THE much ignored aluminium, ferroalloy and tin players could spring some surprises by posting stellar 2Q 2022 earnings even if this has yet to be fully reflected in their share prices.
Stating that this will offer investors attractive trading opportunity, UOB Kaay Hian Research attributed the much improved performance to higher year-on-year production after the lockdown and the spill-over effect of record-high commodity prices from 1Q 2022.
“Most of the companies under our coverage sell forward at least two to three months ahead so they managed to lock in the favourable prices before the prices trended downwards,” observed analyst Hazmy Hazin in a building materials sector update.
“Prices have eased entering into 2H 2022 mainly due to the weak market sentiment caused by the fear of recession. While sentiment may remain fragile in the near term, we believe this presents a good buying opportunity as China’s gradual lifting of its lockdown will stimulate demand and support prices accordingly.”
Reiterating its “overweight” outlook on the building materials sector, UOB Kay Hian Research expects favourable structural supply-demand to support lofty commodity prices especially after China gradually lifts its lockdown in 2H 2022.
“We favour the ferroalloy, tin and aluminium segments as they are poised to post strong results this year due to (i) elevated average selling prices (ASPs); (ii) improved production; and (iii) healthy demand,” justified the research house.
Individually, UOB Kay Hian Research’s three preferred counters are:
- Press Metal Aluminium Holdings Bhd (“buy”; target price: RM7.40) which continues to be a prime beneficiary of strong aluminium prices backed by structural supply shortage and robust demand.
Press Metal has hedged 60% of its aluminium sales volume at US$2,400/metric tonne (MT) for 2022 and 35% at US$2,500/MT for 2023. Preference for low carbon and greener aluminium also lends further strength to current spot prices.
- Malaysia Smelting Corp Bhd (“buy”; TP: RM3.07) which is on track for another strong year in 2022 backed by its production ramp up and improvement in smelting margins from the full utilisation of its new eco-friendly smelting plant.
Despite the volatile market sentiment that is pressuring tin prices, the research house still believes that prices will remain firm in the long run even as such structural supply issue shall persist.
- OM Holdings (not rated; current price: RM2.05) is in a sweet spot to benefit from elevated ferroalloy prices backed by structurally favourable supply-demand dynamics. Its use of low-cost eco-friendly hydropower, tax benefits and long-term earnings visibility via its capacity expansion and diversification plan puts the company ahead of its global peers.
The economic re-opening theme also helps OMH to resolve its manpower shortage issue and to fully resume production going forward. – Aug 4, 2022
