We remain OVERWEIGHT on the Building Material Sector premised mainly on our optimistic outlook for PMETAL. While FY21 was a record earnings year for PMETAL, 4QFY21 earnings missed forecast slightly due to the RM50m Sarawak State sales tax. With aluminium prices remaining elevated and its new 42% capacity, FY22 is likely to be another earnings record year trailing after FY21. Retain OP with TP of RM8.63 for PMETAL. For flat steel player ULICORP, we foresee earnings to remain strong amidst diminished competition post pandemic coupled with the opening up of both of their key markets – Malaysia and Singapore. Still an OP with TP of RM2.30 pegged to 10x FY22E PER. As for ANNJOO, we foresee earnings weakening on lower margins from lower steel ASPs while lagging raw material prices (in previous quarters) play catch-up. Thus, we maintain UP with unchanged TP of RM1.70 anchored to 0.75x FY22E PBV.

LONG STEEL

China long steel prices stagnate on renewed lockdowns. Despite the geopolitical concerns over the Russia-Ukraine war which has sent steel prices in the western world higher (as these 2 countries are net exporters of steel), steel prices in China have remain unchanged as the economic standstill from renewed Covid-19 lockdowns kept prices at bay. Such price dynamics is unfavourable for our domestic long steel coverage – ANNJOO - as their strong profits registered in FY21 was from exporting to China due to weak local demand.

Local long steel prices slightly higher. Meanwhile, March steel prices locally have climbed slightly to c.RM3,275/tonne (+8% MoM) amidst the war tension. That said, we believe local prices are unlikely to see a strong surge mainly because supply for local steel is anticipated to increase. The rationale is as such - due to China’s reduced demand and price, steel manufacturers based in Malaysia which have been supplying billets/rebars to China over the past year will likely divert some of these products back into local market which would increase local steel products in circulation. On the back of only slight increase in demand (upon recovery from pandemic), steel prices would consequently see some pressure on the increased supply moving forward. That said, we do not expect a steep drop in steel prices back to pre-Covid levels as raw material prices globally have also increased.

ANNJOO’s peak profitability has passed. ANNJOO which had benefitted from: (i) the strong demand and price from China (by selling billets), and (ii) superior margins amidst rising steel prices while cost of goods lags, will see weaker profits moving forward as the weakening steel price would compress margins as raw material costs play catch-up. In tandem with the weaker anticipated earnings in subsequent quarters, we maintain UP with unchanged TP of RM1.70 pegged to 0.75x FY22E PBV.

FLAT STEEL

ULICORP will continue registering strong profits in the coming quarter. Flat steel prices have rebounded strongly recently since coming off in Oct 2021 due to the Russia-Ukraine war. This also means flat steel supply would continue to remain tight. This favours ULICORP as such backdrop deters competitors (which are smaller in size) in this space from coming back due to the high raw material costs – as higher working capital is required to purchase raw material. Moreover, in this tight market, local flat steel suppliers (i.e. Mycron) favour ULICORP as a client given their strong cash position – which guarantees prompt payment. Hence, unlike smaller competition, ULICORP will not face raw material shortages despite the tight flat steel market.

With majority of their sales directed towards the Malaysian and Singapore markets which have both opened up – we believe the immediate demand from these two markets for their products would remain resilient. We continue to believe they will command strong pricing power for the rest of FY22 with expected 14% YoY earnings growth. All in all, we maintain OUTPERFORM with unchanged TP of RM2.30 on 10x FY22E PER.

ALUMINIUM

Aluminium prices remain high. Although aluminium prices are off its decade high of USD3,876/MT chalked on 4 Mar 2022 after Russia invaded Ukraine as Russian aluminium producer Rusal, with production output accounts for c.6% of the global supply, shuttered production in an alumina refinery in Ukraine. This is expected to tighten the supply chain further while economies reopening-led demand would continue to keep aluminium prices elevated. In addition, the major structural decarbonisation trends for electric vehicles and renewable energy have boosted aluminium demand leading to aluminium prices remaining elevated. YTD, LME aluminium spot prices have risen another 13% to USD3,436/MT as of last Friday while 1QCY22 average aluminium spot prices jumped 18% QoQ and 55% YoY to USD3,255/MT from USD2,756/MT in 4QCY21 and USD2,094/MT in 1QCY21, respectively.

Raw material cost picks up but still lags behind aluminium prices. After a price weakness in early 1QCY22, alumina prices spiked up in Mar 2022 to close at USD525/MT last Friday which has surged 48% YTD or constituting 15.3% of aluminium price. Nonetheless, this was still below the normalised level of 16%-17% when the average alumina prices in 1QCY22 was 5% lower QoQ at USD401/MT from USD423/MT despite aluminium prices leaping 18% over the same period, bringing the percentage of alumina cost to aluminium price to 12.3% from 15.7% in the preceding quarter. As such this implies that aluminium smelters are expected to see their profit margin expanded again in the upcoming 1QCY22 after a compression in the preceding quarter.

PMETAL to benefit from high aluminium prices; OP maintained. Despite a record FY21, PMETAL performed slightly below expectation for 4QFY21 with core profit of RM284.8m, largely due to an accrual for Sarawak State sale tax of RM50m for FY21 posted in 4QFY21, while operating costs continued to stay elevated especially logistic costs as well as raw material costs. Nonetheless, with alumina price easing off as mentioned above, PMETAL could likely to see margin improvement. Going forth, with solid aluminium prices coupled with the full impact of P3 production volume starting from Oct 2021, PMETAL’s earnings prospects remain promising and FY22 will be another record year. Thus, we continue to rate the stock an OP with TP of RM8.63, based on +0.5SD to 5-year FY22E rolling mean of 33x.

SECTOR CALL

Overall, we maintain our OVERWEIGHT sector call on optimistic outlook for PMETAL which makes up >95% of our Building Material Sector weighting, and flat steel player ULICORP.

Source: Kenanga Research - 4 Apr 2022