We remain UNDERWEIGHT on the Building Materials Sector given the lacklustre outlook for the sector. This is on the back of weaker ASP, softer demand and depressed margin on intensified competition. Furthermore, the expected COVID19-led economic slowdown, sluggish business confidence as well as the collapse of oil prices are piling more pressures on the sector, especially for the long and flat steels as well as ceramic tiles sub-sectors. However, we still see value in PMETAL after a 30% share price decline YTD, viewing the selling as excessively overshooting fundamentals. While aluminium price is likely to remain volatitle, a V-shape recovery is possible based on the 2008 financial crisis scenario. PMETAL remains OUTPERFORM in the sector.

Mixed results. Overall, 2 counters (PMETAL and WTHORSE) performed within our expectations, 1 (ANNJOO) missed and 1 came above (ULICORP). The deviations were mainly as follow:- (i) ANNJOO - lower-than-expected average selling price and higher-than-expected raw material cost, and (ii) ULICORP – higher-than-expected margin achieved by the company.

Quarter-to-date share price performance review. During 1QCY20, as at our report cut-off date of 20/3/2020, the Industrial Product Index registered a negative return of 35.0%, underperforming the FBMKLCI’s performance of -18%. The average share price performance for counters under our coverage fell further to show negative returns of 39.4% from negative 3.8% over 4QCY19, as sentiment was affected by: (i) negative impact from the Covid-19 outbreak which further dent the already slowing down economic growth, (ii) lack of catalyst such as new projects awards and revival of mega infrastructure projects, (iii) unstable political turmoil and iv) oil price collapse after OPEC+ fail to strike a deal on production cut, leading to oil price war.

Tough year ahead. Overall, the building materials market remains challenging largely due to: (i) weak selling prices amid an oversupply situation and intense competition in the domestic market, (ii) slower domestic construction and property development activities as despite the revival of a few mega-infrastructure projects as announced by the government, we believe that demand will only pick up in the later quarters considering the slow work progress as some of the projects are still undergoing redesigning and tendering phases, (iii) outbreak of Covid-19 further slowing down economic growth as several countries have imposed lock-down policy, affecting the export sales. Furthermore, with the Movement Control Order (MCO) imposed by the government, non-essential business such as construction and building material companies have to shut down temporarily; hence, affecting companies sales orders, factories production and daily business operation, and (iv) weaker economic condition resulting from slower economic growth, collapse in oil price (from USD45/barrel to as low as USD25/barrel) and sluggish business confidence has affected the demand for building materials. All in, we opine that CY2020 will be a tough year for building material counters.war.

Source: Kenanga Research - 3 Apr 2020