1HFY20 CNL of RM51.1m is below our expectation but within consensus’s estimate. We attribute the earning miss to: (i) lower-than-expected sales tonnage, and (ii) lower-than expected manufacturing margin. Post results, we increased our FY20E/FY21E losses to RM98m and RM25m, respectively. Maintain UP with lower TP of RM0.500 (from RM0.550) based on forward P/BV of 0.25x pegged to FY21E BV/share.

Below expectations. Excluding one-off overhead cost for plant’s temporary shutdown (RM18m) and allowance for inventories written down (RM19.8m), 1HFY20 CNL of RM51.1m is below our expectation but within consensus’ estimate. This was mainly due to: (i) lower-than expected sales tonnage, and (ii) lower-than-expected manufacturing margin. No dividend was announced, as expected.

Results’ highlight. YoY, 1HFY20 CNL widened drastically to RM51.1m compared to RM17.9m a year ago mainly due to: (i) lower overall sales tonnage dragged by a weaker domestic market, cushioned by better export sales. The domestic market was hampered by mandatory business closure during the MCO period and slow resumption pace of construction activities and (ii) depressed margin caused by lower average selling price and higher raw materials and production cost. QoQ, 2QFY20 registered higher losses of RM33.5m compared to RM17.6m in the preceding quarter, largely due to the same reasons mentioned.

Outlook. Overall, we remain cautious with its prospects as we expect oversupply issues and softer domestic demand to continue to impact the steel industry. Besides, manufacturing margin could be further pressured by the increase in both iron ore and scrap metal prices due to supply tightness and strong demand from China. However, we are encouraged by the group’s strategy to actively pursue export opportunities, which may help in cushioning the negative impact from slower domestic demand while benefitting from tax incentives from increased exports. Apart from that, the company will focus on cost initiatives to optimise operational efficiency, which will also put the group in a good position to respond to market changes.

Earnings revision. Post results, we increase our FY20E/FY21E losses to RM98m and RM25m, respectively, after fine-tuning our sales and margin assumption for MCO-related impacts, lower ASP and higher raw material cost due to supply tightness.

Maintain UP with lower TP of RM0.500 (from RM0.550) based on P/BV of 0.25x (at trough level) pegged to FY21E BV/share of RM2.01 (from RM2.11), which we believe is justified due to: (i) depressed ASP of rebar steel, (ii) higher raw material cost, and (iii) weaker domestic demand.

Risks to our call include: (i) higher-than-expected steel prices, (ii) higher-than expected steel demand, and (iii) lower-than-expected raw material costs.

Source: Kenanga Research - 28 Aug 2020