Perwaja's  results  were  a  letdown  again,  partly  sunk  by  a  RM21.9m  one-off impairment  of  a  receivables  loss.  9MFY12's  core  net  profit  of  only  RM2.1m  was below our and street estimates due to a mismatch in raw materials/selling prices. As  the  premature  monsoon  dampened  mining  operations  and  delayed  the commissioning  of  its  concentration  plant,  we  remain  cautious  over  its  near-term outlook  and  trim  our  estimates  for  the  next  two  years.  After  fine-tuning  our valuation, too, we are trimming the FV to RM0.84. Maintain TRADING BUY, for the attractive upside potential from its upstream makeover.   

Disappointing.  Perwaja  posted  a  heavy  loss  of  RM38.3m  for  3QFY12.  While  we factored in RM21.9m for an impairment of a non-recurring receivables loss, the core net profit of merely RM2.1m for 9MFY12 was still lower than our and street expectations. We suspect  the  sharp  drop  in  the  iron  ore  price  and  scrap  metal  prices  during  the  quarter may have stuck the company with a higher inventory of materials. The demand for Direct Reduced Iron (DRI) and billets were stalled as well, with revenue dropping by 40.2% q-o-q  as  buyers held  back  purchases  while  waiting  for  the  market  to  move  in  a  clearer direction.

Still  waiting  on  new  upstream  income.  Meanwhile,  Perwaja's  mining  venture  is  still pending  the  final  official  award  from  the  Terengganu  state  government.  Despite  that, initial  works  and  test  operations  have  been  carried  out,  according  to  our  sources.  The earlier-than-expected  monsoon  resulted  in  heavy  rainfall,  thereby  stalling  production from  its  mine.  We  also  understand  from  the  management  that  the  construction  of  its concentration  plant  has  been  sluggish  following  the  rainy  season,  thus  the commissioning  date  has  now  been  deferred  to  early  March  2013.  As  Perwaja    was unable to immediately capitalize on the recovery of the iron ore price to almost USD120 per tonne, we decided to revised down our core earnings for FY12 to a loss of RM2.2m in FY12 and a lower profit for FY13 by 7% to RM116.7m

Trading BUY, with lower FV. Although we can understand the final awarding of iron ore mining  rights  from  the  Terengganu  state  government  may  be  time-consuming,  we suspect  the  market  may  have  given  up  after  waiting  too  long,  especially  for  local investors  which  lack  exposure  about  the  mining  business.  This,  together  with  the disappointing  results  has  led  us  to  slash  our  valuation  to  only  account  for  10%  of potential  iron  ore  DCF  from  30%  previously.  However,  we  are  keeping  our book-based valuation  at  0.5x,  and  roll  over  our  valuation  to  FY13  to  derive  a  lower  FV  of  RM0.84. Given  the still-decent upside and  the  fact  that  a  potential upstream transformation may offer  the  next  quantum  leap  to  the  group,  we  are  sticking  to  our  TRADING  BUY recommendation on Perwaja.

Source: OSK