KUALA LUMPUR (Aug 15): The building materials sector is expected to remain challenging throughout 2019 despite improving news flow for the construction sector, according to Hong Leong Investment Bank Research (HLIB Research).

In a note today, HLIB Research analyst Khairul Azizi Kairudin said cement consumption will remain lacklustre in the second half of 2019 (2H19) on the back of still-weak construction and property development activities, which will in turn translate to weak near-term cement prices.

"Beyond 2019, we expect cement prices to recover gradually, as construction activities pick up (expected by 1H20). However, we reckon that the expected pick-up next year will happen on a gradual basis as work contribution from mega project revivals may be partially offset by lower construction contract awards seen post GE14 and weak property sentiment," he said.

Meanwhile, Khairul observed that the rising iron ore price will push steel production cost higher, which will squeeze profitability of steel producers.

"While we expect iron ore price to ease from its recent high, it would take a while for iron ore price to normalise back to its previous price level, hence resulting in high production cost in the near term," he said.

Hence, Khairul expects subdued earnings performance for cement and steel players to persist into the second half of the year, as headwinds includes weak demand for cement, weaker cement selling prices, overcapacity for cement, escalating iron ore price as well as mismatch between production and consumption for steel.

He maintained his underweight rating on the building materials sector, with a sell rating on Ann Joo Resources Bhd and a hold rating on Lafarge Malaysia Bhd.