Stock Name: PERWAJA
Company Name: PERWAJA HOLDINGS BERHAD
Company Name: PERWAJA HOLDINGS BERHAD
| Research House: OSK | Price Call: BUY | Target Price: 1.21 |
We were stunned by Perwaja's RM238.4m FY11 net loss,attributed to a weak steel market, larger-than-expected inventory valueimpairment and reversal in deferred tax assets. Although we are discouragedby the result, we are holding out hopes ofthe company's upstream makeover via its upcoming pelletization plant, as well asit securing the lucrative iron ore mining concession. Considering the higher execution risk aftermany disappointments, we cut our call on Perwaja to Trading BUY, with our FVslashed to RM1.21. We are now addingonly 10% instead of 20% of the iron ore DCF to our base valuation of 0.56x FY12BV.
Unkind cut fromimpairment and write-downs. Perwaja made a hefty RM238.4m loss in FY11after a sharp loss in 4Q. We had earlier anticipated a loss in its coreoperation as the steep fall in the prices of iron ore, steel scrap and steel may have given rise to a negative mismatch between lower selling prices andstill-high raw material costs due to the inherent time lag before the latter starts todecline. However, the huge inventory writedownto realisable value amounting to RM94.2m was indeed deeply disappointing. Iron ore fine price has plunged fromUSD180 to a low of USD116.50 before bouncing back to consolidate at aroundUSD140 a tonne, We had earlier thought that Perwaja may renegotiate the oreprices to the immediate 4Q average rather than the normal practice of benchmarkingthe preceding quarter's average tominimise the impairment. Elsewhere, the reversal of deferred tax assets totalingRM60m in the prior year exacerbated the loss and marred its books althoughthere was no physical cash outflow.
Upstreammakeover ' hope or hype? The company's slow progress in securing officialmining rights has been a big letdown. While we have been waiting patiently for the award to materialise, after the Terengganu Menteri Besar's second verbal confirmation in December 2011 on awarding the concession providedsome assurance, that official word on the award is just around the corner.Meanwhile, Perwaja is building its pelletizing plant which is hoped will boostthe profitability of its direct reduction plant. This plant will allow it to meet its own iron ore pellet needs, as well as achieve total savings of up to USD50 a tonne from the procurement oflocal iron ore, logistics benefits, in-house value-adding and utilization oftax credits on accumulated losses. As for its existing iron and steelmaking operation, we suspect that the kitchen sinking carried out in 4QFY11 may have reconciled the materialcosting to present levels and thus do not expect another impairment, unlessthere is another drop in material prices. Nonetheless, we are keeping ouroriginal estimates of a marginal profit in FY12 before the new iron processing plant starts to contribute significantly. As we are keeping our hopesalive on Perwaja's upstream makeover, we are only cutting our recommendation toTrading BUY, although our fair value is nudged lower to RM1.21. We are addingonly 10% instead of 20% of iron ore DCF to our base valuation of 0.56x FY12 BV.
Source: OSK188
