Overall, we maintain our UNDERWEIGHT call on the building material sector as we are negatively weighted on the steel and aluminium sub-sectors. We expect the higher raw material cost and lower average selling price to pile on more pressure on manufacturing margins. For aluminium, we estimate the average 2019 aluminium price to be at USD2,000/MT, a 5% drop from 2018 average of USD2,108/MT but still a recovery from current price of c.USD1,830 (as of 21 June 2019), supported by the current supply deficit globally. We believe the recent weakness in aluminium prices is temporary and hence, it could see some recovery in the near term. However, PMETAL has managed to hedge c.40% of its FY19 aluminium sales volume at USD2,000-2,100/MT. All in, no changes to our calls and TP except for ULICORP which we downgraded to UP with a higher TP of RM0.480 (previously, MP; TP: RM0.450).

Below expectation. Companies’ performance for the first quarter are much weaker than the previous quarter. 1QCY19’s result came in below our expectations - 2 stocks within our coverage, ANNJOO and PMETAL delivered lower-than-expected sets of results. Notable was ANNJOO’s losses deviations first time since 2015. The negative deviation were mainly due to: (i) ANNJOO higher-than-expected raw material cost, lower-than-expected average selling price and sales tonnage, (ii) PMETAL- higher-than-expected alumina costs and lower-than-expected aluminium prices.

Share price cut-off date performance. Over 2QCY19, as of our report cut off date of 21/06/2019, the Industrial Product Index registered negative return of 4.0%, which underperformed the KLCI index as compared to a positive return of 2.4%. Counters under our coverage recorded a negative average capital of 1.3% QoQ, from a postive return of 9.5%, over 1QCY19, however both stocks were still outperformed the Industrial Product Index with a slightly smaller negative return. We believe the drop in share prices were largely due to i) disappointing 1QCY19’s several earnings ii) lack of projects catalyst and newsflow despite the resumption of mega-infrastructure project announced by government, iii) intense competition in the domestic market and iv) uncertainty from the trade fiction.

Market remains challenging. Overall, the market remains challenging for steel and aluminium counters, largely due to i) higher raw material cost as a result of production and supply disruptions, ii) lower average selling prices led by oversupply situation and intense competition in the domestic market further depressing the company’s margin. Despite the revival of a few mega-infrastructure projects announced by the government, we believe that the revenue will kick into to the industry in the later quarter considering the slower work progress as some of the projects are still undergoing redesigning and tendering phases. Besides, resumption of the projects at reduced cost and intense competition in the tendering phase will further restrict the potential earning. Hence,we opine that 2019 continue to be a tough year for building materials sectors led by unfavourable market sentiment.

Long Steel

Chinese steel update. Based on the official data released by National Bureau of Statistic China, the Chinese steel output hit record high c.89.09m tonnes in May, having registered 10% growth, MoM. The strong steel production was mainly driven by i) attractive average selling price in China due to stronger demand and government’s effort in cutting down capacity under the steel reform policy and ii) China’s property remains robust and infrastructure construction pick up steady this year. Besides, china’s steel prices have been fluctuating significantly in past years, achieving record high of RMB4,780/MT in September 2018 and record low of RMB1,750/MT back in February 2016. As cut-off date, the steel prices have been traded at c.RMB3,800/MT, having retraced from its previous peak of c.RMB4,200/MT in April 2019.

Source: Kenanga Research - 5 Jul 2019