PETALING JAYA: There is potential in the building material sector despite 60% of the counters under Kenanga Research’s coverage underperformed in the fourth quarter of 2022 (4Q22).
It also maintained an “overweight” call on the sector based on expectations of a rebound in demand for aluminium from buyers in China following the easing of zero-Covid restrictions and a pick-up in its property market, which is expected to support commodity prices at current levels.
“Since China’s reopening in early January, commodity prices have rebounded strongly after a lacklustre second half of 2022 (2H22), driven by expectations of a demand recovery in its property market.
“Together with supply constraints in Europe, the average selling price (ASP) is set to rise if not supported at current levels,” the research house said in a report yesterday.
Kenanga Research, however, is cautious about the prospect for steel players.
Despite a reprieve for steel prices (long and flat steel) since the lows hit in November last year, the research house said demand in China remained soft due to the slow implementation of construction and infrastructure projects worsened by its property debt crisis.
Kenanga Research’s “overweight” call on the sector is primarily due to its “outperform” call on sector heavyweight Press Metal
Aluminium Holdings Bhd.
Press Metal is expected to benefit from stronger aluminium prices supported by demand recovery following the normalisation of economic activities, it added.
The brokerage has a “outperform” call on the aluminium producer with a target price (TP) of RM6.30 a share.
“Likewise, OM Holdings Ltd (OMH) will also enjoy a structural cost advantage over its international peers given its access to low-cost hydro power under a 20-year contract ending 2033,” the brokerage added.
Nevertheless, OMH’s FY22 results fell short of expectations owing to weaker-than-expected ASPs and sales volume in the second half of 2022.
Kenanga Research also has an “outperform” call on OMH with a TP of RM2.95 a share.
The poor price outlook for steel means steel producers under its coverage such as Ann Joo Resources Bhd and United U-Li Corp Bhd would continue to face margin pressures, it noted.
The research house has an “underperform” call on Ann Joo with a TP of 80 sen a share, but an “outperform” call on U-Li with a TP of RM1.36 a share.
Kenanga Research expects water pipe maker Engtex Group Bhd to benefit from more pipe replacement contracts to be dished out as more water projects are revived over the immediate term to reduce non-revenue water.
Potential pipe replacement programmes remained largely untapped including those from the 12th Malaysia Plan, the pipe replacement in Selangor such as Sungai Rasau water supply scheme phase two and other ongoing nationwide pipe replacement programmes.
Hence, Kenanga Research has an “outperform” call on Engtex with a TP of 75 sen a share.
While the building material sector’s 4Q22 results were lacklustre with 40% and 60% of the results coming in within and below Kenanga Research’s expectations, the numbers were better quarter-on-quarter when 25% and 75% of the results were above and below expectations.
