Results

1H core net profit of RM19.7m accounted for 58.9% of our full-year forecast. We consider the results within our expectation as we expect performance to weaken in 3Q on several seasonality factors including Ramadhan month. Against the market expectations, the results were below, accounted for 46.1% of the consensus full-year estimates.

Deviations

None

Dividends 

None

Highlights

QoQ. 2Q13 core net profit remains flattish, which grew by 2.5% to RM10m mainly on the back of improved performance at the manufacturing division which more than offset RM2.3m inventory writedown at the trading division.

YTD. Despite adjusted operating profit improving significantly to RM42.6m from an operating loss of RM4.4m (thanks to improved production efficiency at the manufacturing division which more than offset weaker margin at the trading division), 1H13 core net profit declined by 23.8% to RM19.7m on the back of higher finance costs (arising from higher net debt) and smaller tax writeback.

We are keeping our cautious view on the steel sub-sector’s fortunes, as: (1) The recent run-up in the price of iron ore was partly spurred by the low iron ore inventory level in China; and (2) It remains to be seen if the recent new measures by the Chinese government are efficient to curb overcapacity issue in China.

Risks

Downside risks-

• Overcapacity in China remains over the longer term; and
• Volatile input prices, making the sector a play on short-term potential price trend.

Forecasts

Maintained.

Rating

HOLD

Negatives: Volatile and subdued steel prices.

Positives: (1) Likely to be the first to benefit at times of steel prices upswing, thanks to its aggressive procurement strategy; and (2) Move to enhance its value chain by investing into a mini blast furnace.

Valuation

TP maintained at RM1.22 based on unchanged 9x 2014 EPS of 13.5 sen. Maintain HOLD

Source: Hong Leong Investment Bank Research - 29 Aug 2013