Southern Steel’s gloomy medium-term outlook and poor stock liquidity has prompted us to cease coverage on the counter for now. Meanwhile, we also expect  a  long learning curve for its newly-commissioned strip mill on top of extended competition from imported steel  –  particularlyfrom China – which may continue to weigh on its razor-thin margin. Our previous call was NEUTRAL with a TP of MYR1.46.

Near-term  industry  outlook is  bleak.  Southern Steel’s recent  quarterly numbers were weak, which its management attributed to stiff competition stemming from the  dumping of cheaper imported steel  by Chinese steel mills.  Furthermore,  the  Ministry  of  International  Trade  and  Industryrecently decided to terminate its  investigation into the import  of steel bars from  China  as  it  believes  that  there  has  been  no  material  negative impact to the domestic industry  –  even though local steel mills have said otherwise.

Learning curve on new strip mill.  Southern Steel’s new MYR850m hot strip mill is just commissioned.  Meanwhile, disclosure on this project has been  somewhat  limited  but  we  project  its  initial  contribution  to  be marginal.  We  expect  the company to go through a  long learning curve before  it can book  meaningful contributions from its  new strip mill, beingthe  first  of  its  kind  in  Malaysia.  Separately,  the  fast-decreasing  steelprices  –  due  to  the  plunge  in  iron  ore  prices  compared  with  the  more gradual  adjustment  to  scrap  prices,  after  accounting  for  the  weaker ringgit – may translate to prolonged narrow margins.

Ceasing coverage.  Apart from that, the recently-completed issuance  of 5-year,  5%  redeemable convertible unsecured loan stock  (RCULS)  may have raised  some concerns on possible dilution even though their  actual conversion may not happen anytime soon. This, together with the poor liquidity of  the company’s shares  and its glum  outlook for  the  short termto medium term, leads us to cease coverage on Southern Steel for now. Therefore, we do not ascribe any recommendation for the company. Our previous call was NEUTRAL with a TP of MYR1.46.   

Source: RHB