• D/G to NEUTRAL from Overweight; Top Pick: Malayan Cement (LMC). Of the three companies under our coverage which reported results, LMC exceeded expectations while Cahya Mata Sarawak and Press Metal fell below estimates. We continue to favour LMC due to its direct exposure to the rebound in construction and property activities, and its position as the largest cement brand in Malaysia. With numerous local infrastructure projects on the horizon, building materials players – particularly cement producers – are expected to reap significant benefits from the infrastructure initiatives.

• Aluminium. PMAH’s FY23 core earnings fell slightly below ours and Street’s estimates, in tandem with softening metal prices and regional premiums. 4Q23 topline declined 10% YoY but improved QoQ, mirroring the LME price trend (+2.2% QoQ, -4.6% YoY). 4Q23 core earnings amounted to MYR311.7m (+6.4% QoQ, -7.6% YoY) from a higher contribution from associates (+78% YoY) and enhanced smelting profitability as PMAH continued to reap further savings in raw material costs, especially carbon anode, due to the lag effect.

• We tone down our optimism on prospects of the aluminium sector due to expected surplus in FY24. Despite historically low aluminium inventory levels, global aluminium demand remains unexciting, hindering the resurgence of ASPs. Weak demand persists in Europe, with mixed performances among subsectors in China. While we recognise PMAH as one of the lowest-cost smelter in the world, we revise our recommendation on the stock to Neutral, given the lukewarm sentiment of the aluminium industry, coupled with limited upside potential in PMAH’s current valuation.

• Raw materials trend & outlook. Carbon anode prices have decreased to below the CNY4,000/tonne mark, and we anticipate it to remain at the current level barring any significant supply shortages. In contrast, alumina has risen, reaching c.USD367/tonne as of end January (+10% MoM) on concerns over supply chain disruptions following a fuel depot blast in Guinea which impacted bauxite supply. Bulk cement prices have stabilised and continue to sustain at MYR380/MT as of January, and we foresee it remaining within this range given the expected demand.

• Cement. Within RHB’s coverage of the two cement players, LMC surprised the Street yet again, while CMS fell short of expectations. LMC’s 1HFY24 earnings constitute 85% and 70% of ours and consensus’ full-year forecasts. The surge in topline performance and margins were attributable to improvements in volumes, cement and concrete ASPs, and reduced coal cost. Conversely, CMS’ FY23 earnings fell short of ours and Street’s full-year projections at 96% and 86%. Although CMS’ cement division demonstrated sequential improvement – supporting our positive outlook on the cement prospects in Sarawak – the disappointing results were influenced by widening loss in the Phosphates division, and a slowdown in other business segments.

Source: RHB Securities Research - 5 Mar 2024