PETALING JAYA: The slump in business may be soon over for building material companies with construction activities projected to resume following the easing of movement restrictions.
The implementation of movement restrictions by the government in the third quarter (Q3) of 2021 had impacted the pace of construction activity and with that easing, players in the building materials space are now benefitting from the resumption of full operations.
With all, if not most companies now running at an optimal level, analysts expect building material companies to register better earnings in the quarters ahead on the back of firm prices and better demand.
However, rising raw materials costs, such as coal prices, which have risen over 180% year-on-year (y-o-y), could pose a near-term challenge, affecting companies’ margins.
UOB Kay Hian (UOBKH) Research said based on its checks, apart from cement, all building materials and commodities under its coverage had hit all-time highs this year as demand outstripped supply due to pandemic-led disruptions. “For cement, while the price remained weak in the first half of 2022, bulk cement average selling prices (ASPs) showed a gradual recovery from as low as RM195 per tonne earlier in the year to RM220-RM225 per tonne as of November 2021,” the research firm said in its latest Malaysia Strategy report.
The research firm believes that the price of cement will hit RM240-RM260 per tonne in 2022 following industry consolidation and stronger demand from the rejuvenation of construction activities.
“This indicates that most cement companies will turn around after reporting a few years of losses.
“For steel, while we foresee lower earnings as ASPs fall, we believe steel companies will still register healthy profits (higher than pre-pandemic levels) as ASPs will likely remain firm, albeit not at the current highs, supported by the conducive macroeconomic outlook,” it added.
The research firm has “buy” calls on Malaysia Smelting Corp Bhd and Press Metal Aluminium Holdings Bhd as they are “in a sweet spot to reap the positive spillover of stronger prices on favourable structural catalysts”.
On the other hand, it has downgraded Hume Industries Bhd to a hold because the stock’s share price has risen closer to the research firm’s target price as investors price in next year’s earnings recovery.
“For steel, we upgrade Ann Joo Resources Bhd and Choo Bee Metal Industries Bhd to hold as their share prices have dropped 20%-30% from their peaks in the first half of 2021, presenting a good opportunity to accumulate,” it added.
Meanwhile, TA Research said it expects building materials players under its coverage to register “solid” earnings for Q4 of 2021 after three out of the four players under its coverage reported results above expectations.
It has an “overweight” call on the sector and sees Ann Joo Resources, CSC Steel Holdings Bhd and Chin Well Holdings Bhd to continue benefitting from elevated steel prices thanks to the healthy demand arising from fiscal stimulus globally, as well as steel production cuts in China.
Similarly, Kenanga Research also has an “overweight” call on the building materials sector.
The brokerage noted while raw material costs remain elevated, with the price of aluminium staying high at an average of US$2,789 per tonne (RM11,781), Q4 could be another record quarter for the sector.
Kenanga Research argued that its estimates were not overly optimistic, citing that year-to-date, the spot price of aluminium has remained solidly above US$2,600 (RM10,983) per tonne, well above its assumption of US$2,100-US$2,400 (RM8,870-RM10,138) per tonne for 2021-2022.
Kenanga Research has an “overweight” rating on Press Metal and United U-Li Corp Bhd, and “market weight” recommendation on Ann Joo.
“United U-LI’s market leading position in the cable support systems space is further consolidated under the prolonged pandemic which has eliminated weak and smaller competitors. We expect earnings to remain strong on stable margins as they command better pricing power in the space,” the brokerage explained.
As for Ann Joo, it noted, with China steel prices seeing a sharp drop amid the property debt crisis, earnings could come off in the quarters ahead. It noted the company has been a beneficiary of the surging steel prices, which had helped expand its margins.