Results

• 9MFY14 core net profit of RM31.8m beat expectations, accounted 96.9% and 86.4% of our and consensus estimates, respectively.

Deviations

• Lower than expected input costs such as coke and iron ore.

Highlights

QoQ. Despite a decline in revenue by 16.1% to RM508.5m while 3QFY14 core profit increased to RM19.8m from RM1.7m in 2QFY14. The decline in revenue was on account of both on lower average selling price and tonnage sold). The sharp improvement in core profit was due mainly to lower raw materials such as coke and iron ore and productivity improvements across the process.

YoY. 9MFY14 revenue increased by 22.0% to RM1,800.9m from RM1,476.1m while core net profit increased to RM31.8m from net losses of RM14.2m due to lower raw material price and production efficiency.

The management expects that demand will strengthen into 4Q, on the back of restocking activities ahead of the GST Implementation. However, the stronger demand may not translate to the bottom line as the industry is still struggling to compete with the huge influx of cheap Chinese steel products which volume has surged 23.2% qoq, eating up more than half of the steel demand in Malaysia.

On the trade actions that were tabled to MITI in the MISIF conference recently, the management shared that the progress of the recent meetings with MITI were positive. The management remains hopeful that positive measures will be announced within the next 2 months.

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

• FY14/15/16 earnings are revised upwards by 26.9%/ 4%/ 6.4% to reflect mainly the lower raw material costs .

Rating

Sell

Negatives

• (1) Volatile and subdued steel prices; and (2) Overcapacity in the region.

Positives

• (1) Likely to be the first to benefit at times of steel prices upswing; and (2) Move to enhance its value chain by investing into a mini blast furnace.

Valuation

• We upgrade the TP to RM1.00, based on unchanged 9x and FY15 EPS of 11.15 sen, following the upward revision in our earnings forecast. Maintain SELL.

Source: Hong Leong Investment Bank Research - 27 Nov 2014