Stock Name: TONGHER
Company Name: TONG HERR RESOURCES BHD
Steel sector
Maintain neutral: In 1H11, earnings performance for companies under our steel sector coverage was a mixed bag. Two companies, Choo Bee Metal Industries Bhd and Tong Herr Resources Bhd came in above our expectation. Hiap Teck Venture Bhd and Kinsteel Bhd were below while Ann Joo Resources Bhd was within our expectation. However, all three companies covered by consensus (Ann Joo, Kinsteel and Hiap Teck), came in below street expectations.
Across the board, apart from Hiap Teck, companies reported an improvement in sales, underpinned by both higher sales tonnage and higher average selling prices. The average selling price of domestic steel bars has improved to RM2,200 to RM2,400 per tonne from a low of RM1,900 per tonne in 2010. Domestic demand for steel bars has also improved although not significantly. Export sales remained subdued on the back of the softening external environment.
Despite the improvement in demand and top line revenue, margins were affected by the surge in raw material costs. Across the board in 1H11, earnings before interest and tax (Ebit) margins were 0.5 to 9.0 percentage points lower. Recall that the price of iron ore has risen by more than 50% to a high of US$200 (RM596) per tonne from US$130 per tonne a year ago. Correspondingly, the scrap price has surged by more than 30% to around US$500 from US$380 per tonne. In addition, the recent 8% hike in electricity tariff has dented operating margins.
Evidently, domestic steel millers' profit was hit by high input costs. Year-to-date, apart from Tong Herr, where earnings were boosted by the consolidation of its stainless steel business, domestic millers suffered a year-on-year drop in earnings in the range of 25% to 180%.
For this quarter, we have:
(i) Upgraded Choo Bee to 'buy' (from 'add') given the weakness in share price. Target price remains unchanged at RM1.60 based on an unchanged target price earnings ratio (PER) of six times CY12;
(ii) Upgraded Tong Herr to 'buy' (from 'add') and raised our target price (TP) to RM2.85 (from RM2.60) following a 4% to 12% upgrade in FY11 to FY13 earnings forecast;
(iii) Downgraded Hiap Teck to 'sell' (from 'reduce') on the back of 39% to 51% cut in FY11 to FY13 earnings forecast. TP has been lowered to 70 sen (from RM1.05) tagged to seven times CY12 PER; and
(iv) Lowered Kinsteel's TP to 50 sen (from 70 sen) on the back of a 27% to 62% cut in FY11 to FY13 earnings forecast.
The much-anticipated MyRapid Transit (MRT) is expected to drive domestic steel demand. In the medium term, the indicative total project value for both the civil and tunnelling works for the 51km MRT will add up to around RM20 billion. The awarding of the various civil and tunnelling works will extend over the next six to nine months. However, we think real demand for steel stemming from the project will only come on full steam from 1H12 onwards.
After a staggering increase in steel prices over the last six months, mainly driven by re-stocking and cost-push factors, international steel prices are anticipated to soften in 4Q11 given the uncertainties in the developed economies. In addition, raw material cost is expected to remain high, continuing the mismatch between high production costs and weak selling prices. This will continue to affect millers' operating margins.
Although we expect the MRT project to support domestic steel demand in the medium to long term, in the short term we remain cautious on the sector given the doldrums in the external markets. Consequently, steel prices are expected to remain soft in 4Q11. Coupled with project implementation risk, we remain 'neutral' on the sector at this juncture. Upside risks to our view include better-than- expected demand from both domestic and export markets.
For exposure to the steel sector, we prefer long products millers to flat products manufacturers given the anticipated pick-up in construction activities. For short-term trading ideas, we like Ann Joo ('trading buy', TP; RM3.50) for its competent management and a more consistent earnings flow. Kinsteel remains a 'reduce' with a target price of 50 sen. We have a 'buy' on Tong Herr with a target price of RM2.85, given the improving demand for its stainless steel fasteners and expansion at its Thailand plant.
As for flat products, there is no change to our 'add' call on Choo Bee with an unchanged target price of RM1.60 (six times CY12 earnings per share). We prefer Choo Bee to Hiap Teck given the group's exposure to construction steel through its trading arm. Its trading business makes up about 60% of group's total revenue. Hiap Teck remains a 'sell' with an unchanged target price of 50 sen (seven times CY12 EPS). ' Affin IB Research, Sept 7
This article appeared in The Edge Financial Daily, September 8, 2011.
