Kenanga Investment Bank upgrades its sector call to OVERWEIGHT, driven by a significant improvement in earnings delivery in 1QCY24 and an upgrade of sector heavyweight PMETAL to OUTPERFORM. The sector has shown remarkable performance, with companies either beating or meeting expectations. PMETAL and ENGTEX emerge as top picks, benefiting from favourable market conditions and strategic advantages.
Aluminium prices have seen a steady uptrend due to robust consumption in China and increasing demand from renewable energy projects and electric vehicle production. This, combined with supply constraints from the closure of fossil fuel-powered smelters and Western sanctions on Russian aluminium, supports a bullish outlook. YTD, LME aluminium prices averaged USD 2,337/MT, up 4% from 2023. PMETAL’s superior performance is driven by higher-than-expected average selling prices (ASP) and strong results from associate PT Bintan.
In the steel segment, prices remain stable despite increased US tariffs on Chinese steel imports. Global demand is muted due to China’s property debt crisis, but local demand is expected to rise with the rollout of infrastructure projects like the Penang LRT, Kuching ART, and MRT3. Stable steel prices reduce earnings volatility for steel product producers, benefiting companies like ENGTEX and ULICORP, which have managed to overcome margin suppression from high-cost inventories.
Water pipe makers are poised for a promising period as water projects gain momentum. Recent water tariff hikes have strengthened the finances of water operators, leading to initiatives like non-revenue water reduction and the upgrading of water treatment plants. Proposals for water projects worth approximately RM4 billion have been submitted to the Ministry of Finance, with further tariff increases anticipated within the next two years. ENGTEX, as a key player in this sector, stands to gain significantly from these developments.
Overall, the positive macroeconomic outlook and specific industry trends favour the building materials sector. Kenanga’s upgrade to OVERWEIGHT reflects confidence in continued strong performance and growth prospects. PMETAL is well-positioned with its access to low-cost hydropower until 2040, providing a structural cost advantage over global peers. ENGTEX is set to benefit from the revival of local water projects, making both stocks attractive investment opportunities in the building materials sector.
