Cautious outlook seen for building materials sector

TheEdge Tue, Nov 12, 2019 10:56am - 4 years View Original


Building materials sector
Maintain neutral:
The prices of steel bars and billets in Malaysia have continued to be on a downward trend since the beginning of 2019. As at October this year, the average monthly steel prices of steel bars and billets stood at RM1,957.5 per tonne  (+1.6% month-on-month [m-o-m], -19.8% year-on-year [y-o-y], -7.4 year to date [YTD]) and RM1,675 per tonne (-6.9% m-o-m, -24.5% y-o-y, -11.3% YTD) respectively. We believe the steel prices will remain depressed given the: i) lack of new promising catalysts from both the construction and property sectors; ii) oversupply issue in the domestic market; and iii) indirect impact from the global trade war. Meanwhile, the steel bar price in China remains soft, trading at a monthly average of RM2,343.50 per tonne (+0.4% m-o-m, -18.3% y-o-y, -3.5% YTD). In terms of raw materials, the price of iron ore started to normalise in August this year. The gradual resumption of the supply of iron ore from Brazil following the collapse of the Brumadinho dam early this year has eased the supply disruption. The price of coking coals is expected to remain stable while the price of scrap iron has been trending downwards since March this year.

The spread between hot-rolled coil (HRC) and cold-rolled coil has been expanding since May due to lower HRC prices, as the market is worried about demand prospects of HRCs as a result of the US-China trade war. The widening spread could indicate that the cold-rolled steel players in Malaysia may enjoy lower input costs,  translating into better margins. Meanwhile, we welcome ongoing efforts from the ministry of international trade and industry to impose several provisional anti-dumping duties for certain flat steel products to protect domestic cold-rolled steel players.

To recap, the Sarawak state government allocated a record RM9.3 billion of development expenditure under the state Budget 2019, in which RM5 billion or 54% had been utilised as at September. The state government has recently announced a total of RM6.6 billion to be allocated for development expenditure under the state Budget 2020. On top of that, the federal government has allocated about RM4.4 billion of development budget for Sarawak under Budget 2020. The development projects include the construction and upgrading of water, electricity and road infrastructure, healthcare, and education facilities. Together with the ongoing projects such as the Pan Borneo Highway, Coastal Road, and Second Trunk Road projects, we expect demand for building materials in Sarawak will remain robust for the next couple of years.

We maintain a “neutral” recommendation on the building materials sector. The top pick under our sector coverage is Chin Well Holdings Bhd as the group is less reliant on  domestic demand and it is one of the primary beneficiaries of the ongoing trade war between the US and China. Besides, given that the government may allocate additional funds to the water sector after the potential water tariff hike next year, we have a “buy” call on Engtex Group Bhd. We expect the group to be one of the primary beneficiaries due to its dominant position in water pipe manufacturing. For CSC Steel Holdings Bhd, we lower its financial year 2019 (FY19) to FY21 average cost assumptions for HRCs from US$630/US$665/US$670 to US$605/US$600/US$597 respectively. As a result, we increase our FY19 to FY21 earnings forecasts by 23.5%, 53.2%, and 41.1% to RM38.1 million, RM39 million, and RM43.8 million respectively. The stock is upgraded to “buy” with a higher target price (TP) of RM1.11 based on an unchanged 0.5 times calendar year 2020 (CY20) price-to-book value (P/BV).

For Cahya Mata Sarawak Bhd, we maintain a “hold” call at this juncture as the state road maintenance concession remains a near-term concern as it will expire at the end of December. On the other hand, we maintain a “sell” call on Chin Hin Group Bhd in view of the cautious outlook for the broader building materials sector. As we remain cautious on the outlook for the long-steel industry, for Ann Joo Resources Bhd, we lower its FY19 to FY21 average selling price assumptions for steel bars from RM2,200/ RM2,220/RM2,255 to RM2,040/RM2,150/RM2,160 respectively. Consequently, we forecast a wider core net loss of RM65.3 million (from RM11.4 million) for FY19 and we trim FY20 and FY21 earnings forecasts by 47% and 37.8% to RM27.4 million and RM48 million respectively. Thus, we maintain a “sell” call on the stock with a lower TP of 95 sen based on its unchanged 0.4 times CY20 P/BV. — TA Securities, Nov 11

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