We reiterate our NEUTRAL call on BUILDING MATERIALS sector due to challenging outlook in the near-to-medium-term. This is due to the expectations of lower sales volume for steel upon commencement of GST as well as persistently intense competition in the cement sector. Maintain calls and target prices for MASTEEL (MP; TP: RM0.92), ANNJOO (UP; TP: RM1.08) and LAFMSIA (UP; TP: RM8.20). For this quarter, we feature PMETAL (OP; TP: RM5.41) as our TOP PICK due to: (i) stable aluminium price outlook, (ii) industry-leading margins at 16.7% vs. the global average at 9.6%, and (iii) bright earnings outlook driven by capacity expansion. For this quarter, we reckon that the most compelling re-rating catalyst for PMETAL would be its potential inclusion in the Shariah-compliant list in the next review (mid-2015).

4QCY14 results were mixed with 50.0% of stocks under our coverage coming in either above orbelow expectations. PMETAL exceeded expectations due to the strengthening USD against MYR and higher production output while MASTEEL beat expectations due to higher sales volume and margin. However, ANNJOO missed expectations due to lower steel ASP and recognition of forex loss while LAFMSIA posted the second consecutive quarterly disappointments due to lower ASP and higher operating cost. Overall, there were no apparent QoQ or YoY trends. Going forward, we expect aluminium-based company like PMETAL to see continued positive earnings delivery this year. As for the steel and cement players, there could be earnings risks due to pressure on ASP aggravated by cheap imports as well as intense competition.

STEEL Domestic infrastructure projects to boost steel demand but global oversupply persist. In line with our OVERWEIGHT call on CONSTRUCTION sector, we expect the award of multi-billion ringgit infrastructure projects (e.g. MRT Line 2, LRT 3 and highways) to boost the construction sector. In 2014, the construction sector grew by 11.6%, higher than 2013’s 10.9%. In 4Q14, the construction sector’s GDP growth remained resilient at 8.7%. According to our economist, the construction sector is expected to grow but at a slower pace of 9.6% in FY15. Hence, this aligns with our view that building materials will grow marginally, since building materials sector is a direct beneficiary of construction sector growth.

11MP may not be a booster for steel. We opine that the upcoming 11MP announcement in May-15 may not be sufficient to drive the sector in the near-to-medium term. We believe that the booming construction activities in the local market may not help the local steel industry to fully recover as we reckon that the global oversupply situation in major global producers (e.g. China and South Korea) still persists.

Expect decline in sales volume post-GST. We expect sales volume for steel to ease upon commencement of GST effective 1-Apr-2015 as stockists and manufacturers would have already stocked up prior to GST implementation.

Steel sector likely to remain subdued in 1H15. We notice that as of YTD, the average prices for long steel products (billet, rebar, wire rods) have been reduced by 9.0%-12.0%, at a similar pace with reduction in raw material cost (coke and scrap) (refer Chart 1). Although iron ore price rose by 21.0% QoQ, we maintain our view that this is due to seasonal factor as production at year-end tends to slow down during the winter season. Moreover, on 19-Mar-15, Australia, the world’s biggest iron ore exporter lowered its 2015 outlook for iron ore prices, no thanks to increasing iron ore supply from Australia itself and Brazil and slower demand from China. Although productions for iron, steel bars and rods have been reduced by 20.0% MoM in Jan-15 (refer Chart 2), we notice that the reduction in exports (i.e., iron, steel bars and rods) volume (-31.0%) is greater than imports (i.e., iron, steel bars and rods) volume (-0.1%) (refer Chart 3) with escalated export prices while import prices declined further (refer Chart 4). Hence, we believe while lower iron ore seems to be positive to local steel players following lower raw material costs, it may have minimal impact to margin due to stiffer competition from steel imports.

Source: Kenanga Research - 6 Apr 2015