Sluggish property market an Achilles’ heel for M’sia’s basic materials sector
KUCHING: Demand is expected to pick up in 2017 for the basic materials sector, driven by several construction jobs awarded in 2016.
However, analysts believe that the sluggish property market could cap the sector’s upside.
RHB Research Sdn Bhd (RHB Research) in its market outlook for 2017, said, “A slew of infrastructure contracts have already been awarded year to date (YTD), and we believe that the value of construction jobs awarded in 2016 is likely to surpass that of the preceding year.
“Already, various contracts for high-profile projects like the mass rail transit line 2 (MRT2) and Pan Borneo Highway (Sarawak) have been awarded YTD.”
It also expect a meaningful pickup in the usage of basic materials in 2017, driven mainly by infrastructure projects.
However, the research team pointed out that the sluggish property market could translate to lower construction activities for both residential and non-residential projects in the medium term, hence may cap the substantial upside in basic materials requirements.
“Therefore, we remain selective in stock selection within our sector universe,” it said.
RHB Research’s top stock picks in this sector include Press Metal Bhd (Press Metal), Cahya Mata Sarawak Bhd (CMS), and OKA Corporation Bhd (OKA).
It highlighted that Press Metal remained its top pick, as the company still has room for improvements.
The research team explained, “We continue to like Press Metal as we see room for further earnings improvement.
“The company’s Phase 3 smelter in Samalaju was fully commissioned in late May. Phase II of its Samalaju smelter also returned to normal operations in Nov 2015 after six months of repairs due to a fire incident.
“Apart from that, the London Metal Exchange (LME) aluminium cash price seems to have formed a new support above US$1,700 per tonne despite a short span of technical correction.
“The premium, which is a surcharge consumers must pay on top of the LME price, has normalised at around US$70 to US$80 per tonne.
“The uptick in the all-in aluminium price again supports our view on improving fundamentals in the aluminium market, which suggest that prices have bottomed. The stock is our ‘top pick’ for the basic materials sector.”
Meanwhile, it noted that all of CMS’ business units have made a comeback over the last two consecutive quarters, with improved sales and margins recorded across the board after temporary setbacks earlier this year.
“Its traditional businesses in cement, materials & trading, and construction & road maintenance are all set to continue benefiting from RM16 billion Pan Borneo Highway (Sarawak) project and Sarawak Corridor of Renewable Energy (SCORE) development. 25 per cent-owned OM Materials (Sarawak) Sdn Bhd (OMS) is also back on the recovery path after one-off costs incurred to cancel OMS’ hedging position in the second quarter of the financial year 2016 (2QFY16,” it said.
Therefore, RHB Research pointed out that it has upgraded its call on CMS to ‘buy’.
Within the basic materials sector, the research team also favoured OKA given its more aggressive pricing in order to capture a bigger market share.
“In addition, its internal cost optimisation strategies would support margins going forward, in our view. Demand for its products should remain stable, underpinned by various infrastructure projects that were announced, such as new highways and flood mitigation projects,” it said.
In terms of divisions within the basic materials sector, RHB Research said it continued to favour the cement segment as there is only one producer each in Sabah and Sarawak, while in Peninsular Malaysia, the market is dominated by an oligopoly.
Overall, it pegged an ‘overweight’ call, with selective stock picks, for the basic materials sector as it expect a recovery in demand for the sector in 2017.