We were let down by  PERH’s 1QFY13 net loss of  MYR18.5m as we had expected  a  minor  profit  after  the  4QFY12  inventory  write-down.  Its potential mining venture is still in limbo while the commissioning of its new  concentration  plant  is  delayed.  After  cutting  our  estimates  and paring  our  book-based  valuation  to  -0.5SD  from  the  mean,  we  derive  a lower  MYR0.47  FV.  Downgrade  to  only  a  NEUTRAL,  as  the  increasing appetite for risk will offset some of the stock’s downside risks.   

- Another  letdown.  Perwaja  (PERH)  posted  another  net  loss  of MYR18.5m  in  1QFY13  even  after  having  written  down  MYR90m  in inventory in the preceding quarter. Management blamed the poor results on  weaker  selling  prices.  Meanwhile,  slower  demand  for  direct  reduced iron (DRI) led to a 34.9% q-o-q drop in revenue as buyers held back  on purchases during the Chinese New Year holidays.

- No  news  on  upstream  venture.  The company is still  waiting  for  official award of the mining venture by the Terengganu state government. While talks on an iron  ore  deal  may  resurface  after  Barisan  Nasional  regained control of the federal government as well as Terengganu, we suspect that some  investors  may  have  grown  impatient  after  a  prolonged  wait. Meanwhile, the commissioning of PERH’s concentration plant is in limbo, with Management guiding that it will likely take off in 3Q. Without rights to 
iron ore mining, PERH will have to purchase iron ore fine for processing, which will significantly narrow the profitability of this project.  

- Downgrade  to  NEUTRAL.  The  cloudy  near-term  outlook  and  the disappointing results prompt us to pare down our earnings forecasts from a marginal profit to a loss of MYR44m for FY13, as well as a significantly lower  MYR17m  profit  for  FY14,  down  57.6%.  Keeping  our  book-based valuation, we lower our parameters by a notch from the mean to -0.5 SD of the stock’s historical trading range of 0.72x FY14 P/B, and arrive at a lower MYR0.47 FV. Despite there being some downside risks to our new FV,  we  downgrade  the  stock  to  a  NEUTRAL  considering  investors’ growing risk appetite after the general elections. 

Source: RHB