Analysts are upbeat on Press Metal for the promising aluminium price prospects coupled with its new 42 per cent additional capacity expansion which will lead to an expected strong earnings growth this year.
KUCHING: Analysts remain upbeat on the building material sector given its optimistic outlook for Press Metal Aluminium Holdings Bhd (Press Metal) which could be buoyed by promising aluminium prices.
Kenanga Investment Bank Bhd’s research team (Kenanga Research) in a report, noted that aluminium prices are still on the uptrend. It explained that in early September, a military coup in the African mining nation of The Republic of Guinea (Guinea) shook the aluminium market at a time when the aluminium prices were already elevated since early of the year in line with the commodity rally that was driven by economies reopening-led demand.
The coup has raised concern of a likely supply chain distruption as Guinea accounts for 55 per cent of China’s bauxite supply.
Aluminium price have jumped to decade high of above US$2,900 per metric tonne as of last Friday from the start of the month that below US$2,700 per metric tonne.
The research team pointed out that year to date, aluminium prices have risen solidly by 49 per cent from US$1,974 per metric tonne at the beginning of the year.
“We remain upbeat on Press Metal for the promising aluminium price prospects coupled with its new 42 per cent additional capacity expansion which will lead to an explosive earnings growth this year.
“Meanwhile, the upcoming 3QFY21 earnings could be affected by higher logistic costs due to disruption in the shipping market and the delayed commissioning of P3 from 3QFY21 to 4QFY21.
“However, although the commissioning of P3 is delayed to 4QFY21, coupled with the first delivery of alumina from PT Bintan expected soon, this should help to enhance margins and boost earnings higher going forward,” it opined.
As for the performance of other materials such as the long steel industry, Kenanga Research noted that structurally, outlook points to a stable steel price environment.
“China’s long-term policy to achieve carbon neutrality by 2060 has been felt by Chinese steel manufacturers through production limitations. Being the largest steel producer in the world, a steel production cap would mean a tighter supply while demand remains elevated in line with the global Covid-19 recovery (albeit at an uneven rate among countries).
“Consequently, we believe this dynamic would keep steel prices at elevated levels relative to previous years.
“But stronger steel prices above current levels unlikely. However, at the end of the day, China’s target to limit 2021 steel production to 1.065 billion tonnes to achieve carbon neutrality is a long-term target. Hence, being overly rigid with this policy amid a recovery from the pandemic would bring about another problem – inflation – something more dire and serious in the short term.
“Thus, we believe if steel prices do soar further on tight supply, the Chinese government will allow for some leeway for its production cap target to ease. Coupled with the Evergrande debt crisis which would potentially shrink the demand of steel in China as construction activities decline – the prospects of higher steel prices in the immediate future is unlikely,” it said.
All in all, it does not expect a sharp drop in steel prices ahead given the pent-up demand post pandemic.
For flat steel, Kenanga Research continued to believe Ulicorp has bright reopening prospects in the coming quarters backed by dwindling number of competitors facing cash flow issues under the pandemic and [ent-up demand from export markets (Singapore, Bangladesh, and Myanmar).
It noted that its current order-book stands at circa RM120 million (1/3 for export; and the other 2/3 local) to be delivered in the next six months.
“Given that current demand far outstrips supply, Ulicorp gets to select good paymasters and avoid the bad ones. Ulicorp’s products are less commoditised and more niche in nature. While we acknowledge that Ulicorp has benefitted from the inventory lag effect from rising steel prices in the previous quarters, we think they will still be able to sustain its strong profits once steel price stabilises.
“This is mainly due to Ulicorp’s ability to dictate product pricing given their less commoditised products coupled with the weakening competition which has diminished by the pandemic,” it said.
All in, Kenanga Research maintained its ‘overweight’ sector call given its optimistic outlook for Press Metal.