Company Name: TONG HERR RESOURCES BHD
| Research House: AFFIN | Price Call: BUY | Target Price: 2.85 |
Steel sector
Maintain neutral: In 1H11, earnings performance for companies under our steel sector coverage was a mixed bag. Two companies, Choo Bee Metal Industries Bhd and Tong Herr Resources Bhd came in above our expectation. Hiap Teck Venture Bhd and Kinsteel Bhd were below while Ann Joo Resources Bhd was within our expectation. However, all three companies covered by consensus (Ann Joo, Kinsteel and Hiap Teck), came in below street expectations.
Across the board, apart from Hiap Teck, companies reported an improvement in sales, underpinned by both higher sales tonnage and higher average selling prices. The average selling price of domestic steel bars has improved to RM2,200 to RM2,400 per tonne from a low of RM1,900 per tonne in 2010. Domestic demand for steel bars has also improved although not significantly. Export sales remained subdued on the back of the softening external environment.
Despite the improvement in demand and top line revenue, margins were affected by the surge in raw material costs. Across the board in 1H11, earnings before interest and tax (Ebit) margins were 0.5 to 9.0 percentage points lower. Recall that the price of iron ore has risen by more than 50% to a high of US$200 (RM596) per tonne from US$130 per tonne a year ago. Correspondingly, the scrap price has surged by more than 30% to around US$500 from US$380 per tonne. In addition, the recent 8% hike in electricity tariff has dented operating margins.
Evidently, domestic steel millers' profit was hit by high input costs. Year-to-date, apart from Tong Herr, where earnings were boosted by the consolidation of its stainless steel business, domestic millers suffered a year-on-year drop in earnings in the range of 25% to 180%.
For this quarter, we have:
(i) Upgraded Choo Bee to 'buy' (from 'add') given the weakness in share price. Target price remains unchanged at RM1.60 based on an unchanged target price earnings ratio (PER) of six times CY12;
(ii) Upgraded Tong Herr to 'buy' (from 'add') and raised our target price (TP) to RM2.85 (from RM2.60) following a 4% to 12% upgrade in FY11 to FY13 earnings forecast;
(iii) Downgraded Hiap Teck to 'sell' (from 'reduce') on the back of 39% to 51% cut in FY11 to FY13 earnings forecast. TP has been lowered to 70 sen (from RM1.05) tagged to seven times CY12 PER; and
(iv) Lowered Kinsteel's TP to 50 sen (from 70 sen) on the back of a 27% to 62% cut in FY11 to FY13 earnings forecast.
The much-anticipated MyRapid Transit (MRT) is expected to drive domestic steel demand. In the medium term, the indicative total project value for both the civil and tunnelling works for the 51km MRT will add up to around RM20 billion. The awarding of the various civil and tunnelling works will extend over the next six to nine months. However, we think real demand for steel stemming from the project will only come on full steam from 1H12 onwards.
After a staggering increase in steel prices over the last six months, mainly driven by re-stocking and cost-push factors, international steel prices are anticipated to soften in 4Q11 given the uncertainties in the developed economies. In addition, raw material cost is expected to remain high, continuing the mismatch between high production costs and weak selling prices. This will continue to affect millers' operating margins.
Although we expect the MRT project to support domestic steel demand in the medium to long term, in the short term we remain cautious on the sector given the doldrums in the external markets. Consequently, steel prices are expected to remain soft in 4Q11. Coupled with project implementation risk, we remain 'neutral' on the sector at this juncture. Upside risks to our view include better-than- expected demand from both domestic and export markets.
For exposure to the steel sector, we prefer long products millers to flat products manufacturers given the anticipated pick-up in construction activities. For short-term trading ideas, we like Ann Joo ('trading buy', TP; RM3.50) for its competent management and a more consistent earnings flow. Kinsteel remains a 'reduce' with a target price of 50 sen. We have a 'buy' on Tong Herr with a target price of RM2.85, given the improving demand for its stainless steel fasteners and expansion at its Thailand plant.
As for flat products, there is no change to our 'add' call on Choo Bee with an unchanged target price of RM1.60 (six times CY12 earnings per share). We prefer Choo Bee to Hiap Teck given the group's exposure to construction steel through its trading arm. Its trading business makes up about 60% of group's total revenue. Hiap Teck remains a 'sell' with an unchanged target price of 50 sen (seven times CY12 EPS). ' Affin IB Research, Sept 7
This article appeared in The Edge Financial Daily, September 8, 2011.
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