S & P Results Review & Earnings Outlook

? Southern Steel?s 1Q10 results came in within our expectations, with net profit of MYR34.5 mln reaching 24% of our 2010 estimate.

? 1Q10 revenue surged 60% YoY on the back of higher demand and average selling price (ASP) as global economies recover from the financial crisis. The improvement is reflected in an operating profit of MYR41.5 mln from an operating loss of MYR71 mln in 1Q09.

? Revenue growth was more subdued on a QoQ basis, partly due to seasonal factors, when 1Q10 revenue grew 6.8% QoQ. We believe the growth can be attributed mainly to the higher ASP, as global steel prices rose 10%-15% QoQ, as a result of rising raw material costs. Higher raw material prices (+27% QoQ) negatively affected the
group?s margin, which fell to 6.6% (from 11.6% in 4Q09) while operating profit fell by 39% QoQ.

? We believe 2Q10 earnings may improve further as steel manufacturers continue to raise ASP to account for higher raw material prices. We have seen stronger domestic steel demand after Chinese New Year and expect the pace of demand to rise going
forward.

Recommendation & Investment Risks

? We retain our Buy recommendation on Southern Steel with an unchanged 12-month target price of MYR2.85.

? Our target price is derived after ascribing a target PER multiple of 8x(unchanged) against our estimated 2010 EPS plus our estimated 2010 net DPS of 6.9 sen.

? We believe there is still room for share price upside as the domestic stimulus projects get underway and margins expand. Moreover, the group is trading at less than 7x 2010 PER, lower than the peer average of 8x.

? Risks to our recommendation and target price include volatile steel and raw material prices arising from uncertainties in the global environment, and slower-than-expected rollout of large domestic infrastructure projects.