KSB’s  1QFY13  net  loss  of MYR8.4m was  a  letdown,  partly  attributed  to lower earnings from its rolling operations as well as losses in PERH and PCSB. In view of the poor results and delays in its upstream makeover, we  are  decreasing  our  forecasts  for  FY13  and  FY14  and  trimming  our book-based  valuation  to  -0.5SD  from  the  mean.  As  our  lower  FV  of MYR0.43 offers only a limited upside, we are downgrading the stock to a NEUTRAL.

- Disappointed. Kinsteel (KSB) posted a net loss of MYR8.7m, which was below  our  forecast  and  way  off  the  mark  from  street  expectations  of  a sharp  turnaround.  While  its  downstream  operation  continues  to  be profitable, we suspect earnings were lower as buyers opted to hold back on  their  purchases  during  the  long  Chinese  New  Year  holidays. Therefore,  the  profits  generated  by  its  rolling  mills  were  not  enough  to cover the losses in its 37%-owned Perwaja Holdings (PERH; Neutral; FV: MYR0.47).  Its  51%-owned  subsidiary  Perfect  Channel  SB  (PCSB)  was also lossmaking despite ceasing operations at its Gurun plant, which still 
incurred depreciation and some overhead costs.  

- A  glimmer  of  hope  for  upstream  makeover. While  we  still  have  hope for  PERH’s  upstream  makeover  eventually  improving  the  Group’s earnings stream, progress has been rather slow. We  think that investors may have given up after the long wait for an official award of any mining rights. We echo that sentiment, despite signs of positive development for the industry post the General Elections. We understand that meanwhile, construction  of  its  concentration  plant  has  slowed  down,  with  the commissioning date deferred yet again, this time to 3QFY13.

- Downgrade  to  NEUTRAL.  We  are  cautious  on  KSB  after  its  extended losses  and  delays  in  the  upstream  makeover  at  37%-owned  PERH. Although its rolling business is set to see brighter days, especially since the  implementation  of  Malaysia’s mega  projects  is  expected  to  pick  up post elections, we cut our projections for the next two years on the back of  potentially  more  losses  from  PERH  and  PCSB.  We  also  lower  our book-based  valuation  to  -0.5SD  from  the  mean  of  its  historical  trading range and derive a new FV at MYR0.43, implying 0.81x FY14 BV.

Source: RHB