Stock Name: SSTEEL
Company Name: SOUTHERN STEEL BHD
Research House: HWANGDBS
Southern Steel Bhd
(Jan 17, RM2.21),
Kinsteel Bhd
(Jan 17, 96 sen)
Sector's valuation remains attractive: Construction of the RM36 billion mass rapid transit (MRT) project is targeted to begin in July. With that, local steel demand is set to rise.
Pulling back the steel consumption trend from 1994 to 1997 ' when the government implemented high-impact projects such as KLIA, Petronas Twin Towers, Putrajaya city and the LRT lines (project values totalled RM54 billion) ' long steel consumption in Malaysia surged above 310,000 tonnes per month, higher than the average 270,000 tonnes per month.
Then, the sector traded at an average multiple of 1.6 times book value. Looking ahead, we believe the MRT project together with the LRT extension (estimated project values RM36 billion and RM7 billion'' respectively) could lift the demand momentum to the levels recorded in 1994 to 1997.
Hence, we believe the sector is poised for a re-rating given the positive contract flows. The sector's valuation remains attractive, currently trading below book at 0.8 times book value.
We advocate a 'buy' on Kinsteel. Our RM1.25 target price (36% upside) is based on 1.3 times FY11F net tangible assets (NTA). Kinsteel is a value buy, trading at one times NTA, with three-year earnings compound annual growth rate (CAGR) of 42% and 10% return on equity (ROE).
We upgrade Southern Steel to 'buy' (from 'hold') and retain our RM2.50 TP based on 1.2 times FY11F NTA. Southern Steel offers an attractive matrix of 13% ROE, 3% dividend yield and currently trades at one times NTA.
Our forecast for long steel consumption ex-MRT impact in 2011 is 3 million to 3.2 million tonnes, a conservative 5% growth from 2010.
Hypothetically, if steel comprises 10% of the MRT project value, it will translate to 1.6 million tonnes of steel requirement and effectively lift steel usage by about 8% per annum.
The two key risks: (i) Delay in execution. In our opinion, major delay is unlikely as the MRT project was earmarked as a vital component of the Economic Transformation Programme and is one of the prime minister's priority projects; (ii) Soft steel prices and rising iron ore cost affecting profitability. That said, we expect steel prices to improve in 2011.
On our scorecard, Kinsteel ('buy'; TP RM1.25) is ranked first. Kinsteel is an earnings recovery play with three-year net profit CAGR of 42% and 10% forward ROE.
Coming closely behind are Ann Joo Resources Bhd (non-rated) and Malaysia Steel Works (KL) Bhd (non-rated), followed by Southern Steel Bhd ('buy', TP RM2.50).
Meanwhile, Lion Industries Bhd (non-rated) and Perwaja Holdings Bhd (non-rated) scored the lowest. ' Hwang DBS Vickers Research, Jan 17
This article appeared in The Edge Financial Daily, January 18, 2011.
Company Name: SOUTHERN STEEL BHD
Research House: HWANGDBS
Southern Steel Bhd
(Jan 17, RM2.21),
Kinsteel Bhd
(Jan 17, 96 sen)
Sector's valuation remains attractive: Construction of the RM36 billion mass rapid transit (MRT) project is targeted to begin in July. With that, local steel demand is set to rise.
Pulling back the steel consumption trend from 1994 to 1997 ' when the government implemented high-impact projects such as KLIA, Petronas Twin Towers, Putrajaya city and the LRT lines (project values totalled RM54 billion) ' long steel consumption in Malaysia surged above 310,000 tonnes per month, higher than the average 270,000 tonnes per month.
Then, the sector traded at an average multiple of 1.6 times book value. Looking ahead, we believe the MRT project together with the LRT extension (estimated project values RM36 billion and RM7 billion'' respectively) could lift the demand momentum to the levels recorded in 1994 to 1997.
Hence, we believe the sector is poised for a re-rating given the positive contract flows. The sector's valuation remains attractive, currently trading below book at 0.8 times book value.
We advocate a 'buy' on Kinsteel. Our RM1.25 target price (36% upside) is based on 1.3 times FY11F net tangible assets (NTA). Kinsteel is a value buy, trading at one times NTA, with three-year earnings compound annual growth rate (CAGR) of 42% and 10% return on equity (ROE).
We upgrade Southern Steel to 'buy' (from 'hold') and retain our RM2.50 TP based on 1.2 times FY11F NTA. Southern Steel offers an attractive matrix of 13% ROE, 3% dividend yield and currently trades at one times NTA.
Our forecast for long steel consumption ex-MRT impact in 2011 is 3 million to 3.2 million tonnes, a conservative 5% growth from 2010.
Hypothetically, if steel comprises 10% of the MRT project value, it will translate to 1.6 million tonnes of steel requirement and effectively lift steel usage by about 8% per annum.
The two key risks: (i) Delay in execution. In our opinion, major delay is unlikely as the MRT project was earmarked as a vital component of the Economic Transformation Programme and is one of the prime minister's priority projects; (ii) Soft steel prices and rising iron ore cost affecting profitability. That said, we expect steel prices to improve in 2011.
On our scorecard, Kinsteel ('buy'; TP RM1.25) is ranked first. Kinsteel is an earnings recovery play with three-year net profit CAGR of 42% and 10% forward ROE.
Coming closely behind are Ann Joo Resources Bhd (non-rated) and Malaysia Steel Works (KL) Bhd (non-rated), followed by Southern Steel Bhd ('buy', TP RM2.50).
Meanwhile, Lion Industries Bhd (non-rated) and Perwaja Holdings Bhd (non-rated) scored the lowest. ' Hwang DBS Vickers Research, Jan 17
This article appeared in The Edge Financial Daily, January 18, 2011.
No comments:
Post a Comment