• Upgrade to OVERWEIGHT from Neutral; Top Pick: Cahya Mata Sarawak (CMS). Out of the three companies that reported results – CMS exceeded expectations, Malayan Cement (LMC) was in line while Press Metal (PMAH) slightly missed. We upgrade the sector based on our BUY call for PMAH, which holds significant weighting of the sector. CMS is our sector Top Pick now due to its direct exposure to the revival of construction activities in Sarawak, given its prominent role as the leading cement provider in the state.

• Aluminium. PMAH’s 1H24 core earnings fell slightly below our and Street estimates, as we expect a softer 2H24 due to margin pressures from high alumina costs. 1H24 revenue grew 10.9% YoY, driven by stronger LME aluminium prices in April-June quarter – averaging at USD2,522.80/tonne (+14.5% QoQ, +11.5% YoY) and higher Main Japanese Port (MJP) spot premiums (+45.2% QoQ, +28.7% YoY). 1H24 core net margin improved by 3.6ppts on better smelting margin and a higher share of associates.

• Aluminium outlook. Global aluminium prices have recovered from a temporary blip in July, likely due to the anticipated rate cuts by the US Federal Reserve by September. Aluminium ASP is expected to be supported by i) slow capacity expansion in Indonesia, ii) mid- to long-term demand from green sectors such as EVs and solar, and iii) increase in US tariffs on Chinese aluminium imports to 25% from 7%. However, while we expect growth in major drivers, such as solar-capacity expansion to continue, the pace may moderate slightly in 2H of the year compared to 1H. Although alumina costs are expected to remain elevated in 2H24, we think the price could normalise from 2025 due to the increasing supply, with 1m tonnes refinery expansion each in Mempawah, Bintan and India scheduled from 4Q24 to 2027.

• Cement. LMC’s full year core net profit came in within our, but beat consensus estimates – at MYR510.7m (>100% YoY). FY24 revenue saw commendable growth of 18.3% from the improvement in sales volumes for both cement and ready-mixed concrete. Margin-wise, PBT margin improved by 7.8ppts on the moderation in coal prices and better costs management. Meanwhile, CMS’ 1H24 bottomline surprised Street, at MYR74.2m (+49.8% YoY). While 1H24 revenue dropped 1.9% YoY, as the prolonged rainy season slowed construction activities, this was offset by margin expansion, benefiting from lower clinker costs and enhanced operational efficiencies.

• Bulk cement prices have stabilised and continue to sustain at MYR380/tonne as of July, and we foresee it remaining stable given the expected demand from the Pan Borneo Highway, Sabah Sarawak Link Road, Kuala Lumpur-Singapore High-Speed Rail, Johor-Singapore Rapid Transit System and Mass Rapid Transit 3. We remain sanguine on the cement industry's prospects given the inherent synergy with the construction and property sectors. With a range of infrastructure projects planned across the country, building materials companies — especially cement producers — are well-positioned to capitalise on the spillover benefits.

• Key sector downside risks include declining in LME aluminium prices, decelerating global economy growth, higher-than-expected raw material costs, lower-than-expected cement ASP, and lower-than-expected cement production.

Source: RHB Securities Research - 9 Sept 2024