We are maintaining a Neutral rating on the sector. The steel
millers were hit by the slower than expected recovery in steel prices as well
as expensive inventories that eroded the steel millers’ margins. However, we
believe the situation will ease as the mills begin clearing their expensive
inventories and replenish them with the current lower price raw materials. That
said, steel prices will still predominantly be determined by China’s steel
output growth, which has shown a slower growth lately due to the oversupply of
steel in China from the lacklustre demand in the international market.
Nonetheless, we expect to see a brighter prospect for the overall industry as
it moves into the 3Q12 as more construction awards under the Economic
Transformation Programme (ETP) and 10MP projects are announced. This is because
steel makes up c.20% of the total property development costs. This development
will help boost sales orders for both Ann Joo Resources (AJR, MP; TP:RM1.62)
and Malaysia Steelworks (Masteel, MP; TP:RM1.08), which are under our coverage.
We prefer or AJR over Masteel for the former’s well managed production and
proven track record.
Steel mills to
improve as more construction activities kick in. Most steel mills are still
being hit by the slower than expected recovery in steel prices in the previous
quarter although we expect a brighter prospect for the overall industry as it
moves into 3Q12 as more construction awards under the ETP and 10MP projects are
announced. This is because steel makes up c.20% of total property development
costs and should 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
eroded the millers’ margins. Nonetheless, we believe this situation should ease
as the mills begin to clear their expensive inventories and replenish it with
the current lower price raw materials. 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. This is also further
exacerbated by the oversupply of steel
in China due to the lacklustre demand in the international market as the
long-drawn European crisis caused customers to delay their purchases.
Keeping NEUTRAL
rating. Although we are somewhat
positive on contract flows, we are maintaining a NEUTRAL rating on the sector as the steel
millers are still vulnerable to the current volatility of raw material prices,
which may erode their margins. We prefer Ann Joo Resources (MP, TP: RM1.62)
over Malaysia Steelworks (MP, TP:
RM1.08) for the former’s well managed
production and proven track record.
Source: Kenanga
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