KUALA LUMPUR (June 14): Kenanga Research maintains an "overweight" call on the building materials sector, particularly for aluminium, as it anticipates supportive aluminium prices due to supply constraints.

In a note on Wednesday (June 14), the research outfit said higher aluminium prices could bode well for Press Metal Aluminium Holdings Bhd.

Similarly, OM Holdings Ltd is also poised to reap the benefits of a structural cost advantage over global peers thanks to its access to cost-effective hydropower through a long-term contract until 2033.

“Conversely, the steel players face challenges with weak domestic demand in China, particularly due to the sluggish property market there,” said analyst Teh Kian Yeong in the note.

He added consequently, steel producers such as Ann Joo Resources Bhd, United ULI Corp Bhd, and Engtex Group Bhd, will continue to experience margin pressures.

“As for Engtex, pipe replacement contracts will gain momentum in the near term, thus stimulating demand and fostering growth in top line,” said Teh.

However the analyst said the same cannot be said for steel prices as the demand for both long and flat steel remains lacklustre due to excess production and sluggish property market in China while the roll-out of construction and infrastructure projects has not been as robust as anticipated.

“We believe realistically, a pick-up in the property sector may only be seen in late 2023 on government support measures. If China decides to embark on pump priming resulting in a revival in construction activities, there is a chance of steel prices experiencing a gradual recovery,” said Teh.

Hence, he anticipates Ann Joo Resources (target price TP 75 sen) and ULI Corp (TP: RM1.15) to continue facing margin compression as steel ASP continues to fall.

As for Engtex , it is poised to benefit from the revival of water projects nationwide as the new unity government settles in and starts to embark on the roll-out of public infrastructure projects.

He added for the recently concluded first quarter of 2023 (1Q2023), there was a significant sequential deterioration in earnings delivery by the sector with disappointing results from all players under Kenanga’s coverage.
 
“Generally, the top line of all players contracted due to weaker-than-expected average selling price and sales volumes with the exception of Engtex which recorded improved demand for selective steel products.

In terms of bottom line, all players were hit by margin erosion due to higher-than-expected raw materials and operating cost,” he added.