KSB’s losses extended to MYR43.8m in 1HFY13, falling way short of our and  street  estimates.  This  prompts  us  to  widen  our  loss  estimate  for FY13  and  cut  our  FY14  profit  forecast.  KSB’s restructuring,  mining rights  in  Kuala  Lipis  and  commissioning  of  PERH’s iron  processing plant  may  turn  it  around  in  FY14  but  effective  execution  remains  vital. Downgrade to NEUTRAL, with a lower MYR0.30 FV (from MYR0.43). 
 
- Another  dismal  quarter.  The  wider  losses  at  37%-owned  Perwaja (PERH MK; NEUTRAL, FV: MYR0.33) led to Kinsteel (KSB) recording a deeper loss of MYR35.4m in 2QFY13. Its 51%-owned subsidiary, Perfect Channel SB (PCSB), also posted a loss despite having ceased operation at  its  Gurun  plant,  which  was  still  incurring  depreciation  and  overhead costs.  Meanwhile,  weaker  steel  prices  resulted  in  a  marginal  loss  at  its downstream  rolling  operation.  Since  the  bigger  1H13  loss  was  worse than  our  and  street  estimates,  we  lift  our  FY13  loss  projection  and reduce our FY14 profit estimates.

- Taking  action  to  turn  around.  Meanwhile,  KSB  and  associate  PERH are  engaging  financial  lenders  and  major  creditors  to  restructure  the group.  Last  month,  KSB  also  announced  a  mining  agreement  with  the Sultan  of  Pahang  which  gives  it  exclusive  rights  to  mine  iron  ore  and other  minerals  in  Kuala  Lipis,  Pahang.  This  may  create  a  new  income stream  for  the  group.  Separately,  the  commissioning  of  PERH’s concentration  and  pelletization  plant  may  bolster  its  profitability  going forward.  That  said,  effective  implementation  is  vital  to  ensure  a successful turnaround.

- Cash strain. Downgrade to NEUTRAL. Although the mining agreement is  timely  and  could  potentially  pull  the  group  out  of  its  financial  distress gradually, the market appears to be more concerned about its immediate cash  position  in  view  of  the  various  repayments  due.  Note  that  KSB’s share  price  retraced  rapidly  after  spiking  briefly  following  the announcement of the mining agreement. It is against this backdrop that we downgrade our call on KSB to NEUTRAL (from TRADING BUY), with a  lower  FV  of  MYR0.30  (from  MYR0.43),  derived  from  0.65x  FY14F P/BV, or -1 SD of its historical trading range.     

Source: RHB