Stripping off a one-off non-recurring loss, Kinsteel posted a core loss of RM8.3m in 3Q, shrinking its 9MFY12 net profit to merely RM2.2m, which is below our and street  estimates.  As  expected,  its  downstream  steel  op  weakened  in  3Q  as  steel and  material  prices  dropped  again,  resulting  in  a  negative  time  lag.  Performance of  37%-owned  Perwaja  was  also  hit  by  the  same  factors.  In  addition,  prolonged stoppage  at  its  Gurun  plant  has  also  resulted  in  uncovered  overhead  costs.  Inview of the poor results and delays in it upstream makeover, we are trimming our projections for the next two  years. That said, we maintain our NEUTRAL call and FV of RM0.41. 
 
Below  expectation. Excluding the one-off impairment in loss of receivables by its 37%-owned Perwaja in 3Q and termination benefitamounting to RM9m paid to employees of its 51%-owned Perfect Channel SB (PCSB) recorded in 2Q, the group posted a core net profit of RM2.2m in 9MFY12 (3Q: core loss of RM8.3m). The result was below our and way  short  of  street  estimates.  Operationally,  other  than the  operational  loss in  its  37%-owned  Perwaja,  PCSB  also  incurred  uncovered  overhead  cost  following  its  decision  to stop operations at its Gurun plant. That aside, Kinsteel also faced lacklustre sales on the back of weak demand as buyers prefer to hold back purchases pending clearer market direction.

Slow  progress  in  upstream  makeover?  The  deceleration  in  steel  prices  makes  us cautious  on  steel  counters,  including  Kinsteel.  Although  we  are  keeping  high  hopes  on Perwaja's  upstream  makeover  to  eventually  improve  the  group's  earnings  stream, progress  has  been  rather  slow.  We  understand  from  our  source  that  the  initial  mining work  has  been  carried out  but  full-scale  production  still  requires final  approval  from  the state Government. In addition, the earlier-than-expected monsoon had resulted in heavy rainfall, stalling its mine production. We understand that construction of its concentration plant  had  likewise  been  slowed  by  the  raining  season  and  thus  its  commissioning  date had been deferred to early-March 2013.
 
Maintain  NEUTRAL.  We are not pinning too much hope on Kinsteel's rolling business, especially  since  the  implementation  of  mega  projects  under  Economic  Transformation Programme  (ETP)  is  only  expected  to  pick  up  after the  next  General  Election. With the earnings  downgrade  in  Perwaja,  we  are  trimming  its  downstream  rolling  margin, translating  to  47.1%/12%  reduction  in  our  FY12/FY13  estimates.  Meanwhile,  we  are keeping  our  NEUTRAL  call,  with  our  FV  maintained  at  RM0.41,  based  on  a  0.6x  FY13 BV,  or  -1.5  standard  deviation  of  its  historical  trading  range,  premised  on  our  newly revised estimates.

 Source: OSK