Results

FY06/13 core net profit of RM46.8m came in below our expectation, accounting for 92.1% of our full-year forecast. Against the consensus, the results missed the market expectations by 22.3%.

Deviations

Larger-than-expected losses at the steel manufacturing division.

Dividends

Proposed 1st and final DPS of 1 sen, which is in line with our projection.

Highlights

QoQ. Despite revenue increasing by 2% to RM1.26bn, 4QFY06/13 core net profit declined by a whopping 85% to RM7.4m, mainly on the back of weaker performance at the steel division, which turned into operating loss of RM6.6m from a profit of RM29.9m in the previous quarter.

YTD. FY06/13 core net profit declined by 45% to RM46.8m mainly on the back of the weaker steel division performance, which was in turn driven by: (1) Lower sales tonnage (in particularly, wire rod and molten steel); (2) Lower selling prices (which was in line with the international price trend); and (3) Higher raw material prices.

We are keeping our cautious view on the steel 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 effective to curb overcapacity issue in China.

Risks

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

Forecasts

FY06/14-15 net profit forecasts cut by 11.3-11.6%, mainly to account for higher raw material price assumptions at the steel manufacturing division.

Rating

HOLD

Negatives – (1) Inability to pass on higher cost of raw materials to end-users; (2) Complicated corporate structure; and (3) Corporate governance issue could surface from its proposed venture into blast furnace project.

Positives – One of the biggest winners from anticipated pick-up in construction activities from ETP given its huge capacity.

Valuation

SOP-derived TP (at 50% holding company discount) cut by 9.8% to RM1.11 to reflect the latest market prices of the listed subsidiary and associates. Although there is deep value in the company, we believe share price will unlikely perform in the near term, given the macro headwinds that will likely result in investors’ lackluster interest towards cyclical stocks with smaller capitalization. Hence we are keeping our Hold recommendation on the stock.

Source: Hong Leong Investment Bank Research - 30 Aug 2013