SSTEEL (FV RM1.82 - NEUTRAL) 9MFY12 Results Review: Deeper Loss

As we have  recently toned down  our  expectations on Southern Steel’s 3QFY12 results, the wider loss of RM25.2m certainly disappointed us. Other than persistent poor margin for its steelmaking operation, we suspect it also suffered from high carrying costs for its inventory as no impairments were made in 2QFY12. While we and its board expect the company to return to the black in the following quarter, we are  still  forecasting a loss for FY12 and trim  our  FY13 estimates by 16.2% on the back of challenging near-term industry headwinds. As the result, our FV is further reduced to RM1.82 based on 0.85x FY12 BV, or the -0.5 standard deviation of its historical trading range. Maintain NEUTRAL.

Deeper loss for 3QFY12. Southern Steel posted a deeper loss of RM25.2m, which pulled down its 9MFY12  bottom-line into  the red to the tune of  RM14.6m. Although a weak profit was still within our expectations, we did not foresee a loss in 3Q. The poor result can be attributed to persistent weak demand conditions in steelmaking operations and hence, the  soft recovery in steel prices. The Chinese New Year celebration  has caused the company’s volume to weaken slightly and hence, it suffered a q-o-q revenue decline of 6.4%. Furthermore, we reckon the group had not made any provision for inventory impairment in the past two quarters and may be still stuck with some high cost raw materials and thus, facing a negative spread. 

Harnessing steel synergies with new JV? Southern Steel informed Bursa Malaysia recently that it has entered into a joint venture agreement with NV Bekaert SA (Bekaert), a company incorporated in Belgium, to form a joint venture company (JV Co.) in Singapore for the manufacture and sale of specified steel. Southern Steel has been focusing on the higher grade wire rods and downstream products in recent years. Since Bekaert has expertise in drawn steel wire products and advanced solutions based on metal transformation and coatings, Southern Steel will now have the opportunity to expand its steel wire manufacturing and sale business. While we are generally excited over the proposed JV, we do not see any major earning contribution from this new unit in the near term.

Reiterate NEUTRAL. We have trimmed our  earnings  estimates recently as we  had expected the persistently poor margin for steelmaking to impact the performance of Southern Steel for the remainder of FY12. However, the deeper 3Q loss has led us to believe the group will likely remain in the red for FY12 with an expected loss of RM4.1m as well as trim our FY13 estimates by 16.2%. We value Southern Steel based on  -0.5 standard deviation of its historical trading range or 0.85x FY12 BV, which gives a lower fair value of RM1.82 after incorporating our latest downward revisions to the bottom-line. We maintain our NEUTRAL stance.  

Source: OSK