July 15, 2024

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PETALING JAYA: Affin Hwang Investment Bank Research has maintained its “overweight” call on the building materials sector as the economy continues to strengthen in the second half of the year.

In a report, the research house said among the key elements to look out for in the aluminium, tin and cement sub sectors are commodity price movements, potential changes in demand and supply dynamics and levels of economic activity.

“We will also look at potential disruptions in the global supply chain due to logistics challenges, and potential government interference on cement price discounts given to support the construction industry,” it said.

Its top picks are Malayan Cement Bhd and Press Metal Aluminium Holdings Bhd which are expected to continue recording strong earnings, backed by favourable average selling prices (ASP) and input costs.

The research house said for 2024, the 57% year-on-year earnings growth for Press Metal is underpinned by lower input costs coupled with ongoing strength in aluminium prices.

“We also like Press Metal as a beneficiary of an elevated aluminium price environment,” it said.

Additionally, it said Malayan Cement’s earnings are expected to stabilise at the current high base given the industry ASPs coupled with coal prices that are expected to remain subdued.

“Within the sector, we prefer exposure to Malayan Cement, due to the strong margin recognised from the cement price hikes which are likely to remain sticky at current highs, coupled with subdued coal prices,” the research house said.

Its assumptions for Malayan Cement are cement prices at RM380 per tonne.

As for Malaysia Smelting Corp Bhd (MSC), the research house said its operations are unfortunately unable to reap the full benefits of the recent surge in tin prices which was brought about by export constraints by major producers, as this resulted in lower tin tolling business.

Its assumptions for the group are tin prices at US$30,000 per tonne.

Meanwhile, it also noted that both Press Metal and MSC are bound to be negatively impacted by a stronger ringgit, since their products are priced in US dollars.

“The opposite would be the case for Malayan Cement, as its input costs are priced in US dollars. Nonetheless, the sector profitability is also determined by global raw material price movement,” it said.

Some of the downside risks to the sector to look out for will include weakening ASPs, rising raw material prices, and slower-than-expected growth in economic activities such as construction, amongst others.

“On the other hand, escalating raw material costs, electricity, and fuel costs remain downside risks to the sector,” the research house added.

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