Newsbreak

• To reflect the pricier gas purchase price, Gas Malaysia announced that it will adjust natural gas tariff for non-power sector users in Peninsular Malaysia by -3.3-12.1% to RM19.52-22.22/mmbtu (depending on usage).

Comments

• Natural gas accounts for less than 1% of total production cost of steel players under HLIB’s coverage (namely Ann Joo Resources and CSC Steel). We note that higher natural gas tariff will hit directly to the steel players’ bottom lines, as this will unlikely be passed through to the customers (given the intense price competition within the steel sub-sector).

• Based on our estimates, higher natural gas tariff will reduce our FY15 net profit forecasts for Ann Joo Resources and CSC Steel by 2-5%, assuming higher natural gas tariff to be absorbed entirely by the players.

Forecast

• Maintained for now, pending further update with management. Catalysts Steel sub-segment

• More effective measures introduced by the Chinese authority to curb steel capacity.

• Potential effective trade action(s) by the government on steel dumping activities.

Risks

• Overcapacity in China remains over the longer term;
• Increase in raw materials which will reduce margins.

Rating

NEUTRAL Steel sub-segment

Negatives

• Overcapacity results in volatile earnings.

Positives

• Potential effective trade action(s) on steel dumping activities.

Sector View

Maintain NEUTRAL stance on the sector with a HOLD recommendations for Ann Joo Resources (TP:RM1.02) and CSC Steel (TP: RM0.95). For exposure in the building material sector, we prefer the cement sub-sector, with top pick as Lafarge (BUY; TP: RM10.72).

Source: Hong Leong Investment Bank Research - 10 Jun 2015