UOB Kay Hian Research retains overweight on steel sector

Posted on 09 February 2018

Source: The Star Online

UOB Kay Hian Research Malaysia Research expects the steel segment to remain under the spotlight with local steel prices at multi-year highs.

The research house said on Thursday it believes the cement segment will make a significant turnaround as industry utilisation is expected to improve to 74% in 2018.

“We view the recent share price weakness in steel companies (Ann Joo and Choo Bee fell 15.4% and 9.5% from their peaks) and cement companies (Hume fell 11.1% from its peak) as an opportunity to accumulate. Maintain overweight,” it said.

UOB Kay Hian Research said local steel bar prices in January 2018 rose by a slower 4.4% on-month to RM2,750 a tonne (December 2017: +8.8% on-month), largely reflecting easing China steel prices after they peaked in December.

Despite the slower growth, local steel bar prices are still at a five-year high. China’s steel bar prices declined to 4,208 renminbi a tonne (RM2,814) in January 2018, down 13.1% on-month from a multi-year high of Rmb5,044 (RM3,134) following sharper-than-expected cut in steel production during the heating season.

“We believe steel companies will post better qoq earnings in their upcoming results, thanks to the 3.2% on-quarter rise in local steel average selling prices (ASP). In addition, prices of raw materials have also declined by 1.1% for scrap and 7.1% for iron ore.

“However, margins could take a hit from the 7.6% on-quarter increase in coal prices. We also believe 1Q18 is likely to show a further sequential improvement in earnings given higher ASP (+4.4% year-to-date) and normalising raw materials costs.

UOB Kay Hian Research is of the view that the cement industry will turn around by 2H18 with more construction activities from mega and infrastructure projects being rolled out.

The research house believes the steel segment will continue to deliver exciting earnings while the cement segment will make a significant turnaround in 2018.

It noted that recent share price weakness in steel companies is attributed to the decline in China steel prices as well as concern over domestic supply.

“Note that the decline in China steel prices was from the multi-year high. We also believe that the entry of Alliance Steel should not post a significant threat to local steel players as we gather that it will only supply the steel requirement for the ECRL project.

“In addition, local players also can export their excess production to neighbouring markets,” it said.

Top picks in steel segment: Ann Joo Resources (Buy/Target: RM4.50) and Choo Bee Metal Industries

Ann Joo is a prime beneficiary of rising ASP demand for long steel products given its hybrid manufacturing facility as well as effective capital management.

Choo Bee is benefitting from spill-over demand from mega and infrastructure projects as it supplies flat products to the construction sector.

It also trades at a compelling 0.6 times 2018F P/B vs Ann Joo’s 1.7 times and Southern Steel’s 1.3 times.

“As for Hume Industries (Buy/RM2/Target: RM3.50). We are expecting a significant turnaround for Hume as cement demand recovers coupled with no additional cement supply in the coming years,” it said. 

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