All in, we downgrade our sector call to UNDERWEIGHT on the building material sector as we are negatively weighted on the cement, steel and tiles space. We are cautious on long steel sector as we expect dampened domestic demand on slower flows of construction/infrastructure projects as well as new steel supply coming from Alliance Steel to pile on more pressure on steel prices. Similarly, we foresee challenging operating environment for flat steel sub-segment likely due to weaker domestic and export demand. Weak domestic demand woes, overcapacity in the market and high cement rebates dished out will continue plaguing the cement sub-sector. Bleak outlook for tiles sub-sector over the near-immediate term due to the slowing down of property and construction jobs in the market is affecting sales volume, whilst rising cost pressure lingers. Current volatility in the aluminium and alumina markets continues to disrupt earnings visibility in the near term. However, long-term positive operating outlook and earnings growth potential remain intact for Aluminium players. In addition, we anticipate alumina prices would moderate from the current level (USD450/MT) in the likely case that Norsk Hydro’s Alunorte plant fully restarts its production facility. In addition, we estimate 2019 aluminium price at USD2,100/MT, flat from 2018 average of USD2,110/MT but a recovery from current price of c.USD1,898, supported by the current supply deficit. We downgrade ULICORP to UNDERPERFORM with a lower TP of RM0.505 (from RM0.675). Meanwhile, we maintain UNDERPERFORM call on WTHORSE with lower TP of RM1.20 (from RM1.50). Other calls and TPs are unchanged, namely: ANNJOO (MP; TP: RM1.25), LAFMSIA (UP; TP: RM1.85) and PMETAL (MP; TP: RM4.80).

More disappointments. Of the 5 stocks within our coverage, only 1 stock came in broadly inline with expectation ULICORP) while the other four stocks fell short of estimates (LAFMSIA, WTHORSE, PMETAL, ANNJOO). This is much weaker than 2Q18 with 2 within and 3 below expectations. The negative deviations for 3Q18 were due to: (i) PMETAL- due to higher-than-expected alumina prices, (ii) ANNJOO- higher-than-expected raw material prices and lower steel demand, (iii) LAFMSIA- dragged by lower-than-expected cement demand, and (iv) WTHORSEhit by lower-than-expected tiles demand.

Bracing for a more challenging 2019. Over 4QCY18 (till report cut-off of 14/12/2018), counters within our coverage continued to weaken, registering average negative return of 15.9% QTD, worse than 3QCY18 average negative return of 6.2%. Most of the players under our coverage (except for PMETAL which only inched down by 0.4%) saw significant share price contraction as the last reporting season was dampened by deteriorating earnings quality and lowering dividend pay-out. We believe 2019 will be a more challenging year considering the lack of sector catalysts and unexciting newsflow while the weak property market and slow construction activities continue plaguing the building material players. As such, even after project cost for LRT3 and MRT2 has been concluded, work progress remains slow in the market as some of the portion of the works are still undergoing redesigning especially for LRT3. We opine that any infrastructure newsflows are unlikely to revive the sector in near-term as we believe it is more of longer-term play.

Not yet time for bottom-fishing. With share prices undergoing corrections recently in 4QCY18, our counters’ Fwd. PER and Fwd. PBV, are mainly trading at trough to +1.0SD levels. In light of anticipation of seasonally weaker 4Q18 earnings QoQ, we do not discount the possibility that the sector may de-rate further as it still lacking of compelling catalysts to drive improvement in topline figures as demand remains weak. Similarly, looming margins compression as a result of higher-than-expected raw material cost as well as company’s proposition to increase export sales, which normally command lower margins could post further earnings risks, of which we are unable to account for at the moment. Hence, we reckon it is still early to call for bottom-fishing strategy until we get more clarity on companies outlook post 4Q18 results performance. Additionally, the sector would require the leading sector, namely Construction, to see improvement before the building materials sector can catch a glimpse of light at the end of the tunnel.

Source: Kenanga Research - 4 Jan 2019