Source: The Star Online
UOB Kay Hian Malaysia Research sees a brighter outlook for the cement and steel products in the second half of 2019, underpinned by higher average selling prices (ASPs) folowing the consolidation in the industry and more construction activities.
The research house said on Monday it expects the cement industry to be out of the doldrums with a series of gradual ASP hikes while steel ASP has already started to increase moving into the second half.
“Upgrade the sector to market weight as ASP improvements will be supported by a gradual improvement in demand,” it said.
UOB Kay Hian Research expects more construction activities in the second half to create more cement and steel demand which would support a recovery in ASPs.
It also pointed out local steel bar prices improved marginally to RM2,195 a tonne as at July 2019, compared to RM2,165 in June 2019, largely due to a low base effect.
Meanwhile, China steel prices remain elevated as a result of the production curb in Tangshan city, causing iron ore as well as ferrosilicon and manganese alloy prices to surge.
“We believe that commencement of mega and infrastructure projects will gradually stimulate demand for steel and cement starting 2H19. Apart from that, industry consolidation in the cement industry and potential easing in steel oversupply in 2H19 will help support a recovery in cement and steel ASPs,” it said.
UOB Kay Hian Research retained its hold call on Hume Industries (RM.104/Target: RM1.20) based on a price-to-earnings (PE) of 15 times (- one standard deviation below industry average) on an FY20F EPS of 8.1 sen.
It said the outlook for Hume is expected to improve along with a better outlook for the industry following industry consolidation and improving cement demand. Entry price 90 sen.
“We believe industry consolidation coupled with the gradual improvement in cement demand will help to sustain a series of gradual hikes in cement ASP in H2, 2019. Assuming cement ASP is raised twice in 2H19 at a rate of 10% on every hike, cement ASP could reach RM242 a tonne by end-2019, surpassing Hume’s break-even ASP of RM230 a tonne, in our view.
“For FY20, we have assumed a cement ASP of RM250 a tonne and we forecast Hume to report earnings of RM38.8mil. In a blue-sky scenario where the cement price hike is higher than our expectation of 20% (that is RM260/tonne or 30% from current price), Hume’s earnings could improve to RM55mil and our target price will be adjusted to RM1.70,” it said.
As for local steel bars, it said prices improved slightly as at July 12 to RM2,195/tonne compared to RM2,165/tonne in June, according to the Ministry of International Trade and Industry (MITI).
“We believe that the 1.4% increase in steel bar prices as at 12 Jul came from a low base impact whereby steel bar prices dropped in June 2019 by 2.4% on-month during the Ramadhan and Hari Raya season - compounded by muted construction activities. We are forecasting steel ASPs of RM2,400 and RM2,500 for RM2,200 and RM2,300 2019 and 2020 respectively,” it said.
Meanwhile in China, hot rolled coil and steel bar prices remained firm at Rmb3,898/tonne and Rmb4,251/tonne respectively as at July 18. This was largely owed to the all-time high in crude steel production which was reported at 89 million tonnes (+10% on-year) in May 2019, according to the National Bureau of Statistics. In addition, Tangshan city also recently announced stricter production curbs till end-July which could lend support to China steel prices in the near term.
Following positive vibes from China steel prices, ferrosilicon alloy prices jumped by 7.2% on-month to US$1,195/tonne as at July 17 while manganese alloy prices were up 4.3% on-month in the same period to US$1,265/tonne.
Based on newswires, China Hebei Steel raised its purchase prices for alloys in accordance with market expectations.
The research house also understands that despite the opening of a new production plant in Kazakhstan, some suppliers have been closing down their manufacturing facilities, especially in the European region.
“We view this development positively, although sustainability is yet to be seen given that China steel production may weaken in 2H19 after reaching peak production in May/June 2019. Should the price hikes be sustainable, Cahya Mata Sarawak will see firmer earnings contribution from OM Sarawak (its 25% associate), particularly in 2H19.
“Based on our channel checks, construction activities in Malaysia are still soft post the Ramadhan and Hari Raya festive season. We reiterate our views that domestic steel demand is expected to gradually improve in 2H19, predominantly from the roll-out of mega and infrastructure projects. Particularly, near-term catalysts for the sector will emerge from the East Coast Rail Link
(ECRL) project which is set to be re-launched by end-August 2019,” it said.
Prices of iron ore continue to be at multi-year highs following the incident at the Vale Dam coupled with high crude steel production in China. As at July 18, iron ore prices were reported at US$130 a tonne, an increase of 17% on-month.
Despite sourcing iron ore locally, high iron ore prices do not augur well for profit margins of steel players as local iron ore prices are benchmarked against international iron ore prices.
“We think that the upcoming results announcements will continue to be mundane. Average steel bar prices in 2Q19 were up by only 1.7% on-quarter to RM2,202/tonne compared to the 20.7% increase in iron ore prices (US$101/tonne in 2Q19 vs US$84/tonne in 1Q19). Based on our generic theoretical model, gross profit margin for steel companies is expected to ease to an average of RM454/tonne in Q2, 2019 compared to RM476 a tonne in Q1, 2019.
UOB Kay Hian Malaysia Research says the outlook for building materials in 2H19 seems to be brighter with higher ASPs for cement and steel following industry consolidation and more construction activities. The cement industry is expected to be out of the doldrums with a series of gradual ASP hikes while steel ASP has already started to increase as we move into 2H19. Upgrade the sector to MARKET WEIGHT as ASP improvements will be supported by a gradual improvement in demand.