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PP 7767/09/2010(025354)

1 March 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
1 March 2010
MARKET DATELINE

Kinsteel Share Price


Fair Value
:
:
RM0.995
RM1.22
4QFY12/09 Dragged Down By Perwaja; Bumper Profit Recom : Outperform
Ahead (Maintained)

Table 1 : Investment Statistics (KINSTEL; Code: 5060) Bloomberg: KSB MK


Net Core FD EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009A 1,928.1 18.3 1.9 -1.3 NM NM - 1.2 2.0 2.3 1.0
2010F 1,546.5 106.8 11.2 10.2 >100 9.8 10.3 1.1 1.6 11.9 1.7
2011F 2,049.2 123.0 12.9 11.7 15.2 8.5 13.0 1.1 1.4 13.7 1.7
2012F 2,062.3 124.9 13.1 11.9 1.5 8.4 - 0.8 1.0 11.1 1.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Below expectations. Stripping off EI gains of RM32m, Kinsteel reported RHBRI Vs. Consensus
FY12/09 net loss of RM23.7m that missed our and market expectations of a Above
net profit of RM4.1-4.3m. We believe the variance against our forecast came In Line
mainly from the lower-than-expected contribution from 37.4%-owned Below
Perwaja on the back of lower-than-expected steel billet selling prices.
Issued Capital (m shares) 941.2
♦ YoY. Stripping off EI gains of approximately RM32m arising from the reversal Market Cap(RMm) 950.5
of provision on impairment, FY12/09 reversed to a net loss of RM23.7m from Daily Trading Vol (m shs) 7.9
a net profit of RM32.0m in FY12/08 due to: (1) Weaker selling prices; (2) 52wk Price Range (RM) 0.36 – 1.18

Higher depreciation expenses; and (3) Higher finance costs. Major Shareholders: (%)
Tan Sri Pheng Yin Huah 34.2
♦ QoQ. 4QFY12/09 net profit more than doubled to RM41.1m from RM19.8m in Maju Holdings 20.6
3QFY12/09 due to EI gains of approximately RM32m arising from the reversal Unifund 4.4
of provision on impairment that more than offset the normalisation of tax
FYE Dec FY10 FY11 FY12
expense in 4QFY12/09 from a tax writeback in 3QFY12/09.
EPS Revision (%) -4.6 -2.9 -
♦ Future outlook. We believe Kinsteel’s near-term earnings are likely to be Var to Cons (%) -0.9 -10.0 -
strong on the back of the recent rise in global steel prices that will boost
Share Price Chart
profitability at 37.4%-owned Perwaja, as Perwaja’s production cost in
1HFY12/10 will only increase marginally given that its contracted iron ore
shipment at low prices will last until 2QFY12/10. Upstream operation aside,
we believe Kinsteel will benefit from the rising domestic long steel product
demand arising from the pending implementation of stimulus packages as
well as a pick-up in property development activities (indicated by a surge in
property launches since 2H09).
♦ Risks. Risks for the steel sector include: (1) Oversupply in China that results
in dumping activities by Chinese steel producers in the international market; Relative Performance To FBM KLCI
and (2) Steep contraction in global steel consumption that will weigh down on
international steel prices; and (3) Steep rise in energy cost, in particular
electricity.
♦ Earnings forecasts. We are cutting our FY12/10-11 net profit forecasts by
Kinsteel

4.6% and 2.9% respectively to reflect lower earnings contributions from


Perwaja in FY12/10-11 and higher interest cost assumptions. FBM KLCI

♦ Investment case. Correspondingly, indicative fair value is cut by 4.6% from


RM1.28 to RM1.22 based on 12x revised FY12/10 fully-diluted EPS of 10.2
sen, in line with our 1-year target forward PER of 12x for the long steel Chye Wen Fei
product sector. Maintain Outperform. (603) 92802172
chye.wen.fei@rhb.com.my
Please read important disclosures at the end of this report.

