In view of continued softer demand, higher raw material and production cost and depressed margin on intensified competition, we remain UNDERWEIGHT on the Building Materials sector. In addition, the expected COVID19-led economic slowdown and sluggish business confidence are piling more pressures on the sector, especially for the long and flat steels as well as ceramic tiles sub-sectors. However, we believe aluminium prices have already bottomed out and a V-shape recovery is possible once COVID19 subsides, based on the 2008 financial crisis scenario. As such, PMETAL should enjoy better earnings prospects next year on aluminium price recovery. In addition, new +42% new capacity next Jan and potential logistic cost savings should propel its earnings to new heights.

Below expectation. Overall, for 1QFY20, only PMETAL performed broadly within our expectations, with the remaining 3 counters coming in below our expectations. The deviations were mainly as follow:- (i) ANNJOO - lower-than-expected sales tonnage and manufacturing margin, (ii) ULICORP – lower-than-expected margin achieved, and (iii)WTHORSE- lower-than-expected sales and profit margin.

Quarter-to-date share price performance review. During 2QCY20, as at our report cut-off date of 30/6/2020, the Industrials Product Index had rebounded 24%, outperforming FBM KLCI return of +11%. The improved market sentiment was buoyed by: (i) hopes on business recovery post economic re-opening, (ii) potential revival of mega infrastructure projects, and (iii) market technically rebounding from oversold position due to political change and outbreak of Covid-19.

Gradual recovery expected but outlook remains lacklustre. Post economic re-opening, following the resumption of construction activities, property development projects and raw material’s supply chain, we expect the industry to recover gradually from 3QCY20 onwards. However, (i) weak selling price, (ii) oversupply and intense competition situation, (iii) softer market demand resulting from slower construction and property development activities, (iv) higher raw material and production cost, and (v) economic slowdown remain the downside risk to the industry. Hence, we opine that CY2020 remains a tough year for the building material sector until we see increased investment on infrastructure project, revival of mega project, or recovery in property development activities.

Long Steel China steel vs. Malaysia steel. As of the report cut-off date, China domestic steel rebar traded at c.RM2,200/MT (excluding import duties, safeguard measure and transportation costs) compared to the domestic average steel price of c.RM2,000/MT. The China steel price has been rebounding recently following the resumption of the construction activities across the country. Moving forward, we think the price trend remains strong, boosted by government economic stimulus packages and huge investment in supporting infrastructure development. With the current price gap, we believe the risk from imported steel to Malaysian players remain low as the domestic price is more attractive and the steel demand in China is stronger than our domestic market demand

Source: Kenanga Research - 10 Jul 2020