Results

1Q13 reported net profit of RM17.5m beat expectations, accounting for 51.8% and 52.5% of our and consensus estimates.

Deviations

• Better-than-expected sales volume; and
• Slightly lower-than-expected effective tax rate of 24% vs 25% we assumed.

Highlights

On a yoy basis, 1Q13 net profit more than tripled to RM17.5m from RM5.6m a year ago, due mainly to a significant rise in sales volume that more than mitigated slightly lower selling prices, margin expansion arising from lower raw material and per unit production cost (on the back of higher utilization rate), coupled with a slightly lower depreciation expense.

On a qoq basis, 1Q13 net profit more than tripled to RM17.5m mainly on the back of higher sales volumes and lower raw material costs.

Despite the positive earnings surprise, we continue to hold our cautious view on the company’s medium-term outlook as concerns on overcapacity in China will continue to linger (given the aggressive capacity expansion over the past few years). Risks Downside risks-

(1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.

Forecasts

2013-2014 net profit forecasts raised by 34.2% and 12.4% respectively, to account for higher sales volume and EBIT margin assumptions.

Rating

Trading BUY

• Positives – Strong balance sheet
• Negatives – Inability to pass on higher cost of raw materials to end-users

Valuation

• SOP-derived TP raised by 16.8% to RM1.46 to reflect: (1) Upward net profit forecast adjustments; and (2) The net cash position.

Source: Hong Leong Investment Bank Research - 14 May 2013