The Malaysian financial services firm Kenanga Investment Bank Berhad Research has upgraded the building materials sector to an 'Overweight' rating, primarily influenced by its recent reassessment of sector heavyweight Press Metal Aluminium Holdings Bhd.

Press Metal Berhad is a Malaysian-based aluminium company with a significant global presence.

In a report released on June 18, 2024, the research house highlighted a marked improvement in earnings performance across the sector during the first quarter reporting season. Stocks under its coverage either met or surpassed expectations, prompting an optimistic outlook for the sector.

Kenanga Research said, "We expect aluminium prices to stay firm on supply constraints while stable steel prices translate to stable steel product prices, reducing earnings volatility of steep product producers."

Overweight stock rating

An overweight rating on a stock indicates that it should have a greater weighting in a portfolio compared to its current weighting in the benchmark index. This rating reflects an equity analyst's belief that the stock's price will perform better in the future.

Kenanga’s briefing on the upgradation

Kenanga Research recently upgraded Press Metal to 'Overweight' from 'Market Perform' with a target price of RM6.25 for the next 52 weeks, citing the revival of water projects as a key driver for the industry's growth.

"Our sector top picks are - Press Metal, given its structural cost advantage over its global peers thanks to its access to low-cost hydropower locked in until 2040, and Eng Tex Group Bhd (target price: RM1.41) as a proxy to the revival of water projects locally, "it said.

The report indicated that aluminium prices have been rising since the beginning of the year, driven by unexpectedly strong consumption in China in the early months and by demand from renewable energy projects and electric vehicle production outside of China.

“We are mindful that sustainable demand in China depends on a revival of infrastructure and property projects, the outlook of which is still uncertain currently,” it said.

It noted that the closure of fossil fuel-powered smelters, particularly those using coal, driven by growing environmental awareness and Western sanctions against Russian aluminium producers, will continue to limit supply.

Additionally, it noted that water pipe manufacturers anticipate a promising period as water operators initiate long-overdue projects, now supported by stronger finances following recent water tariff increases. These projects include initiatives to reduce non-revenue water (NRW), pipe replacement programs, and the construction or upgrading of water treatment plants, which include consolidating old and small plants to optimise costs.

AL Circle's industry-focused report, "Global Aluminium Industry Outlook 2024", unveiled that in recent years, the aluminium industry's long-term outlook has significantly improved, driven by heightened investments in renewable energy and sustainable technologies amid the energy crisis. The global aluminium market is expected to experience substantial growth as nations and corporations ramp up their commitment to carbon neutrality and strive to meet zero-emission targets.

The report also anticipated a resurgence in both demand and prices for aluminium, which is expected to manifest in the latter half of 2024. China’s construction industry continues to face challenges, contributing to short- to medium-term concerns about the demand for aluminium. However, a gradual price increase in 2024 has also been anticipated as demand slowly recovers. Net-zero, carbon neutral, and sustainability will be major subjects and drivers in the global aluminium industry. The transportation sector will largely drive aluminium demand, with EVs playing a major role. The renewable energy sector will be a new entry in the top demand drivers list for aluminium (Solar and wind Turbines).