We  cut  SBB’s  FY14/FY15 estimates by 30%/53.6% following the 18.8% increase in electricity tariff. The untimely tariff revision  is  also  likely to delay  the  company’s  new  strip  mill  from  making  a  significant contribution.  Thus, we maintain our NEUTRAL rating on SBB,  with  our FV trimmed  slightly to MYR1.57 based on  0.71x FY14 P/BV,  or  -1 SD of the stock’s historical 5-year P/BV.

• Tariff  hike.  Southern  Steel  (SBB)  operates  an  electrical  arch  furnace (EAF) that consumes some 600 kWhr of electricity to produce a tonne of billets  and  110-150  kWhr  to  manufacture  a  tonne  of  bars  or  wire  rods from billets. The company’s  electricity cost makes  up about  10% of its production  cost.  The  company  falls  under  the  “special  industrial  tariff” group under the latest hike in electricity tariffs.
• An  untimely  revision?  As  SBB  is  in  the  midst of  installing  a new  hot strip mill at its Prai plant, the electricity tariff hike  announced yesterday would  certainly delay the  new plant from making significant contribution to  the  company,  especially  since  this  mill  is  the  first  of  its  kind  in  the country.  That  said,  we  have  not  incorporated  the  mill’s  potential contribution  into  our  estimates,  as  disclosure  on  this  project  is  limited and its initial contribution may be marginal. However, we are prompted to slash  our  FY14/FY15  estimates  by  30%/53.6%  based  on  the  latest electricity tariff increase  from 1 Jan 14 and  its potential impact on SBB’s existing long steel capacity.
• Reiterate NEUTRAL.    In providing an outlook for the company  following its  recent  results  announcement,  management  appears  concerned  over the threat from steel imports.    Investors  are also likely to shy away from steel  stocks  in  the  near  term,  especially  after  two  steel  counters  were recently  designated  under  PN17,  and  with  the  latest  tariff  revision potentially  causing  a  dent  in  steel  mills’  earnings.  As  such,  we  remain NEUTRAL  on  SBB,  with  our  FV  trimmed  slightly  to  MYR1.57  (from MYR1.61), based on  0.71x FY14 P/BV,  or -1 SD of the stock’s  historical 5-year P/BV. 

Recommendation Chart

Source: RHB