PERWAJA (FV RM1.24 - TRADING BUY) 1QFY12 Results Review: Finally Swings Back Into The Black

Perwaja’s 1QFY12 net profit of RM16.2m represents a major turnaround after six consecutive quarters of losses. This can be largely attributed to cheaper iron ore pellets which made its iron-making operations profitable once more. That aside, we also think the major kitchen sinking in 4QFY11 also enabled the group to start the year with  a cleaner book. We expect the delay in the commissioning of its concentration plant to be offset by the favourable spread for DRI. In view of the potentially lucrative margins from the long-awaited mining concession award, we are keeping our Trading BUY call on Perwaja. Our FV of RM1.24 is based on 0.56x FY12 BV or -0.5 standard deviation of its historical trading range plus 10% DCF for its potential iron ore concession.

A  turnaround finally at hand? Perwaja’s fortunes swung positively to a net profit of RM16.2m in 1QFY12 compared to a net loss of RM183.7m in 4QFY11. This came in above our original expectation of only marginal profits for full-year FY12. We understand from market  sources that iron ore pellet is currently offered at a relatively smaller premium to iron ore fine prices of approximately USD35 a tonne, compared to a high of USD70 a tonne since early 2012. Since Direct Reduced Iron (DRI) is a direct substitute for scrap metal, their average selling prices (ASPs) are perfectly correlated. If scrap metal prices remain high, so will DRI prices. In light of this, the decent 1Q result could, to a large extent, be attributed to expanded margins for its iron-making operation. Furthermore, we also think the kitchen-sinking exercise in 4QFY11 also allows Perwaja to start the year with a cleaner book.

Upstream makeover still in progress… While we continue to think Perwaja is poised to secure the lucrative iron ore mining concession at Bukit Besi, Terengganu, we have yet to see any official award by the state government. Meanwhile, Perwaja has also started constructing its iron ore concentration and pelletization plant. The concentration plant likely to be commissioned in July 2012, which is slightly behind our original projection. Furthermore, with the plant expected to experience some technical hiccups during the initial stages of commissioning, we have recently revised down contributions from this plant in FY12. Meanwhile, we are excited over the boost to Perwaja’s earnings coming from cheaper iron ore pellets, more so with the DRI selling price remaining at reasonably high levels. This could easily compensate for the potential lower earnings generated by the new plant. Since we reckon the sustainability of cheap iron ore pellets is also a key determinant of whether  the  iron makers’ margins could  be  sustained moving forward, we prefer not to be overly bullish on Perwaja’s latest results until it secures the lucrative mining concession from the Terengganu state government.

Source: OSK