PETALING JAYA: The implementation of water infrastructure projects in Malaysia is expected to strengthen investor interest in pipe manufacturers.
According to Kenanga Research, water pipe makers are in a bright spot, as they stand to gain from an anticipated surge in demand. This follows the recent water tariff hikes that could strengthen the cash flows of water operators, allowing them to kick start their capital expenditure programmes, including non-revenue water reduction initiatives.
“This will be in addition to a significant allocation for pipe replacement programmes under the 12th Malaysia Plan,” the brokerage said in its report yesterday. Kenanga Research added that the increase in demand for water pipes would also be driven by the development of Sungai Rasau Water Supply Scheme Phase 2 in Selangor.
“We also see better margins as pipe makers will not be weighed down by high-cost steel inventory (which happens when steel prices are in a persistent downtrend) given that steel prices have bottomed out,” it said.
On that note, Kenanga Research favoured Engtex Group Bhd
, citing the huge potential in the water pipe replacement market locally, the company’s dominant market position in both large-diameter mild steel (MS) pipes and ductile iron (DI) pipes, and its strong earnings visibility underpinned by significant order backlogs and a strong pipeline of new projects.Kenanga Research rated Engtex’s shares an “outperform”, with a target price of RM1.41.
It said as observed in March 2024, commodity prices had eased, pointing to local long steel price, which moderated slightly by 2% month-on-month (m-o-m) to around RM2,766 per tonne, while local flat steel price inched up marginally by 1% m-o-m to RM3,164 per tonne.
It projected a slightly higher average aluminium price of US$2,350 per tonne for this year, as compared with US$2,255 per tonne last year, while low-carbon ferrosilicon (FeSi) prices are expected to average at US$1,300 per tonne this year against US$1,437 per tonne in 2023, and silicomanganese (SiMn) at US$920 per tonne for 2024 against US$962 per tonne last year.
“We see slightly better aluminium prices after a two-year lull, but remain cautious on FeSi and SiMn prices, given the protracted downturn in China’s steel sector,” Kenanga Research explained.
“Generally, the demand outlook for these commodities is unfavourable due to economic challenges in China, though partially cushioned by supply constraints due to the decommissioning of fossil fuel-powered smelters (especially by coal) on stricter environmental regulations coupled with Western sanctions against Russian producers,” it added.Overall, Kenanga Research said it expected 2024 earnings growth for aluminium smelter Press Metal Aluminium Holdings Bhd to be driven by better aluminium prices, while FeSi and SiMn alloy producer OM Holdings Ltd (OMH) by higher production volumes.
It rated OMH “outperform” with a target price of RM1.80, while Press Metal was rated “market perform” at RM4.90.
For the building material industry as a whole, Kenanga Research reiterated its “neutral” stance.
“We expect a slow recovery in China’s steel sector amid a deepening property debt crisis, partially cushioned by a robust automotive sector driven by the adoption of electric vehicles backed by extended tax breaks and investment in renewable energy infrastructure,” it said.
“Nonetheless, we believe steel prices have bottomed out and hence there will be no significant inventory write-downs in 2024,” it added.
