PETALING JAYA: The fall in average selling prices (ASPs) of building materials have led to the lack of improvement in the sector’s second-quarter results for the financial year 2022 (2Q22), says Kenanga Research.

The research house noted that earnings of building material producers under its coverage were subdued, with 33% and 67% coming in within and below its expectations, respectively, unchanged from the previous quarter.

Press Metal Aluminium Holdings Bhd’s 2Q22 fell short of its forecast as the weaker-than-expected ASP negated higher plant utilisation of 97% compared with 93% in the preceding quarter on plant maintenance, said Kenanga Research in its note to clients yesterday.

United ULI Corp Bhd (Ulicorp) also missed expectations as “it marked down product selling prices in tandem with the sharp decline in the market price of input cold-rolled coil (CRC) to stay competitive, while it had locked in CRC inventory at high prices”, noted Kenanga Research.

Similarly, Ann Joo Resources Bhd’s 2Q22 core profit plunged 75% year-on-year, which was within its expectation as the spread earned over cost of goods sold evaporated given the declining steel prices.

According to Kenanga Research, the aluminium prices on the London Metal Exchange (LME), which peaked in early April at US$3,849 (RM17,334) per tonne, had since started to trend lower, to about US$2,300 to US$2,400 (RM10,358 to RM10,808) per tonne currently.

Year to date, the average LME spot price of US$2,919 (RM13,146) per tonne is still 18% higher than US$2,476 (RM11,151) per tonne in 2021 and pre-pandemic level of US$1,728 (RM7,782) per tonne in 2019.

“ASPs may continue to ease in the second half of 2022 (2H22), but the downside will be capped and unlikely to retrace back to pre-Covid-19 levels in the near term, given the supply constraints in the global market amid skyrocketing gas prices in Europe,” the research house noted.

Meanwhile, both long and flat steel prices have plunged since the end of June, mainly due to the weakening demand from China arising from its strict zero-Covid policy and the property debt crisis.

Kenanga Research said: “Such a steep fall in steel ASPs would mean contracting margins for steel manufacturers as they typically hold three to six months worth of inventory at higher historical costs.”

Despite the challenges, the research house maintained an “overweight” call on the building materials sector.

Kenanga Research is positive on the aluminium sector, given that the aluminium prices will be well supported by supply constraints, which augur well for its sector pick, Press Metal with a target price (TP) of RM5.62.

However, the same cannot be said for steel prices due to the slowdown in China due to intermittent lockdowns arising from Beijing’s strict zero-Covid policy and the property debt crisis.

“This means long steel producer Ann Joo and cable support system manufacturer Ulicorp will continue to face margin pressures,” it noted.

Kenanga Research has a “market perform” call on Ulicorp with a TP of RM1.08 and an “underperform” call on Ann Joo with a TP of 85 sen.

Thank you for your report!

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