is favourable on rising automotive demand and global supply deficits. Our Preferred Pick for the sector is PMETAL (OP; TP: RM4.99) due to its good price outlook, industry-leading margins and 320k MT capacity expansion. Maintain OUTPERFORM on ANNJOO (TP: RM1.47) and MASTEEL (TP: RM1.20), and MARKET PERFORM on LAFMSIA (TP: RM10.00).

3QCY14 results were mixed. ANNJOO exceeded consensus estimates, while PMETAL was within consensus. LAFMSIA and MASTEEL missed expectations. ANNJOO’s 9M14 results made up 90% of consensus as raw materials cost declined at a greater rate than steel prices. PMETAL’s 9M14 results met estimates at 74% on the strong aluminium price recovery in 3Q14. However, LAFMSIA saw dismal 9M14 earnings at 53% of consensus on intensifying local competition while MASTEEL’s 9M14 results were at 63% of consensus due to plant upgrades during the quarter as well as an unexpectedly higher tax charge.

Infrastructure growth to augment existing demand. Going forward, we expect the award of major multi-billion ringgit infrastructure projects (such as the MRT Line 2, Project 3B and East Coast Expressway projects) to add to the robust existing construction demand. In 3Q14, resilient residential demand (+18.6%) continued to drive construction sector growth, followed by non-residential (+7.9%) and special trade (+8.5%). The construction sector contributed a solid 9.6% to domestic GDP growth in 3Q14, well on track to meet our FY14 in-house estimate of 12.2%. This bodes well for the building materials sector which is a direct beneficiary of construction sector growth.

Near-term catalyst from pre-GST stocking up. We expect a one-off boost in sales volume as stockists and manufacturers may start loading up on durable goods in the 3-6 months prior to GST implementation effective 1-Apr-2015. In particular, we expect to see a one-off boost in sales volume for steel players in 1Q15, which could partially offset the traditional construction slowdown due to the festive season. As for the cement sector, due to the short shelf life of cement (< 3 months) and concrete products (< 1 day), we expect minimal sales impact from GST implementation next year. The aluminum sector should see limited impact from GST as approximately 80% of aluminum produced by PMETAL is exported and hence zerorated.

Steel sector likely to see price improvement from trade actions against Chinese steel dumping. On 15-Dec-14, MITI announced a provisional safeguard duty of 24% on hot-rolled steel plate (HRP) imports. This is in addition to the 16-Oct-14 announcement of provisional anti-dumping duties from 3%-29% on hot-rolled coils (HRC) from China, Indonesia and Korea producers. While neither ANNJOO nor MASTEEL is directly involved in the production of HRP and HRC, we are positive on the announcements as this bodes well for the ongoing anti-dumping investigations into rebar and wire rods imports. We gather that other measures being considered include import licensing and export restrictions on certain raw materials. We expect to see conclusive measures announced by 1Q15. As previously highlighted, we estimate that a 5% anti-dumping duty across the board could result in 2% higher ASP/MT which should lift earnings by 8% for steel players under our coverage.

Bright aluminum price outlook to USD2100/MT (+11%) in FY15E. We continue to be positive on the aluminum price outlook in FY15 as we expect demand to rise in tandem with global urbanization, with additional catalyst from the growing use of aluminum in the auto sector. Furthermore, the slow rate of plants to restart has led to a global supply deficit of 152k MT as of 9M14 (compared to FY13 surplus of 1.0m MT) as global consumption outstrips existing production. Accordingly, global inventories have been trending downward, currently at 6.4m MT in 4Q14 (-10% YoY, -6% QoQ). We think these trends should continue to exert demand-driven price improvement in aluminum prices throughout FY15.

Maintain OVERWEIGHT with positive outlook on Aluminum and Steel. We reiterate our positive view on the building materials sector, favoring the aluminum and steel subsectors. Our Preferred Pick for the sector is PMETAL (OP; TP: RM4.99) due to: (i) our positive aluminum price outlook, (ii) its globally competitive margins at 10% vs. the global average at 5.7%, and (iii) its 320k MT/yr (+73%) capacity growth to be completed in stages by 2018. We are also positive on steel companies such as ANNJOO (OP; TP: RM1.47) and MASTEEL (OP; TP: RM1.20) due to resilient domestic demand and potential trade remedies to improve local steel prices. Maintain our neutral view on cement company LAFMSIA (MP; TP: RM10.00) due to rising local competition which could lead to depressed pricing in the near- to-mid-term.

Source: Kenanga