Strong catalysts seen in building materials sector
KUCHING: The team behind AmInvestment Bank bhd (AmInvestment Bank) maintained its overweight outlook for building materials for the next six to 12 months and was positive on all subsegments other than the cement industry, particularly in Peninsular Malaysia.
“The key catalysts for this sector are visible, underpinned by the stronger demand for building materials based on record order books of the construction players in the country,” it outlined in a strategy report for the second half of 2017.
“Our overweight stance on the building materials sector could be further strengthened by higher-than-expected average selling prices (ASPs) for selected building materials like steel and aluminium.”
Steel ASP has shown a recovery since the last quarter of 2016 with the ongoing steel supply cuts in China -- due to global steel glut caused by China in 2015 -- by 50 million metric tonnes by end-June 2017 and cost-push factors, such as an increase in raw material prices.
“Local steel ASP is further boosted with the extension of safeguard measures for imported steel after a preliminary investigation by the Ministry of International Trade and Industry to impose safeguard duties for steel reinforcing bar and steel wire rods and deformed bar in coil till April 2020.”
Year to date, average steel ASP stands at RM2,050 MT. AmInvestment Bank project steel prices of RM1,890 MT and RM2,022 MT for 2017 and 2018 respectively.
Meanwhile, it believed aluminium demand is expected to grow modestly driven by the transportation and construction segment.
“ASP for aluminium is seen to remain stable due to the sturdy demand as well the ongoing reforms in China to cut excess supply coupled with the move to address pollution caused by the aluminium smelters in the country,” it added.
Meanwhile, unlike steel and aluminium, the outlook for cement in the peninsula remains lacklustre. AmInvestment Bank noted that cement’d ASP continues to depress in 1H2017 mainly due to the oversupply within Peninsular Malaysia.
“Earnings for peninsular cement players were further pushed down to a record low. For year 2017, cement ASP is forecast to be at RM245 per tonne,” it said.
“Large- scale construction projects, which are expected to begin in 2H17, will spur greater demand resulting to an improved cement ASP.”
Contrary to peninsular cement players, Cahya Mata Sarawak Bhd (CMS) the only cement player in Sarawak continues to deliver positive results due to strong demand of cement in the state coupled with better ASP.
“We project cement price of RM255 per tonne in 2018.”
Thus, AmInvestment Bank Bhd led its top large- cap and small-cap picks as CMS and Ann Joo Resources Bhd respectively.
“CMS is the sole cement manufacturer and one of the dominant local players supplying building materials (aggregates, premix and wire mesh) through its construction and materials trading arm,” it explained.
“The ongoing development plan in the state, spearheaded by the federal and state governments, namely the Sarawak Corridor of Regional Energy ( SCORE) and the Sarawak Economic Transformation Plan (SETP) will spur the construction industry via infrastructure projects such as road connectivity improvement via the construction of Pan Borneo Highway and roads into the hinterland and building of additional power plants including hydroelectric power plant.”
Other potential projects in the state pipeline include improving public transport amenities via the introduction of LRT and BRT in Kuching, it added.