PETALING JAYA: Basic materials companies are expected to chart stronger earnings next year as demand for their products will continue to rise as economic activities pick up.
But a deterioration in global macroeconomic conditions, unfavourable raw material prices, currency fluctuations and a resurgence of Covid-19 cases could derail all that.
Thus far, some of the basic materials’ stocks have delivered positive results, while valuations continue to look palatable.
As such, RHB Research, in its recent report, has maintained its “overweight” stance on the sector.
It also has a “buy” call on all three companies – Press Metal Aluminium Holdings Bhd, Cahya Mata Sarawak Bhd (CMS) and Malayan Cement Bhd – under its coverage.
Its top pick for basic materials is still Press Metal for its three-year earnings compounded annual growth rate of 77% and favourable environmental, social and governance angle pertaining to the aluminium industry’s decarbonisation transition.
The research house pointed out that data by the World Bureau of Metal Statistics indicates that the global primary aluminium market has swung into a deficit of 1.36 million tonnes in January-October this year, as demand (plus 8.3% year-on-year) outpaced supply growth (plus 4.1% year-on-year).
“We believe this deficit scenario is likely to persist heading into 2022.”
It opined that aluminium prices would have to stay higher for longer – with current prices at US$2,600-US$2,700 (RM10,949-RM11,271) per tonne – in order to incentivise the restarting of higher-cost idled smelters, as well as commissioning of new smelter projects to support market equilibrium going forward.
On the other hand, RHB said that for value play, it sees bargain-hunting opportunities in the small mid-caps space, namely CMS and Malayan Cement.
“The recent hike in bulk cement prices to RM275 per tonne in November (third quarter 2021: RM220.00 per tonne) should underpin Malayan Cement’s recovery over subsequent quarters, after grappling with steeper coal feed stock prices and constrained cement demand during the recurring lockdowns,” it said. Notwithstanding recent headwinds, it foresees the group posting a sharp earnings rebound to RM128mil in FY22. This is after a milestone profitability turnaround of RM7mil in FY21.
Barring a resurgence of Covid-19 cases, RHB added that the conclusive outcome to the recent Sarawak elections should pave the way for the deployment of the state’s planned infrastructure development projects heading into 2022. This bodes well for CMS’ traditional businesses.
Concurrently, its earnings should be boosted by rising contributions from its diversified portfolio of strategic investments across various industrial and services sectors, especially its ferroalloy-producing associate leveraging off strong average selling prices.
RHB’s target price for Press Metal is RM8.50, Malayan Cement (RM3.70) and CMS (RM1.70) a share.