Upgrade Sector to Neutral from Underweight on the back of better steel demand and recovery in aluminium prices moving into CY21. With slightly more optimism over the construction space which would cascade into better steel demand and subsequently prices, we upgrade Ulicorp to Neutral with higher TP of RM0.375. That said, long steel player ANNJOO might not feel the positive effects as much given the emergence of Alliance Steel in 2018 with its massive capacity – which would cap upside for long steel prices. Hence, we keep our UP rating and TP of RM0.50 for ANNJOO unchanged. Meanwhile, we believe aluminium prices have already bottomed out and a V-shape recovery is possible once COVID-19 subsides, based on the 2008 financial crisis scenario. As such, PMETAL should enjoy better earnings prospects next year on aluminium price recovery. In addition, its new additional 42% new capacity next Jan, potential logistic cost savings and favourable raw material costs should propel its earnings to new heights. PMETAL is an OP with TP of RM5.95.

3QCY20 Quarter-to-date share price performance review. As at our report cut-off date of 25 September 2020, the Industrials Product Index (KLPRO index) increased marginally by 0.85%, almost similar to KLCI’s 0.54% performance. The indices are currently consolidating post a rebound in 2QCY20. During the quarter, we dropped our coverage on WTHORSE.

Long Steel

The existing situation is undesirable. Since 2018, the local steel prices have been trading at constant discount against China’s prices – reflecting the relatively weaker local demand. To make things worse, the recent pick-up in demand for iron ore (a key raw material in steel making) by China as they rebounded from the Covid-19 pandemic faster than any other nations, has resulted in mounting cost pressures for the local steel players. The squeeze from top (sales) and bottom (costs) is likely to weight onto local steel makers’ earnings for the foreseeable future despite them already been mired in losses for the past two years.

Better but unlikely to be much better. Moving forward, our view is that the construction sector will be stronger as the government will likely pivot their focus onto development capex i.e. pump-priming for the mid-long-term growth of the nation. But unlike last time whereby steel prices would increase in tandem with construction demand, the dynamics this time around might be slightly different.

This is due to Alliance Steel’s huge capacity of 3.5m tonnes which came on stream into the local market in 2018. Hence, the size of projects are now required to be larger before its impact on the steel sector and steel prices can be felt. With this less favourable context, we maintain UP for ANNJOO with unchanged TP of RM0.50 based on P/BV of 0.26x (at minus 2SD) pegged to FY20E BV/share of RM2.11.

Source: Kenanga Research - 7 Oct 2020