Stock Name: KINSTEL
Company Name: KINSTEEL BHD
Company Name: KINSTEEL BHD
| Research House: OSK | Price Call: HOLD | Target Price: 0.49 |
Kinsteel posted a net loss of RM121.6m in FY11, largelyattributed to the loss in its upstream operation (37%-owned Perwaja), as well as poor showing at its downstreamoperation following the sharp drop in material and steel prices. Apart fromexpecting stable but thin rolling margins moving forward, we are pinning somehopes on its upstream makeover via the building of itsown pelletization plant and potentially securing an iron ore mining concession. Thatsaid, we suspect Kinsteel's cash flow may come under strain as we see a lowtake-up for its on-going fund raisingexercise, and thus downgrade the stock to NEUTRAL. Our lower fairvalue of RM0.49 is derived from 0.72x FY12 BV, or -0.5 standard deviation of its historicaltrading range.
2011 a painful year.Kinsteel posted a net loss of RM121.6m for FY11 on a drastic loss in 4Q.Although its downstream operation normally enjoys stable albeit low margins, wesuspect the sharp fall in steel prices during the period may haveeroded the already meager margins,together with some loss in inventory value. However, it also suffered a majorsetback at 37%-owned Perwaja, which recorded a huge loss on the back of poor steelmarket conditions, which gave rise to anegative mismatch between lower selling pricesand the still-high raw material costs, a writedown on inventory to realisablevalue amounting to RM94.2m, while a RM60m from reversal of deferred tax assetrecognised in the prior year exacerbated loss.
Pinning hopes on upstream makeover. There are nomajor concerns over Kinsteel upstreamoperation as we expect the kitchen sinking in 4Q to have cleaned up the high costinventory plus stable rolling marginand a potential uptick in long steel demand in Malaysia. As for Perwaja, the second verbal confirmation from Terengganu's Menteri Besar onawarding the mining concession to the company in December 2011 provided some assurance that the officialaward is around the corner. Perwaja is also building a pelletizing plant thatit hopes will boost the profitability of its direct reduction plant. This plantwill enable it to meet its own iron ore pellet needs and help it to achievesavings of up to USD50 a tonne from the procurement of local iron ore,logistics benefits, in-house value-adding and utilization of tax credits onaccumulated losses.
Downgrade to NEUTRAL.Perwaja's huge loss will certainly dousethe interest of minority shareholders in subscribing for Kinsteel's ongoing Restricted Offer forSale, unless the concession is given before the subscription closing date. Thismay potentially mean that Kinsteel is likely to end up with majority ofPerwaja's RCULS costing up to RM280m, and hence drain the group's cash flow.With that, we downgrade Kinsteel to NEUTRAL, with our FV cut to RM0.49. Weare removing our earlier 10% iron oreDCF which we included in our base valuation of 0.72x FY12 BV (-0.5 standarddeviation).
Source: OSK188
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