Results

• 1QFY15 core net profit of RM2.1m came in below expectations, accounted for only 6% and 6.6% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected sales tonnage, and additional RM6m write-down of raw materials.

Dividends

• -

Highlights

• QoQ… 1QFY15 core net profit improved to RM2.1m (from RM0.6m in the previous quarter), as lower selling prices were more than offset by higher sales tonnage, lower raw material costs, the absence of one-off payroll expense (RM5.5m in 4QFY14) arising from collective agreement with the worker’s union, as well as lower inventory write-down.

• YoY… 1QFY15 core net profit declined by 79.2% to RM2.1m, and the weaker performance was driven by several factors including: (1) Depressed selling prices, which have also resulted in RM6m inventory write-down; (2) Lower export tonnage; and (3) Higher finance cost.

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

• FY15-16 net profit forecasts cut by 52.3% and 32.7% to RM15.4m and RM38.2m respectively, largely to account for lower production volume and selling price assumptions.

Rating

• Hold

Negatives

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

Positives

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

Valuation

• We also took this opportunity to switch our valuation methodology to P/B (0.5x P/B, in line with its historical trough valuation cycle) from P/E previously, given our lessbullish view on its near-term earnings prospects and its high book value. Post valuation methodology rationalization, our TP on the stock has been raised slightly from RM0.98 to RM1.02 (based on 0.5x P/B).
• While we are keeping to our less-than-positive view on the domestic steel sector’s earnings outlook (given the persistent overcapacity issue in the region), we upgraded our recommendation on the stock from Sell to Hold, due to the recent share price weakness.

Source: Hong Leong Investment Bank Research - 28 May 2015