We maintain a
Neutral rating on
the sector as
both steel and
cement are currently vulnerable
to volatile raw material prices, which may erode margins. We prefer the cement
sector over the steel sector as the latter could experience margins erosion
from the timing difference of current volatile raw material prices.
Furthermore, steel customers are still cautious in restocking as the China steel
output growth is slacking and as the country puts greater focus on its consumers
rather than building projects. On the other hand, the cement sector will fare
better comparatively as margins expansion in the sector on lower coal cost as
well as higher sales volume from the expected construction contract awards and
execution particularly from the MRT and LRT extension works will continue to
support the sector. In the steel sector, we prefer Ann Joo Resources (MARKET
PERFORM, TP: RM1.96) over Malaysia Steelworks (MARKET PERFORM, TP: RM1.19) for
its well managed production and proven track record. On cement, we do not have
a rating for Lafarge Malaysian Cement (NOT RATED) as we have yet to cover the
stock.
Steel mills to
improve as more construction activities kick in. Most steel mills are still
being hit by the dip in steel prices in the previous quarter although we expect
to see a brighter prospect for the overall industry as it moves into the 2H12 as more construction awards
under the Economic Transformation Programme (ETP) and 10MP projects are announced.
This is because steel takes up c.20% of
total property development costs which in return, will help boost sales orders
for both AJR and Masteel.
Sales volume still
muted. In the past few months, steel
mills were hit by (1) weakened steel prices and (2) expensive inventories that have eroded the millers’ margins. Nonetheless,
we believe this should ease as the mills
begin to clear their expensive inventories and replenish it with current lower
priced raw materials. With steel prices expected to spike in 2Q12 on the back
of potential restocking by traders and coupled with cheaper scrap costs, we
expect most of the steel mills to see improving margins as they move into 2H12.
That said, steel prices are still predominantly determined by China’s steel output
growth, which has shown a slower growth lately as its government puts greater focus
on the consumers rather than building projects.
Slow down post-CNY
but 2012 on overall will still be good for cement. On the cement sector, we believe that 2QCY12
earnings will be muted given the typically slower construction activities
post-CNY. Nonetheless, for the full
year, we believe that the sector will
be supported well
by 10MP and
ETP projects such
as KLIA 2,
LRT Package A and execution
of new projects such as the LRT Package
B, Greater KL/KV MRT (Sg BulohKajang) and government land developments at Sg
Buloh and Cochrane.
Preference for cement
companies. We are more positive on
cement companies compared to steel companies given the stable coal cost, which
has remained sideways c.US$120/MT for the past 10 months, coupled with
normalised rebates of US$10-30/MT. We are not so concerned of the
additional capacity from Hume (+7% in
2013) as we believe this could be absorbed by the greater demand from the ETP
projects such as LRT, MRT, KL International Financial District, Warisan
Merdeka, Sg Buloh Malaysia Rubber Land, etc.
NEUTRAL. Although
we are somewhat
positive on contract
flows, we are
maintaining a NEUTRAL rating on
the sector as both steel and cement are vulnerable to the current volatility of
raw material prices, which may erode
their margins. That said, we prefer cement companies over steel companies due
to the easing international coal prices as opposed to the volatile steel price,
which may have an adverse impact to steel margins. We prefer Ann Joo Resources
(NEUTRAL, TP:RM1.96) over Malaysia Steelworks (BUY, TP: RM1.44) for its well
managed production and proven track record. We do not have a rating for Lafarge
Malaysian Cement (NOT RATED) as we have
yet to cover the stock.
Source: Kenanga
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