KUCHING: Malaysia’s building materials sector could benefit from the soon-to-be-announced Budget 2015 which could offer fresh catalyst boosts construction sector and near-term earnings boost from pre-goods and services tax (GST) stocking up activities in the property sector.
Furthermore, the Budget 2015 is expected to address issues such as steel dumping activities and margin expansion from stable selling prices and lower raw material cost.
Kenanga Investment Bank Bhd’s research arm (Kenanga Research) in a recent report said: “The construction sector could receive a fresh catalyst boost from the announcement of Budget 2015 thanks to the anticipated 10th Malaysia Plan and Economic Transformation Programme (ETP) infrastructure projects (which are MRT Line 2, East Coast Expressway), and major property development projects in Kuala Lumpur and Johor.
“These new projects should strengthen demand for building materials which is already supported by stable orderbook replenishment and major ongoing projects (which are the referinery and petrochemicals integrated development or RAPID Pengerang, MRT, West Coast Expressway, PR1MA affordable housing).”
Year to date, it explained construction activity in the second quarter of 2014 (2Q14) remained robust at 10 per cent year-on-year (y-o-y) growth, mainly driven by the residential sector (16 per cent) followed by non-residential (12 per cent) and special trade (10 per cent).
“While it has slowed down from 1Q14’s 19 per cent growth y-o-y, we are not overly concerned as it is well on track to achieve our in-house economic forecast for construction sector growth of 11 per cent for 2014,” it viewed.
Meanwhile, the implementation of GST in 2015 should bode well for Malaysia’s building materials players, Kenanga Research opined.
“We are of the view that the GST effective April 2015 could be positive for building materials players. We anticipate stocking up activities to take place in the months leading up to the GST implementation on April 1, 2015 as stockists and manufacturers may choose to load up on durable goods.
“Taking a three to six month view, we expect the GST implementation to contribute to a one-off boost in sales volume for steel players in the fourth quarter of 2014 to first quarter of 2015 (4Q14 to 1Q15.
“As for the cement sector, due to the short shelf life of cement (less than three months) and concrete products (less than a day), we expect minimal sales impact from GST implementation next year,” Kenanga Research projected.
As for the issue in steel dumping, the research team opined that things should improve by end-1Q15 due to recent investigations by Malaysian authorities.
“Recall that on September 3, 2014, the Ministry of Trade and Industry (Miti) announced an investigation into dumping of steel rebar imported from China and Korea. This is in addition to the ongoing administrative review on wire rods announced on June 24, 2014.
“As preliminary determination by Miti will usually be made within 120 days (about four months) from initiation, we believe that anti-dumping duties could be implemented in the near-term (before end of 1Q15),” it viewed.
Previously, it said imposed duties ranged from five to 35 per cent based on the dumping margin of the manufacturer.
“We have yet to factor in the possible duties but we estimate that a five per cent anti-dumping duty across the board could result in two per cent higher average selling price per metric tonne which should lift earnings by eight per cent for steel players under our coverage.
“However, if we do not see any significant action from these investigations by end 1Q15, we are most likely to assign a lower price to book valuation below mean valuation (from current mean to one standard deviation valuation) to steel counters and downgrade the sector to neutral as the depressed prices will reduce competitiveness of local steel products,” Kenanga Research said.
Aside from that, the research team expects steel players’ margins to expand as raw material costs decline rate is more than final product prices.
It explained, “We observe that in 3Q14, key raw materials prices for steel production (iron ore, coke and scrap) fell by an average of 22 per cent year-on-year (y-o-y) and two per cent quarter-on-quarter (q-o-q) quarter-to-date (QTD) due to international oversupply.
“However, semi-finished and finished long product prices (billets, wire rod and rebar) were stable in 3Q14, at an average of negative four per cent y-o-y and minus one per cent q-o-q (QTD).”
As such, it viewed, the slight price decline was mainly caused by slowing demand in China, offset by the improving US economy. As a result, we expect steel players’ margins to improve in the upcoming 3Q14 results due in November 2014.
For the cement sector, Kenanga Research said coal prices have been on a similar declining trend in 3Q14 at minus 12 per cent y-o-y and minus six per cent q-o-q (QTD).
“However, LAFMSIA may see a delayed or muted effect from the lower input cost due to its partial hedging policy,” it noted.
Overall, the research team sees ample upside to the building materials sector, on the back of improving market fundamentals and potential trade action, while downside risk remains limited.