Steel outlook remains uninspiring as demand stays weak
KUALA LUMPUR: Building materials such as long steel has garnered cautious views for the fourth quarter of 2018 (4Q18) and financial year 2019 (FY19), while analysts’ outlook for the flat steel sector still remains uninspiring.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) revealed its cautious stance on long steel in a building materials sector update.
“We expect dampened domestic demand on slower flows of construction or infrastructure projects as well as potential additional steel supply coming from Alliance Steel to pile on more pressure on steel prices,” Kenanga Research said.
“However, Ann Joo Resources Bhd’s (Ann Joo) management is actively weathering the downturn by increasing its proportion of export sales to approximately 30 per cent of its production in 2019 as compared to 20 per cent of production in 2018.
“Nonetheless, we remain less optimistic on the new export proposition given that margin from export sales is generally low.”
Kenanga Research noted that in light of soft steel demand combined with the sector lacking impetus, Ann Joo’s management guided that they are unable to honour the group’s 60 per cent dividend payout policy and had instead lowered it to 40 to 45 per cent as mentioned by management during the last quarterly result briefing held on November 30, 2018.
The research arm thus made an adjustment to its financial year 2018 (FY18) dividend forecast by trimming net dividend per share (NDPS) to six sen from 10 sen, implying 27 per cent dividend payout ratio, lower than management’s guidance in this sector report.
“We believe it is unlikely that there will be another interim dividend in the upcoming 4Q18 given challenging operating environment.”
As for flat steel, Kenanga Research said that the outlook for the sector still remains uninspiring, underpinned by the weak prospects in the construction industry and stiff competition from other new players.
For stocks under its coverage, the research arm noted that United U-LI Corporation Bhd’s (ULICORP) performance is highly premised on their ability to fight off competition in this weak market.
It pointed out that ULICORP currently commands a market share of circa 40 per cent, and the silver lining would be lower flat steel input cost, which has been on a downtrend.