Southern Steel - In The Black Despite Patchy Start

While the recent drop in steel prices had again resulted in a price/cost mismatch, especially  with  product  prices  falling  faster  than  material  costs,  Southern  Steel  managed  to  remain  in  the  black,  posting  a  net  profit  of  RM7.1m  in  1QFY12.  Meanwhile,  we  expect  the government’s provisional measures to curb wire rods  dumping  to  stop  non-genuine  imports  but  the  overall  impact  on  the  company  is not significant. Its 1Q profit remains uninspiring despite being marginally ahead of  our  initial  expectation.  Thus,  we  maintain  our  NEUTRAL  call  on  Southern  Steel,  with the FV kept at RM1.72 as we make no changes to our estimates. 

1QFY13  in  the  black.  Southern  Steel  managed  to  stay  in  the  black  after  returning  to  profit  in  4QFY12,  recording  net  profit  of  RM7.1m  in  1QFY13.  Although  the  result  was  slightly  better  than  our  initial  projection,  we  think  the  small  profit  may  not  excite  the  market. The lacklustre result can be attributed to the steeper plunge in steel prices than  that of its key material scrap metal, with the delivery lag resulting in the typical price-cost  mismatch. Therefore, we decided to keep our original estimates unchanged.

Measures to curb wire rods dumping welcome. The International Trade and Industry  Ministry  (MITI)  announced  in  October  2012  that  the  Government  has  completed  preliminary  anti-dumping  investigations  on  steel  wire  rods  imports  from  various  countries. While it may need more time (a maximum of 120 days) to conclude the study,  we  welcome the provisional measures that now require importers of wire rods to pay a  provisional  anti-dumping  duty  ranging  from  0%  to  33.62%.  We  believe  this  will  deter  non-genuine  imports  of  wire  rods  as  importers  face  the  risk  of  their  deposits  being  forfeited should the Government find sufficient evidence of dumping activities.

Near-term  outlook  improves,  but...  The  implementation  of  the  provisional  measures,  which  should  curb  imports  is  positive  for  major  local  wire  rods  producers  such  as  Southern  Steel.  Nonetheless,  since  our  sources  reveal  that  wire  rods  imports  have  declined since the petition was submitted to the Government, we see limited impact from  the imposition of a new duty. Furthermore, we see limited recovery in local steel prices  despite  a  rebound  in  international  steel  prices  over  the  past  few  weeks,  given  that  domestic  long  steel  product  prices  have  held  steadier  than  international  prices  in  the  recent  downcycle.  In  addition,  some  investors  may  have  held  on  to  their  shares  on  expectations that the projects rolled out under the Economic Transformation Programme  (ETP) could potentially spur steel demand. As a result, local steel counters are trading at  some premium to their regional peers. We maintain NEUTRAL on Southern Steel, with  our fair value retained at RM1.72. 

Source: OSK