KENANGA Investment Bank has reiterated its neutral rating on the building material sector, saying prices for both ferrous and nonferrous metals are expected to remain stable.
This is despite the economic challenges in China given supply constraints arising from stricter environmental regulations coupled with Western sanctions against Russian producers, the research house said in a sector update on Monday (April 29).
“Generally, the demand outlook for these commodities is unfavourable due to economic challenges in China, though partially cushioned by supply constraints due to the decommissioning of fossil fuel-powered smelters (especially by coal) on stricter environmental regulations coupled with Western sanctions against Russian producers,” it said.
“Overall, we expect FY24 earnings growth for aluminium smelter PMETAL (MP; TP: RM4.90) to be driven by better aluminium prices, while low-carbon ferrosilicon (FeSi) and silicomanganese (SiMn) alloy producer OMH by higher production volumes.”
Kenanga expects a slow recovery in China’s steel sector amid a deepening property debt crisis partially cushioned by a robust automotive sector driven by the adoption of EV backed by extended tax breaks and investment in RE infrastructure.
“Nonetheless, we believe steel prices have bottomed out and hence there will be no significant inventory write-downs in CY24,” it added.
Meanwhile, the research house also projected water pipe makers to be in a bright spot.
“We like ENGTEX on expectations of high demand for water pipes following water tariff hikes translating to strengthened cash flows of water operators, allowing them to kick start their capex programmes including nonrevenue water (NRW) reduction initiatives,” it noted.
“This will be in addition to a significant allocation for pipe replacement programmes under the Twelfth Malaysia Plan (12MP).
“The demand for water pipes will also be driven by the development of Sungai Rasau Water Supply Scheme Phase 2 in Selangor.”
Kenanga also sees better margins as pipe makers will not be weighed down by high-cost steel inventory (which happens when steel prices are in a persistent downtrend) given that steel prices have bottomed out.
For instance, in Mar 2024, local long steel price eased slightly to c.RM2,766/tonne (-2% MoM) while local flat steel price inched up to RM3,164/tonne (+1% MoM).
Kenanga’s sector top picks are OMH (OP; TP: RM1.80) and water pipe maker ENGTEX (OP; TP: RM1.41).
“For OMH, this is given its structural cost advantage over international peers due to access to low-cost hydropower under a 20-year contract ending 2033, its strong growth prospects underpinned by plans to expand its capacity by 30%-36% to 610,000- 640,000 metric tonnes per annum over the medium term as well as its appeal to investor given its clean energy source,” the research house remarked.
“As for ENGTEX, this is given the huge potential in the water pipe replacement market locally, its dominant market position in both large-diameter mild steel (MS) pipes and ductile iron (DI) pipes, and its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects.” – April 29, 2024
Main pic credit: The Star
