1Q16 core net loss of RM17.9m is within our profit expectation of RM6m but beat consensus’ loss expectation of RM16.5m, as the market in general expects stronger quarters ahead. No dividends as expected. Earnings are upgraded by 7x and 3x for FY16E and FY17E on the back of higher steel ASP and stronger margins. The company expects to complete the rights issues of RCPS, LTIP and DRP by 2H16 (refer overleaf).

1Q16 registered core net loss (CNL) of RM17.9m, which came in within our profit expectation of RM6m but beat consensus’s loss expectation of RM16.5m. This is after stripping off reversal of inventories written down to net realisable value of RM18.5m and unrealised forex gain of RM4.9m. We deemed this quarter as within expectation as we are expecting FY16E earnings to return to black from 2Q16 onwards. No dividend declared as expected.

Improvement in margins on the back of stronger steel ASP. While 1Q16 recorded CNL of RM17.9m, it improved threefold QoQ from 4Q15 CNL of 53.8m, on the back of: (i) turnaround in both manufacturing and trading revenue, and (ii) significant recovery in manufacturing (1.6%) and trading (7.9%) margins. However, YoY, 1Q16 CNL was significantly lower than 1Q15 CNP of RM21.4m, due to: (i) higher average steel ASP and sales volume in 1Q15, and (ii) weaker manufacturing margin (1.6% vs 1Q15’s 3.2%).

Raising FY16-17E earnings by 7x and 3x. As a result of higher steel ASP, we raised our earnings estimates to RM51.7m and RM58.0m for FY16E and FY17E, respectively. However, we are concerned about price sustainability and believe that the outlook for steel remains challenging in the medium-longterm (refer overleaf for details).

Rights issue, LTIP and DRP. Along with with its results, the group proposed three corporate exercises; (i) rights issue of RCPS (5% p.a. dividend, for 8years), (ii) long-term incentive plan (LTIP), and (ii) dividend reinvestment plan (DRP). These exercises are expected to be completed by 2H16. The 1 RCPS for 4 ordinary shares is expected to raise up to RM62.6m, which will be used for working capital purpose. While it is dilutive to EPS, we are slightly positive as this may be the best option to pare down debt (refer overleaf).

Maintain UNDERPERFORM but upgrade TP to RM1.04. Following the upgrade in our earnings forecasts, we upgraded TP higher to RM1.04 based on FY16E with higher PBV of 0.53x (0.30x previously), while keeping our UNDERPERFORM call on the stock (previous TP of RM0.61). The target PBV of 0.53x is close to -0.5SD over 4-year historical Fwd. PBV, on the back of margin recovery underpinned by better outlook in steel prices. We believe our valuation is justifiable, given the sudden supply shortage locally, sharp surge in steel ASP in 2016 and improvement in margins. However, we think that upsides are limited as market has largely priced in the positives in view of recent run-up in share prices. Additionally, the cash-call announcement is slightly negative as the main purpose is for working capital rather than expansion. Thus, we raise our TP to reflect the better ASP but maintain our UP call. Risks include lower-than-expected steel selling prices, softer-than-expected steel demand, and higher-than-expected raw material costs. 

Source: Kenanga Research - 25 May 2016