Stock Name: KINSTEL
Company Name: KINSTEEL BHD
Research House: MAYBANK
Kinsteel Bhd
(April 6, RM1.04)
Upgrade to buy at RM1.03, target price raised to RM1.23: Kinsteel's share price fell 12% from its peak in January and was the worst-performing construction steel stock on a six-month basis. We upgrade Kinsteel to buy from hold, with a revised target price of RM1.23 (previously RM1.03), after raising our earnings forecasts and a higher eight times 2011 price-earnings ratio (PER) target on optimism for near-term margin growth.
We have turned positive on Kinsteel as its April-May 2010 billet deliveries have been sold forward at US$550 (RM1,765.50) per tonne (versus US$600 per tonne currently) but already reflecting the inflated iron ore costs.
Its current iron ore inventory, sufficient till June 2010, was procured at an average price of US$110 per tonne (versus 2Q10 quarterly contract of US$200 per tonne). The resulting margin expansion will be more than sufficient to compensate for a potential gas price hike.
With a three-month iron ore inventory in hand, Kinsteel will not commit to the 2Q10 iron ore contract (90% above 2009 annual benchmark of US$90 per tonne for iron ore pellet). The management may consider sourcing iron ore from domestic reserves which could have more favourable pricing. Our channel checks indicate that Malaysia has at least 50 million tonne of iron ore reserves. Perwaja consumes two million tonnes per annum, which would preserve margins for longer.
We think the shares offer a better risk reward ratio now, given higher steel prices, positive global steel fundamentals, and low foreign shareholding of less than 10% (3Q08: 25%). Our visit last week to Kinsteel's 37%-owned Perwaja steel plant (in Kemaman, Terengganu) with foreign fund managers was well received.
We raise our 2010 earnings per share (EPS) by 13% while that of 2011 is largely unchanged, reflecting latest steel prices and iron ore input costs. This upgrade brings our forecast to the top-range of broker estimates. - Maybank IB, April 6
This article appeared in The Edge Financial Daily, April 7, 2010.
Company Name: KINSTEEL BHD
Research House: MAYBANK
Kinsteel Bhd
(April 6, RM1.04)
Upgrade to buy at RM1.03, target price raised to RM1.23: Kinsteel's share price fell 12% from its peak in January and was the worst-performing construction steel stock on a six-month basis. We upgrade Kinsteel to buy from hold, with a revised target price of RM1.23 (previously RM1.03), after raising our earnings forecasts and a higher eight times 2011 price-earnings ratio (PER) target on optimism for near-term margin growth.
We have turned positive on Kinsteel as its April-May 2010 billet deliveries have been sold forward at US$550 (RM1,765.50) per tonne (versus US$600 per tonne currently) but already reflecting the inflated iron ore costs.
Its current iron ore inventory, sufficient till June 2010, was procured at an average price of US$110 per tonne (versus 2Q10 quarterly contract of US$200 per tonne). The resulting margin expansion will be more than sufficient to compensate for a potential gas price hike.
With a three-month iron ore inventory in hand, Kinsteel will not commit to the 2Q10 iron ore contract (90% above 2009 annual benchmark of US$90 per tonne for iron ore pellet). The management may consider sourcing iron ore from domestic reserves which could have more favourable pricing. Our channel checks indicate that Malaysia has at least 50 million tonne of iron ore reserves. Perwaja consumes two million tonnes per annum, which would preserve margins for longer.
We think the shares offer a better risk reward ratio now, given higher steel prices, positive global steel fundamentals, and low foreign shareholding of less than 10% (3Q08: 25%). Our visit last week to Kinsteel's 37%-owned Perwaja steel plant (in Kemaman, Terengganu) with foreign fund managers was well received.
We raise our 2010 earnings per share (EPS) by 13% while that of 2011 is largely unchanged, reflecting latest steel prices and iron ore input costs. This upgrade brings our forecast to the top-range of broker estimates. - Maybank IB, April 6
This article appeared in The Edge Financial Daily, April 7, 2010.
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