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Table 2: Earnings Review (YoY Cumulative)


FYE Dec 2008 2009 % YoY Observations/ Comments
(RMm) 12M 12M Change
Turnover 2,457.9 1,928.1 -21.6 Dragged down by lower average selling price.
Operating profit 102.9 28.3 -72.5 Hit by: (1) Lower selling prices; and (2) Higher production costs, in
particular, the 37.3%-owned Perwaja.
Finance costs -92.6 -126.4 36.5 Due to: (1) Higher cost of financing; and (2) Higher net debt, which
increased to RM1,600.1m from RM1,416.9m in FY12/08.
Pretax profit 10.3 -98.1 NM Hit further by higher finance costs.
Taxation 40.2 42.8 6.3
Minority interest -18.5 73.6 NM Filtered down from pretax loss.
Net profit 32.0 18.3 -43.0
EPS (sen) 3.5 2.0 -43.1

Operating margin (%) 4.2 1.5 -2.7 pts


Pretax margin (%) 0.4 -5.1 -5.5 pts
Net profit margin (%) 1.3 0.9 -0.4 pts
Effective tax rate (%) -390.6 43.6 NM

Table 3: Earnings Review (QoQ)


FYE Dec 2009 2009 2009 2009 % QoQ Observations/ Comments
(RMm) 1Q 2Q 3Q 4Q Change
Turnover 440.3 693.1 457.7 390.9 -14.6 Mainly due to: (1) Lower sales volume; and (2)
Lower selling prices for downstream steel
products.
Operating profit/(loss) -56.8 -37.9 43.6 79.3 81.9 Boosted by RM32m EI gains arising from the
reversal of provision for impairment.
Finance costs -36.5 -36.1 -26.7 -27.0 1.3 Net debt increased to RM1,600.1m from
RM1,542.9m in the previous quarter.
Pretax profit/(loss) -93.3 -74.0 16.9 52.3 >100 Filtered down from operating profit.
Taxation 16.9 13.0 14.1 -1.3 NM
Minority interest 41.6 53.1 -11.3 -9.9 -12.3 Due to lower contribution from 37.4%-owned
Perwaja and 51%-owned Perfect Channel.
Net profit/(loss) -34.8 -7.9 19.8 41.1 >100 Filtered down from pretax profit.
EPS (sen) -3.8 -0.9 2.1 4.4 >100

Operating margin (%) -12.9 -5.5 9.5 20.3 10.8 pts


Pretax margin (%) -21.2 -10.7 3.7 13.4 9.7 pts
Net profit margin (%) -7.9 -1.1 4.3 10.5 6.2 pts
Effective tax rate (%) 18.1 17.6 -83.2 2.5 85.7 pts

Table 4: Earnings Forecasts Table 5: Forecast Assumptions


FYE Dec (RMm) 2009A 2010F 2011F 2012F FYE Dec 2010F 2011F 2012F

Turnover 1,928.1 1,546.5 2,049.2 2,062.3 Capacity (‘000 tonnes p.a.)


Turnover growth (%) -21.6 -19.8 32.5 0.6 DRI 1,800 1,800 1,800
Billets 1,800 1,800 1,800
EBITDA 140.2 498.3 530.6 524.5 Bars 500 500 500
EBITDA margin (%) 7.3 32.2 25.9 25.4 Wire Rod 200 200 200
Sections & Beams 500 500 500
Depreciation -111.9 -115.5 -114.8 -114.1
Finance costs -126.4 -114.7 -110.0 -89.1 Production Volume (‘000 tonnes p.a.)
DRI 1,450 1,450 1,450
Pretax profit -98.1 268.0 305.8 321.4 Billets 1,200 1,200 1,200
Tax 42.8 -9.2 -17.8 -18.1 Bars 400 400 400
Minorities 73.6 -152.1 -165.0 -178.5 Wire Rod 100 100 100
Net profit 18.3 106.8 123.0 124.9 Sections & Beams 200 200 200
EI -32.0 0.0 0.0 0.0
Core net profit -13.7 106.8 123.0 124.9 RM/US$ 3.30 3.25 3.30
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

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This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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