Overall, we maintain our NEUTRAL view on the Building Materials sector despite being positive on the steel and aluminium sub-sectors due to the larger market weightage of our negatively weighted cement sub-sector. We are positive on the long steel sector as we expect construction activities within the infrastructure space to pick up pace, which would drive demand for steel rebars and subsequently prices, targeted at RM2,225/t for FY17. Meanwhile, we have initiated coverage on a downstream flat steel player – ULICORP and are positive on its prospects given their: (i) ability to protect margins and pass on cost to consumers, and (ii) planned expansion plans. Aluminum price outlook remains solid, thanks to announced Chinese production cuts and thinning inventories. PMETAL should see good earnings growth (FY17-18E: 51-21%) thanks to bullish aluminium prices and increased operating efficiencies. However, the cement sub-sector is expected to remain weak due to high excess capacity from the additional 16% capacity in FY16, causing intense price competition amongst cement manufacturers. Maintain call and TP for ANNJOO (OP; TP: RM4.30), ULICORP (OP; TP: RM5.60), PMETAL (OP; TP: RM3.15) and LAFMSIA (UP; TP: RM4.33).

Mixed results in 1Q17 with 1 above (ANNJOO), 1 below (LAFMSIA) and 2 within/broadly within (PMETAL, ULICORP) expectations. ANNJOO came in stronger than expected due to higher-than-expected selling prices on the back of lower-thanexpected raw materials costs i.e. coke, iron ore, scrap. Meanwhile, LAFMSIA was underperformed due to lower-than-expected cement demand on the back of higher-thanexpected rebates dished out. That aside, we initiated coverage on ULICORP recently, which saw a decline in YoY earnings which we deem within expectations as we had anticipated higher OPEX to be incurred with the commissioning of its new plant. We believe that future performances will compensate with stronger volume output and wider margins. All-in, 1Q17 results performance is inferior over the last quarter when we saw all 3 counters within our coverage coming above expectations.

Share price performance. Over 2QCY17 (till report cut-off of 23/6/2017), ANNJOO’s share price was up 18% which we believe is due to their better-than-expected results. LAFMSIA was down 22% as they registered their first quarterly loss since 2005 and the worst loss since listing. In addition, they missed dividends for the third consecutive quarter which was previously consistently paid out every quarter since FY10. Meanwhile, PMETAL’s share price was stable (+2%) at RM2.68 prior to its temporary suspension on 19-June as the company changed its corporate structure to an investment holding company format to better facilitate future expansions. As for ULICORP, its share price fell by 9% since our initiation of the stock on 25/5/2017 which we believe is due to their comparatively poorer YoY results announced.

SUMMARY

Maintain NEUTRAL with selective buys on Building Materials. All in, we maintain our NEUTRAL view on the building material sector despite being positive on steel sector and aluminium sector as the market weightage of our negatively weighted cement sector is larger. We maintain our UNDERPERFORM call on LAFMSIA (TP: RM4.33) due to the intense pricing competition from the overcapacity issue faced by cement players. Maintain OUTPERFORM on ANNJOO with unchanged TP of RM4.30 on the back of anticipated pick-up in construction activities, which would drive steel demand. We also maintain ULICORP at OUTPERFORM with an unchanged TP of RM5.60 as we believe its future growth prospects driven by improving production capabilities are still intact. Meanwhile, we maintain PMETAL at OUTPERFORM with unchanged TP of RM3.15 due to continued cost efficiency improvements and rising proportion of higher margin products.

Source: Kenanga Research - 7 Jul 2017