PETALING JAYA: Optimism is returning to the building materials sector with the likelihood that the government will push plans for large-scale infrastructure spending to pump-prime the economy.
The revival of mega infrastructure projects would be a positive catalyst for the building materials sector as it would boost steel demand and see a recovery in prices of aluminium moving into 2021, said Kenanga Research.
Expecting better days ahead for the sector, Kenanga Research has upgraded the sector to “neutral” from “underweight”.
With more optimism over the construction space, the demand and prices for steel would get better, it said in a report.
It upgraded United U-Li Corp Bhd (Ulicorp), a flat steel player, to “neutral” with a higher target price of 37.5 sen.
On the other hand, Kenanga Research feels that long steel player Ann Joo Resources Bhd might not feel the positive effects as much given the emergence of rival Alliance Steel (M) Sdn Bhd into the scene two year ago.
Alliance Steel has a massive capacity of 3.5 million tonnes, which would cap upside for long steel prices. Hence, Kenanga Research keeps its “underperform” call and target price of 50 sen for Ann Joo unchanged.
According to the research firm, Ulicorp is likely to enjoy the pick-up of any pump-priming initiatives in a more significant manner compared to the long steel players.
“Being the largest cable support system player in a fragmented industry, Ulicorp will see its smaller competitors, which crowded out the space in 2017, either quitting, downsizing or being shaken out, given the current lacklustre demand, ” it said.
If this is the case, the company stood to capture the initial demand and in turn cascade that down to its bottomline in the form of better margins, added Kenanga Research.
As for aluminium, based on the 2008 financial crisis scenario, the research firm believed prices have already bottomed out and a V-shape recovery is possible once the Covid-19 subsides.
“As such, Press Metal Aluminium Holdings Bhd (pic below) should enjoy better earnings prospects next year on aluminium price recovery. In addition, its new additional 42% new capacity next January, potential logistic cost savings and favourable raw material costs should propel its earnings to new heights, ” it said.
Kenanga Research has an “outperform” with a RM5.95 target price for Press Metal despite its share price having rebounded sharply by 77% from the RM2.85 low in mid-March.
The company has additional smelting capacity, slated to come onstream next January. This, coupled with a recovery in aluminium prices and favourable raw material costs, would propel the group’s earnings to new heights, said Kenanga Research.
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