KUALA LUMPUR (Oct 19): Kenanga downgraded its stance from “overweight” to “neutral” on the building material sector, as the demand outlook for both ferrous and non-ferrous metals is unlikely to improve over the immediate term, in the absence of strong policy responses from Beijing to revive the Chinese economy.

In a report on Thursday, Kenanga Research mentioned that prices of non-ferrous metals, including aluminium, ferrosilicon (FeSi), and silicon manganese (SiMn), are expected to stabilise, despite recent weaknesses caused by economic challenges in China, and slower growth in advanced economies.

However, supply constraints from decommissioning fossil fuel-powered smelters and Western sanctions on Russian aluminium are anticipated to support average selling prices (ASPs).

"Due to softening ASPs, aluminium smelter Press Metal Aluminium Holdings Bhd, and FeSi and SiMn producer OM Holdings (OMH) are expected to post weaker results for the second half of the financial year.

“The steel sector is facing challenges of price declines due to a lingering property debt crisis, a lack of significant stimulus in China, and slow construction activities. However, supply constraints and reduced input costs like iron ore, scrap metal, and coking coal could partially mitigate the situation. Local steel players like Ann Joo [Resources Bhd] and Engtex [Group Bhd] are unable to significantly raise selling prices to boost margins," it said.

The research house downgraded its call on Press Metal to “market perform" from "outperform", and reduced its target price (TP) for the counter to RM5 from RM6, due to a lowered terminal rate growth assumption in the discounted cash flow model, reflecting the weakened prospects for China, the largest consumer of aluminium.

OMH is the top pick in the sector due to its structural cost advantage over international peers, given its access to low-cost hydropower under a 20-year contract ending in 2033.

Kenanga also noted OMH’s strong growth prospects underpinned by plans to expand its capacity by 30%-36% to 610,000-640,000 metric tons per year over the medium term, and its appeal to investors given its clean energy source.

Meanwhile, the house keeps its “outperform” call on steel product maker United U-Li Corp Bhd, with a TP of RM2.18, given the surge in demand for its cable support systems driven by the local construction boom.

At Thursday's noon break, Ann Joo shares settled two sen or 1.8% higher at RM1.14, translating into a market capitalisation of RM659.6 million, while OMH was unchanged at RM1.49, with a market value of RM1.1 billion. Press Metal was also unchanged at RM4.90, with a market cap of RM40.4 billion, whereas United U-Li was down by one sen or 0.6%, with a market value of RM387.7 million.