Source: The Star Online
Steel stocks continue to garner market attention despite normalising steel prices.
Investors are instead focused on the investment merits of the industry as some of these companies are anticipated to churn out strong profit growth after a long period of difficult competition that finally ended late last year due to overproduction in China.
While steel prices have normalised, fundamentally the situation in China still has not changed since the government there clamped down on steel mills on environmental concerns.
Some companies in the sector have already started to churn out a strong comeback in their bottom lines in their latest quarterly financial reports.
Companies such as Malaysia Steel Works (KL) Bhd (Masteel) and Hiap Teck Venture Bhd are among the few that have posted impressive growth in bottomlines.
In its third quarter ended Sept 30, Masteel said its net profit surged by 31 times year-on-year (y-o-y) to RM38.7mil while Hiap Teck’s posted a turnaround in its net profit for its first quarter ended Oct 31 with a profit of RM16.04mil from a loss position a year ago.
Investors would now be looking ahead to see the next quarter’s profit performance to see if this performance can be sustained.
Steel prices have thus far normalised but still grew month-on-month (m-o-m) by 4.4% for steel bars and 4.7% for steel billets, basing upon statistics that were sourced from the International Trade and Industry Ministry.
According to UOB Kay Hian’s building materials analyst Abdul Hadi Manaf, the steel industry is still an “overweight” despite normalising prices as these prices are high enough to support local players.
“Steel price in China has come down, it was in its peak on Dec 15, 2017. But then it started to come down after hitting its peak. Local steel prices are still on the high side and it still rose m-o-m in the month of January,” Abdul Hadi tells StarBizWeek.
“Prices are still going up, but at a slower pace because China has started to reduce their prices a bit so our local prices will start to mirror that accordingly.
“Our house view is that the price may actually decline as it will follow steel price movements in China, it’s still on the high side though,” he adds.
Abdul Hadi notes that prices which are still elevated would be more than sufficient for producers locally to make a profit.
“I don’t think local steel prices would decline substantially as it is well supported by demand here. Most steel production here are absorbed by local demand and exports are very minimal at about 5% of total production,” he says.
In his report that was published about a month ago, Abdul Hadi says that 2018 will be another ‘good year’ for steel companies on persistently high steel prices and the gradual recovery in steel demand largely fuelled by mega and infrastructure projects.
Notable construction mega projects that have been announced which are in progress or about to take off include the KL-Singapore High Speed Rail, East Coast Rail Link, Pan Borneo Highway, Light Rail Transit 3, Gemas-Johor Baru rail link, Mass Rapid Transit Circle Line and the MRT 2.
“All these projects would require lots of steel and it would be busy years ahead for local producers,” another analyst says.
Based on these factors, Abdul Hadi believes the steel industry will continue to outperform.
“We also believe valuations could stretch further for companies that undertake effective capital management.
“While Ann Joo Resources Bhd and Choo Bee Metal Industries Bhd are our top picks, we also note that CSC Steel Holdings Bhd and Prestar Resources Bhd are among the share price laggards within the steel industry,” he says.
A separate report by Kenanga Research at the beginning of the year notes there are likely currently little to no rebar imports from China into Malaysian shores as it is too expensive given the net price is higher comparatively after the incorporation of duties and fees on imported steel from China.
“We also believe that China’s supply side reforms with the implementation of capacity reduction through the elimination of older and less efficient steel plants and China’s game plan in tackling environmental issues, such as the winter smog, would spell more sustainable global steel prices into the future,” Kenanga says.
“Hence, we are positive on this given that the high China steel prices could serve as a benchmark to which our local steel prices can rally up to,” it adds.
Kenanga’s top pick is Ann Joo.
The research house is estimating that Ann Joo’s fourth quarter net profit will be at RM67mil with a 42% anticipated growth from the previous quarter.
Its assumption is based on an average plant utilisation of 90%, average rebar prices of RM2,500 per ton, scrap prices of US$335 per ton, coke prices at US$290 per ton and iron ore prices of US$70 per ton.
In the local industry, it expects construction steel demand to remain strong from the oncoming and ongoing infrastructure mega projects that will lend support to steel rebar prices.
It also highlights a new steel plant that will be coming onstream by Alliance Steel with a plant capacity of 1.5 million tonnes long products that is expected to be operational from this month.
“That said, we only expect its full capacity of 1.5 million tons of long products to come online in the second half of the year due to teething/gestation period during the early months of operations.
“While we understand that this new capacity is meant for the export market, we note that no restrictions were put in place for Alliance Steel to sell domestically,” it says.
Despite that, the local steel market’s demand is large enough to absorb this new capacity coming onstream, it says.
“Domestic steel demand is circa 10 tonnes per annum while the capacities of all rebar manufacturers locally are at 8.3mt per annum.
“Also, with the additional demand from the mega infrastructure developments in place, we believe this new capacity from Alliance Steel would have minimal pressure towards selling prices for the 2018,” Kenanga Research says.