KUALA LUMPUR (May 3): Several steel counters on the local bourse were down this morning, falling by between 1% and 7%, after UOB Kay Hian Securities (M) Sdn Bhd turned “more cautious” and “less optimistic” on the outlook for local steel prices.
According to UOB Kay Hian, the sluggish outlook for the local steel sector in the second half of 2018 (2H18) is based on factors such as softer average selling price (ASP) and rising steel supply that could easily outstrip rising demand.
Several steel counters that took the bite include Mycron Steel Bhd which fell by as much as 7.22% during the morning trading session today, followed by Southern Steel Bhd (2.09%), Lion Industries Corp Bhd (1.06%), CSC Steel Holdings Bhd (0.72%) and Malaysia Steel Works (KL) Bhd (1.89%).
UOB Kay Hian said rising domestic steel supplies and lower average selling price (ASP) may eventually contract margins for steel companies from the second quarter of 2018 (2Q18).
“Based on our generic model, we think that steel companies may report another set of strong earnings for 1Q18, with gross profit per tonne potentially expanding to RM711 per tonne (4Q17: RM708 per tonne),” UOB Kay Hian analyst Abdul Hadi Manaf said in a report to clients today.
Margins “would ease moving into 2Q18 and beyond, given softer steel ASP and rising domestic supply,” UOB Kay Hian added.
Amid contained optimism, UOB Kay Hian is retaining a “market weight” stance on the local steel sector, as the upside factor is capped by the influx of rising incoming supply in 2H18.
As for stock pick, UOB Kay Hian is keeping its Buy call on Ann Joo Resources Bhd, but has cut target price to RM3.60 per share, from RM4.50 per share previously.
“This is mainly to capture a wider valuation horizon during previous cycles, as well as the period when investors were risk-averse on small-cap stocks,” the investment bank added.
Similarly, UOB Kay Hian has also cut its target price on Choo Bee Metal Industries Bhd to RM2.70, from RM3.10 previously, as the counter has been less volatile in terms of earnings cycle, amid a relatively stable demand, as well as ASP for steel products.
At noon-break, Ann Joo paused unchanged at RM2.90, while Choo Bee rose 2 sen or 0.85% to pause at RM2.38 respectively.